The Official Blog of Matthew L. Adler
Commercial Real Estate
Thursday, April 15th, 2010
I am back from my writing sabbatical. It is amazing when you get out of the pattern of regularly updating a blog how quickly months go by. Now that is has been three months since my last post, a fair question is, “What has changed?” From my perspective not a whole lot! Employment is creeping up and healthcare reform has passed but things don’t feel significantly different. I still believe the worst of the economic downturn is behind us, but the recovery will remain slow. Despite slow growth, I am seeing some signs of life in the commercial real estate market.
Our big news in the company is we are under contract with the first acquisition of 2010. I cannot say much about it other than it falls squarely within our mantra of working with not a distressed property, but rather a motivated seller. We plan to close some time this quarter.
The acquisition market has increased; we are seeing more deals then last year but also more competition. On multi-family and most institutional quality assets, cap-rates have reportedly compressed 100-150 basis points. I am not sure if that is a sign of the recovery but it certainly is a sign that there is more competition on the buy side and money is coming off the sidelines. I believe the combination of an improved lending environment and a renewed sense of optimism has fueled increased buyer demand. To date this has not been met with a significant increase in supply by sellers. Consequently, the demand to buy is resulting in price increase.
Even with the inefficiencies in the market, Adler Group is optimistic that we will be active buyers for the remainder of 2010. And, as mentioned in previous blogs, our sector has far less competition than institutional and multi-family assets. To succeed in our product type one must be a strong operator. Just like the asset we currently have under contract, we believe we can buy performing assets with cash flow and an attractive risk adjusted return. Stay tuned for more good news on the investment front.
Tags: acquisition, cap-rates, cash flow, Commercial Real Estate, contract, distressed property, economic downturn, employment, healthcare reform, institutional, investment, motivated seller, multi-family, optimism, performing assets, risk adjusted return
Posted in Commercial Real Estate | 1 Comment »
Tuesday, December 22nd, 2009
2010 is almost here! I pride myself on being an optimist and always looking for the good in life. Therefore, I am heading into the new year with hope that even though 2009 was a difficult year for everyone, I think 2010 will be an improvement. I am not suggesting that the economy will come out of this crisis overnight, but I do think that we have bottomed and that in 2010 will see the start of a recovery.
This is the first in a series on what to expect in 2010. The post below was written by Joel Levy. Joel is the Vice Chairman and former President of the Adler Group. He has worked with my family for over 25 years and has been a significant mentor to me. Having managed dozens of commercial real estate acquisitions and dispositions over three decades, Joel is uniquely qualified to offer thoughts for the new year. I intend on posting my thoughts and other guest posts over the coming weeks.
Some Thoughts on 2010 — Part 1
By Joel Levy
There are no lack of issues to discuss about commercial real estate and countless opinions as what to expect in 2010. In Matthew’s previous blogs, there has been a lot written about “Distress”, whether it be distressed assets, debt, owners, lenders, etc. etc. I however want to focus on one of the areas Adler Group intends to emphasize in the year ahead.
In 2009 we attempted to acquire properties from certain sellers who we did not believe were distressed, but who appeared ready to shed assets for various strategic reasons. It could have been a need to raise cash, a desire to sell an asset not core to their business or a desire to exit from a particular market. Let me report that as of now we have not been successful in this pursuit. Why you ask? It is really simple, an insurmountable spread between bid and ask. However, we now think that a narrowing of this spread is on the horizon. Are we being too optimistic or naïve? I hope not.
We have heard many opinions from various real estate professionals, and based on their and our own opinions we look to the new year with some optimism as to the narrowing of the pricing differential. Some of the issues are as follows:
- There is a very large amount of capital that has been on the sidelines or is currently being raised. We are believe that buyers will lower their return expectations and be more active acquirers.
- All signs are pointing to their being more available debt at better rates and slightly increased loan to value ratios.
- Sellers will be under more pressure to dispose of assets to fulfill their strategic goals as noted above. Many of the assets have recently been marked to market, making it easier to justify disposing of assets at lower prices.
- Although gradual in its impact, economic signs are improving and there will be an ability to underwrite a bit more positively.
While we intend to continue to pursue this path, we will also be in a pack of investors looking at distressed assets and debt.
Stay tuned for another interesting ride in the year ahead and more posts about the new year.
Tags: 2009, 2010, acquire, Acquisitions, Adler Group, assets, bid and ask, capital, commercial, Commercial Real Estate, crisis, debt, dispositions, distressed, hope, improvement, lenders, loan to value, marked to market, market, new year, optimist, owners, predictions, Properties, recover, return, sellers, spread, thoughts, year
Posted in Commercial Real Estate | 1 Comment »
Tuesday, November 24th, 2009
I am out of town for Thanksgiving so I am thrilled to have a guest blog post from Adam Lubkin. Adam has gained some notoriety in the commercial real estate world for facilitating some prominent note sales. We are proud to be one of Adam’s approved developer partners. I hope you all enjoy his unique insight into the distressed acquisitions world.
How to Acquire Distressed Real Estate Assets
By Adam Lubkin
First, I would like to thank my good friend Matt Adler for allowing me to write a short blog on his site. I enjoy Matt as a friend, as a real estate professional, and I always appreciate his insight and views on real estate.
My company, Ibis Development Group, was created three years ago specifically as an outsource acquisition arm to approximately 30 developers throughout the United States. We locate, analyze, bid and hopefully close on all types of assets, primarily commercial real estate. Although we look at assets throughout the United States, recently we have had success within our home state of Florida with note and mortgage sales. The primary sources of these note sales are local and regional banks, large real estate funds, special servicers and attorneys.
Here are the top 5 frequently asked questions by our developer/owner-operator partners and our responses:
1) Do you analyze the note’s asset or just the discount from the note’s face value? We always analyze the underlying value of the real estate asset. In fact, we rarely ask about the mortgage’s face value. Obviously, we will eventually find out the asset value, but we want to first focus on the asset itself, not necessarily the discount being offered. Frankly, the discount offered is a secondary consideration. We prefer REO’s or deed in lieu scenarios. Most developers shy away from litigation, but that’s a real risk when playing in this arena and everybody has a certain level of risk tolerance.
2) What the best advice you can give when talking with the banks? Be considerate. Most of these bankers run into “tire kickers,” people who need to raise money in order to close, and inexperienced wannabe developers who talk a big game and just want to take advantage of a distressed situation. Remember, most of these bankers are also the same people who originated the loan so this process is very uncomfortable for them. Also, don’t assume that you are the only developer in town or the only company with cash. Its a very competitive marketplace, and there is incredible wealth out there and plenty of people who can close a deal. My advice is to show credibility through recent closings; be completely transparent and honest by showing your analysis, assumptions and ROE (Return on Equity); and be prepared to show proof of available funds. Lastly, act like you are the great wide receiver Jerry Rice – If you score a touchdown, just give the ball to the ref, don’t showboat and run quietly to the sidelines!
3) Are transactions happening? Absolutely. Deals ARE getting done quietly. Banks aren’t going to publicize the fact that they are selling bad loans, but they are. Furthermore, if you expect to buy more loans in the future, don’t brag about your most recent acquisition – It’s bad business. There is no upside for developers to spam e-mail the world or advertise about their conquests.
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Tags: analyze, asset class, asset value, assets, attorney, banks, broken condos, buyer, capital expenditures, Class A, Commercial Real Estate, cycle, deed in lieu, developer, distressed acquisitions, due diligence, face value, Florida, hospitality, hotels, industrial, JV partner, loans, multi-family, note sales, office, purchases, real estate funds, REO, replacement value, retail, seller, special servicers, stabilized asset
Posted in Commercial Real Estate | 2 Comments »
Thursday, November 19th, 2009
The historical norm in office investment is a flight to quality. Typically, a premium has been paid for brochure quality assets with “credit” tenants. At the top of the last cycle, I would estimate a minimum of a 150 basis point cap rate premium was paid for Class A assets over B.
Adler Group’s core competencies are the acquisition and operation of multi-tenant, management intensive Class B office and flex space. For decades we have been on the front lines, working with investors to optimize the value of these assets. We have always believed that focusing on smaller, entrepreneurial tenants, allows us to more consistently maintain higher occupancies and raise rents. In addition, we believe our credit risk is mitigated by the size and diversity of these tenants. In our properties, typically there is not a single tenant whose default or non-renewal would cripple our occupancy and therefore inhibit our ability to pay debt service. In addition, we believe that in this current economic climate, tenants will gravitate to Class B space as a cost saving measure.
Smaller entrepreneurial tenants tend to be more rooted to their location. Often, large national companies make decisions having little to do with local operations. For example, in difficult times, national companies are more likely to merge their Orlando and Tampa offices into one. Smaller tenants tend to live within a few miles of their office and employ multiple family members. Their size makes it harder to downsize their space. Large companies can have layoffs and shrink from 20,000 to 10,000 square feet. It is hard to downsize when you only lease 2,000 feet and your employees are relatives.
I am not saying that we are without defaults or downsizing in our portfolio but generally we have seen our entrepreneurial tenants fight on because they have limited options. Their business is literally what puts food on their family’s table.
Today, there is growing awareness of the advantages of Class B office within the investment community. Inherently, new office buildings are Class A. In Downtown Miami and Brickell there is over 1.5 million square feet of new office towers set for completion in the coming months. New buildings, typically do not encourage smaller tenancies and therefore have less effect on Class B buildings. In addition, there is less allure to large “credit tenants”. Some of the largest and most prestigious companies in the Country have gone into bankruptcy’s causing additional Class A vacancy.
Finally, the amount of money one needs to invest in Class A leasing is discouraging investors, who are currently more focused on immediate cash flow than they have in the past. Class A office tenants generally demand significant tenant improvement allowances to build out their space, while Class B tenants require far less improvement allowance. In our space we often just provide new paint and carpet. This makes the recurring annual reinvestment in the space far less on a percentage basis.
There will always be an investment market for Class A office. However, I believe the premium many were willing to pay for Class A is diminishing and there is starting to be a recognition to the benefits of Class B. The one challenge with Class B office space is it remains management intensive, but strong operators with expertise can provide an attractive return.
Tags: acquisition, Adler Group, assets, basis points, Brickell, cap rate, Class A, Class B, core competencies, credit, cycle, defaults, downsize, entrepenurial, flex space, investment, investors, management intensive, Miami, mulit-tenant, occupancies, office, operation, Orlando, return, Tampa, tenant improvement, tenants
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Friday, October 23rd, 2009
A few weeks ago the developers of a new Class A office development, 1450 Brickell Avenue announced the signing of their first tenant, Bilzin Sumberg Baena Price & Axelrod LLP. The announcement of the 80,000 square foot transaction was met with great enthusiasm in the real estate community as it was the largest lease in the Downtown/Brickell Avenue market this year.
I agree, the signing of this lease is cause for some optimism. Clearly, the long term commitment of a major local law firm to a new development is a positive sign. It is an indication that companies are gaining confidence in the future and are able to make lengthy future commitments.
However, despite the positive feelings there is still great cause for concern. The other reality of this lease is when Bilzin Sunberg moves in January 2011 they will be vacating 100,000 square feet at the Wachovia Financial Center. The downtown office market will now have 20,000 square feet of negative absorption as the net effect of this transaction.
There has not been much speculative commercial development in this country. That is why I believe in general the commercial market will fare better than the residential market has in this cycle. One of the major exceptions to where new development has occurred is in central business district (CBD) markets such as Miami. Downtown Miami and Brickell Avenue have three major office developments in progress including 1450 Brickell set to be delivered in the next 18 months. The addition of more than 1.5 million square to the market is set to push already high vacancy rates even higher. Most experts believe Downtown Miami’s office vacancy will soon be in excess of 15%.
My concern is how does this community fill that space? As we just discussed, the only new tenant at 1450 Brickell is an existing tenant in the market that is downsizing. Similarly, one of the other new developments in the market, the 753,200 square foot Met 2 has three signed tenants that are also existing tenants in the market which will move from older buildings. If all we are going to do is reshuffle our existing tenant base, we can not expect to absorb this space.
In order to have positive absorption three things will need to happen; we need existing tenants to grow, we need companies to move to the market and we need new business to start. Until those things occur we can not expect occupancies in Class A, Downtown Miami office space to increase. So while the Bilzin Sumberg lease is cause for some optimism we have a long way to go before truly good news in CBD office.
Tags: 1450 Brickell, absorption, Bilzin, Brickell, CBD, commercial, Development, downtown, lease, Met 2, Miami, occupancy, office, office market, optimism, space, square foot, tenant, vacancy
Posted in Commercial Real Estate | 1 Comment »
Wednesday, October 7th, 2009
The FDIC announced yesterday the winner of an extensive bidding process for the assets of now defunct Corus Bank which included some of the largest names in private equity. The portfolio comprises mostly construction loans for residential condominiums. The winner was a group led by Starwood Capital Group. The most fascinating part of the deal was the incredibly innovative structure created by the FDIC. The structure detailed in this Wall Street Journal Article allowed Starwood to invest equity of only $554 million for a portfolio that is estimated to have an original face value of over $5 billion. Although Starwood purchased controlling interest in the portfolio their ownership will only be 40%. It is estimated that Starwood valued the portfolio at $2.77 billion and the remained funds were part of a series of equity and debt provided by the FDIC which is maintaining a 60% stake in the portfolio.
The structure of this deal is very compelling as it incentivized a company such as Starwood and their partners to enter into a long term strategy to workout these loans but still allows the FDIC the opportunity for significant upside participation. I suspect, as the FDIC continues to close banks and control pools of loans that we will see more transactions of this kind. It is pretty interesting that the FDIC in this transaction essentially became the seller, the buyer, the lender and equity partner all at the same time.
Tags: assets, buyer, condominiums, debt, equity, FDIC, residential, seller
Posted in Commercial Real Estate | 2 Comments »
Tuesday, September 29th, 2009
On September 15th the IRS issued new guidance on the modification of commercial Mortgage backed securities (CMBS) loans. Though, largely unnoticed outside of real estate circles, this was an important first step in addressing the pending maturity of hundreds of millions of dollars of CMBS debt in the coming years. I wanted to post something on this topic but before I got a chance an attorney of ours, Wythe Michael with Hirschler Fleischer in Richmond, Virginia offered an article he wrote as a guest blog. I hope this is the first of many guest posts.
Modifying Securitized Real Estate Loans – New Guidance Provides Flexibility
By G. Wythe Michael
Over the past decade, many commercial real estate owners financed the purchase of commercial real estate with loans that were securitized by the original lenders as commercial mortgage backed securities (CMBS). Although these loans offered advantages such as lower interest rates, limited recourse and limited guarantees, the tax regulations governing the associated conduits severely limit the ability to modify the terms of such mortgages. In general, the tax regulations prohibit loan modifications unless the modification is due to a default or a reasonably foreseeable default. The tax regulations can impose still penalties – including the possible loss of favorable tax status – on the conduits (but not the borrowers) if the regulations are violated. Because there was little guidance from the IRS concerning what constituted a “reasonably foreseeable default,” loan servicers have been reluctant to discuss loan modifications until an actual default occurs.
With the collapse of the CMBS market and the lack of other financing options, borrowers attempting to negotiate with loan servicers prior to the maturity date of their loan have been ignored by the servicers or told that nothing can be done until loan maturity – when the loan defaults. The servicers generally blame their unwillingness to negotiate on the tax regulations. Given that approximately $150 billion of CMBS loans are scheduled to mature between now and 2012, numerous industry participants asked the IRS to ease the regulations.
The IRS responded to this situation by issuing guidance on September 15, 2009 concerning modifications to CMBS loans. In general, the guidance allows servicers to modify loan terms if the servicer “reasonably believes that there is a significant risk of default of the loan at maturity or at an earlier date.” A servicer must document this belief by written facts provided by the borrower. In such a case, the servicer may modify the loan if the servicer reasonably believes that the modified loan will substantially reduce the risk of default.
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Tags: bondholders, CMBS, commercial, default, foreclosure, IRS, loan, maturity, modifications, real-estate, servicer
Posted in Commercial Real Estate | 1 Comment »
Friday, September 18th, 2009
I may have published my last post a few days too early. I spent this week at the Young President Organization’s (YPO) Real Estate Round Table. It was a gathering of members of YPO who are in the real estate business. After being around people from all sectors of the industry for three days, my take away is there are two clear distinct camps.
A fair amount of people are convinced that great opportunity in the distressed real estate market is right around the corner. Others believe that the opportunity is years away, if ever. I am trying to reconcile these seemingly divergent opinions.
Most of the confusion is being caused by the great unknown, what happens to the trillions of dollars of commercial loans that need to be replaced in the coming years. Obviously, we are experiencing a significant de-leveraging of assets. The loss of leverage will need to be replaced with a combination of equity and/or loss in asset value.
The big question is: How does de-leveraging impact property values now and into the future? The lack of an answer to this question, I believe, is largely the cause for the present lack of transaction volume. The spread between the bid and ask price is still wide because buyers must project this future distress into their pricing. In addition, lenders are not yet prepared to realize significant losses. To date, banks and special servicers who control CMBS debt are not selling distressed assets or loans in any significant way. Property owners who purchased assets from 2005 – 2007 either have lost most of their equity or are holding off hoping things will improve.
So will transaction volume increase in 2010? I think we will see activity and more assets and notes trade. I am not expecting the RTC 2 frenzy that some have been expecting but there will be deal flow. The only way to participate is to be conservative and stay in the market. Only while in the market can one ever hope to participate at the bottom.
Tags: 2010, assets, CMBS, commercial, de-leveraging, distressed, equity, leverage, loans, opportunity, real-estate, value
Posted in Commercial Real Estate | 3 Comments »
Tuesday, September 15th, 2009
Today, real estate companies fall more or less into two categories: ones crippled with distressed assets and those trying to purchase those assets at steep discounts. We are fortunate to be in the latter.
Every day we hear of a new company forming a distressed real estate fund. Just last week Sam Zell announced the latest of these ventures. We are also in the process of raising our own commercial real estate investment fund. However, while we plan on having a distressed allocation, our acquisition strategy will primarily focus on performing assets in the core plus and value add category.
At the Adler Group, we have a saying about this market: “we don’t want to buy distressed assets. We want to buy high quality assets, from distressed sellers”. Today at the Adler Group, we are focused on performing assets for a number of reasons. Our primary rationale for adopting this investment strategy is our experience. We have been successful in developing, acquiring, managing and leasing multi-tenant, management intensive commercial real estate for generations. Distress in the market place isn’t a reason to depart from our core competency.
Our other reason is risk. The investment management business is primarily about diversity and asset allocation. We believe that all the money raised targeting “opportunistic” returns will compete for many of the same deals. The competition for distressed deals may lead some to overpay for properties, thus over estimating the potential “risk adjusted return”.
On the other hand, with many focused on distressed properties and other historic buyers having left the market, few are focused on performing assets. We project the targeted return on core plus and value add acquisitions to be 400 to 600 basis points higher than these same categories in 2007. These higher targeted returns are theoretically intended for the same corresponding risk category. However, there is no question that with less leverage and more conservative underwriting there is actually less risk. So in this cycle, we hope to make acquisitions taking less risk than years ago while targeting a significantly higher return.
Our company culture has always been to focus on singles and doubles rather than the home run. We believe that the potential return on the acquisition of performing assets in the coming years will be attractive, particularly when compared to other investment alternatives. We would be very happy to make relatively conservative acquisitions and achieve a return above sixteen percent. If that turns out to be a single, I’m happy to be Ichiro and hit for average and leave the home runs (and the strike outs that inevitably accompany them) to others.
Tags: Acquisitions, asset allocation, assets, commercial, core plus, distressed, fund, opportunistic, real-estate, value add
Posted in Commercial Real Estate | 2 Comments »
Thursday, September 3rd, 2009
The cliché I hear most often these days is that “commercial real estate is next.” I assume it’s being used to make a direct comparison to the distress in residential markets. I just don’t see a lot of similarities between the current residential and commercial markets, however.
Residential real estate is largely the cause for our international economic crisis – commercial real estate is merely a symptom. Over-building, investor speculation and insane lending were the catalysts for a global recession, the likes of which the world has never seen.
Yes, commercial real estate owners face significant challenges. The triple threat of cap-rate deflation, maturity defaults and tenant performance are daunting. However, commercial real estate doesn’t have close to the same absorption issues residential is facing. We just didn’t see excessive speculative development in the last 20 years.
In addition, although lenders got carried away in commercial, we are not talking about negatively amortizing 100% loan-to-value (LTV). At its worst, commercial lenders were originating debt with interest only at 80% LTV. However, those loans still had debt service coverage ratios. The threat in commercial real estate, by in large, is with maturity defaults; an inability to replace debt at the end of the term. This is far different from the 50% or worse write-downs we are seeing with some residential projects.
This is going to be a challenging time. Commercial properties will continue to lose occupancy and experience lower market rents. Retail and Class A offices will certainly be the hardest hit. Although the distress in commercial real estate will be painful, it will be nothing like the disaster we have seen in residential.
This economy is challenging enough and simplifying conditions to cute clichés may serve the needs of the commentators and pundits, but doesn’t serve the public good. No, commercial real estate is not immune from the economy, but it certainly isn’t next.
Tags: commercial, economy, real-estate
Posted in Commercial Real Estate | 1 Comment »
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