WHAT IS HAPPENING WITH NEW HOME BUILDING?

The information today is that new housing starts in the US are down again and look to continue this trend. Actually down by 20 percent from last years numbers. There is just too much inventory for sale now. Add to that slumping sales figures there is not much good news her. So what are these developers doing now?

Well, They are moving to multi-family developement. In fact the only good numbers that were posted for new construction were found in Multi-family projects. These starts are up almost 24 percent over last year.

If you are looking to get in on an emerging trend, I would suggest you get in early. Three years from now will be too late! I believe it is time to take a good look at Multi-family investments . Not 2 years from now. NOW!

The following article appeared in the September 2007 issue of “Retail Traffic”.  It discusses the differences between CMBS (Commercial Mortgage Backed Securities) lenders who sell the loans they originate on the secondary market  and Portfolio Lenders (lenders who originate loans to be held in their own portfolios).  A principal difference between the two has always been that CMBS lenders usually require “yield maintenance” in lieu of fixed prepayment penalties while the Portfolio Lenders typically use fixed prepayment penalties.  We usually recommend that investors who may want to sell or refinance within a few years avoid the uncertainty of “yield maintenance” in favor of the predictable prepayment penalties offered by Portfolio Lenders.

For the last several years and until the recent impact of the “sub-prime” residential loan problems on the CMBS markets the CMBS lenders have generally been able to offer lower rates and more liberal underwriting standards than the Portfolio Lenders.  It appears that the advantage has shifted to the Portfolio Lenders for now.

REAPING THE REWARDS

Sep 1, 2007 12:00 PM, By Jennifer Popovec

Jeffrey Packard, an assistant vice president with life insurance company John Hancock, which does about $2 billion in commercial mortgage lending, has been waiting for this moment for four years. The rise of CMBS lenders has radically altered the scene. CMBS lenders have been driving the terms for all commercial real estate lenders. Life insurance companies — once a dominant player — have moved to the back seat.

But to do so CMBS lenders have gotten more and more aggressive. That left executives at companies like John Hancock — which, admittedly, still got its share of deals — shaking their heads at some of the terms conduit lenders were offering to borrowers. Loans were being made that Packard says his firm could never justify.

“The conduits created a situation where the competitive bidding for deals got really out of hand,� he says. “I think they just got sloppy with a lot of underwriting.�

The big surprise is not that the correction arrived, but that it has not been of the conduit lenders own making. Instead, CMBS lenders have been hammered as a result of the subprime mortgage meltdown. Nonetheless, it’s only natural that they feel vindicated by what’s happened in the CMBS market.

Portfolio lenders had gotten used to coming up short on almost every aspect of a loan. But with the recent developments stemming from the subprime meltdown (See story on p. 38), the gap has narrowed, Packard says. “We’re absolutely happy that the correction has finally occurred.â€?

Now, though, conduit lenders are bearing the brunt of the beating in the debt markets. Balance-sheet lenders, like life insurance companies and real estate banks, are sitting back and enjoying the show.

“Portfolio lenders are sitting back in their chairs, saying ‘I told you so,’â€? says Martin Kamm, managing director of Jones Lang LaSalle’s Capital Markets Group. (Kamm is also a former executive with Northwestern Mutual.)

Balance-sheet lenders are enjoying the fortuitous turn of events. Such companies can do deals when conduits can’t — a shocking reversal. No one’s sure how long this situation will last. But portfolio lenders are intent on making the most of this window of opportunity.

“They are looking at this situation as a huge opening because right now they almost have 100 percent market share,� Kamm says.

It’s not as if things have been all bad for life insurance companies. They have been hitting their targets. But those targets were much more modest than what CMBS lenders had been shooting for. Overall, market share has shifted dramatically out of their favor in the past decade. No one expects things to fully turn back the other way — CMBS is here to stay — this has given a lifeline to the sector.

“Most of the life companies were still hitting their numbers, but when they were going head-to-head with the conduits, they were losing,â€? says Mike Wood, executive vice president of NBS Financial Services in Seattle. Wood is advising his clients to consider portfolio lenders during this tumultuous period. “I am not advising them to steer clear of conduits, but I can’t guarantee that a conduit deal will stay the same and won’t get repriced,â€? he explains.

Seeing more deals

During the first quarter 2007, $87.5 billion in commercial mortgages were originated, a 37 percent increase over the same period last year, according to the quarterly survey conducted by the Mortgage Bankers Association. Conduits accounted for the bulk of the new loans with $60.85 billion in originations, while non-CMBS issuance reached $20.05 billion, a 55 percent increase over the first quarter 2006.

Preliminary estimates from the Mortgage Bankers Association show that second quarter originations volumes were higher across the board. CMBS lenders, in fact, set a record (see chart below). Expect that to change when third quarter numbers come out.

Even with the CMBS turmoil, portfolio lenders have not pulled back their commercial property lending goals. While many conduits are paralyzed, there’s still plenty of debt available from banks and life companies.

“Despite fears that we are facing a liquidity crunch, loans are still getting quoted from both CMBS and non-CMBS lenders,â€? Kamm says. But, it’s not quite the free-for-all it was earlier this year. Portfolio lenders are being more selective, he says. They’re not going to be forced into deals they don’t like.

Overall, most portfolio lenders are feeling pretty good about the underlying fundamentals of commercial real estate and that’s keeping them in the game. “We have life companies calling us, and just yesterday we had one that we hadn’t seen in a while stop by and tell us they wanted to see more deals,â€? says James DuMars, senior vice president and managing director of NorthMarq Capital’s Phoenix office.

John Hancock, for example, hasn’t changed its lending targets, Packard says, adding that he anticipates closing 10 percent to 20 percent more transactions because of the CMBS turmoil. “We’re definitely seeing more deals, and depending on how things shake out, we would expect to see more business for our company and industrywide for portfolio lenders,â€? he notes.

DuMars estimates that portfolio lenders are now seeing 20 to 25 packages when they were used to just 5 to 10 packages. “In my opinion, this environment is a good cherry-picking opportunity,� he says.
In fact, portfolio lenders are quickly becoming overwhelmed with the volume of loan requests, especially from borrowers they’ve never worked with, Kamm says. “Most of them are focusing first on servicing existing clients who have stuck with them.â€?

Portfolio lenders continue to be interested in retail, although there are some concerns about the sector’s ongoing health and fundamentals. John Hancock, for example, is still interested in providing debt for retail properties, but Packard admits the firm has a higher level of vigilance when reviewing retail deals. “We do have some concerns on retail, and they relate primarily to what’s happening in the housing market,â€? Packard says. In particular, he expects increased foreclosure rates and a weak housing market to put a damper on consumer spending.

Pricier loans

While portfolio lenders aren’t the only game in town, they certainly are the only ones that can provide any kind of confidence that a deal will close on time with the agreed upon terms, says Todd McNeill, a senior director with Metropolitan Capital Advisors, a Dallas-based mortgage banking firm. “Certainty of execution is the main thing in our business, and the conduits can’t offer that now — portfolio lenders can so they actually have the advantage over the conduits,â€? McNeill says.

“I have borrowers who have told me that they don’t want to waste time on a conduit,â€? says Michael Derk, a senior director at Marcus & Millichap Capital Corp.

Certainty of execution isn’t the only advantage that portfolio lenders have over the conduits these days. McNeill says they’re disturbing the waters in a market that is causing even the most seasoned professional to get a little seasick. Balance-sheet lenders, though, are operating like business as usual. And that’s become a distinct advantage.

In fact, underwriting has remained largely the same for portfolio lenders, experts say. Although conduit lenders have been forced by credit ratings agencies and bond buyers to modify their underwriting standards, portfolio lenders have not changed their underwriting standards. Their loans rarely included riskier terms such as 10-year interest-only loans and debt service coverage below 1.0 x. “We’ve maintained a pretty good discipline over the years, so now we’re just doing what we’ve always done,â€? Packard says.

But, volatility in the bond market has pushed up the cost of commercial real estate debt — not only for CMBS loans, but also for whole loans. The big difference is that portfolio lenders’ pricing is actually better than CMBS pricing now even though it has increased from six months ago.

“The tables have completed turned over in the past month,â€? Derk says. “Previously, portfolio lenders just sat there and lost deal after deal to conduits because they couldn’t compete. But the difference of pricing and volatility in CMBS is giving portfolio guys a leg up.â€?

DuMars says that even though life insurance companies are still less aggressive than CMBS, their spreads were lower as of mid-August. A typical life company deal offers 65 percent loan-to-value, 25-year amortization, and 150 to 190 basis point spread over 10-year Treasuries. In contrast, CMBS quotes are coming in at 200 basis points over 10-year Treasuries, he says.

Pricing on John Hancock’s mortgage loans had increased as of mid-August, according to Packard, but he declined to say by how much. “Our pricing has trended up along with everyone else in the industry,â€? he explains.

Even at spreads of 180 basis points over 10-year Treasuries, mortgage loans are still at historically low levels — below 7 percent. But, borrowers have been so spoiled by the conduits that they are balking at these more expensive terms. And some mortgage brokers are advising them not to make long-term loans right now.

“Borrower expectations are based on what was occurring just two months ago,â€? DuMars says. “We’re forced to do a tremendous amount of expectation correction with our borrowers.â€?

And he’s not only managing borrower expectations, but lender expectations too. Dumars is warning portfolio lenders that higher prices are going to be a hard sell to borrowers for a while.

Many of Wood’s borrowers are pretty vocal in their frustration as well. “I tell them to just look at the coupon rate instead of looking at the spreads because the all-in rate is not that much different. Treasuries have come down,â€? he says.

Nonetheless, Wood has had a couple of deals fall through because of the increased coupon rates. He had borrowers walk away from the table because their cost of debt had increased by 25 basis points or more from what they were expecting.

Neil Efron, senior vice president of commercial mortgage banking for BankAtlantic, a $7 billion Fort Lauderdale, Fla.-based bank, has seen a lot of deals blow up too. That’s why BankAtlantic has created a new mortgage loan product — a three-year to five-year fixed-rate loan with partial recourse and no prepayment penalty.

“Some borrowers can’t wait for the market to settle down, and this loan solves the problem because they refinance or acquire their property now and can come back and get a new loan once spreads have gone down,â€? he explains.

Right now, no one has any idea of when spreads will come back down because it’s not just the competitive environment that is determining pricing for portfolio lenders. Many have increased their spreads because of internal pressures, DuMars says, pointing out that mortgage lending is just one investment vehicle for most portfolio lenders.

Many life insurance companies are active buyers of CMBS paper and corporate bonds, both of which are being sold at very cheap prices. That means that mortgage lending groups have to compete with other investment vehicles.

“Life companies can still go out and buy a AAA corporate bond at a 140 basis point spread,â€? Wood says. “When you compare corporate bonds to whole loan mortgages, it’s only fair that you be compensated for taking on the additional risk from mortgages. That’s a big reason why borrowers who get portfolio loans can expect to pay more.â€?

This article discusses the increasing interest of U.S. shopping center developers in South and Central America.  There are also residential projects underway in Mexico and Panama and other commercial and industrial projects underway in Mexico and these activities are expected to grow in coming years. 

STAKING CLAIM DOWN SOUTH -  BY ANNE FIELD

A decade ago, when many U.S. retail owners and developers were first looking beyond U.S. borders for expansion opportunities, Latin America was a hot target. At the time it seemed many once-schizophrenic economies were showing signs of stability. Argentina, for example, was a darling of international commerce. With booming economic growth and a proliferating middle class it was an oft-pointed-to model for other developing nations.

Then the wheels fell off.

Economic collapses in Argentina and Mexico crippled the region. Moreover, a series of U.S.-friendly regimes fell in elections throughout the continent, ushering in a wave of more left-leaning presidencies less open to free-trade agendas.

As a result, Latin America lost its status as a hot market. Many attempts by U.S.-based investors and developers to enter the region were scuttled and attentions were diverted to other parts of the world.
Today, though, companies are once again turning their eyes to the region, but with a much more targeted approach. Much of the action today is focused on two countries: Mexico and Brazil. And for good reason. With populations of over 100 million and close to 200 million respectively, each country is big enough to provide a lot of room for growth. Plus, their populations are young. About 45 percent of Mexico is under 45 years old, for example.

“Latin America is booming,â€? says Stan Eichelbaum, president of Marketing Developments Inc., a Ft. Lauderdale, Fla., and East Lansing, Mich-based research, consulting and development planning firm. David Berger, managing director for Latin America and the Caribbean region at NAI Global agrees. “I’ve been working in the region for the last 15 years and I’ve seen huge leaps in terms of the institutionalization of democracy,â€? Berger says. “There’s no turning back.â€?

None of that would matter, of course, if their economies weren’t healthy. But, thanks to years of stability and new government policies, once out-of-control inflation is down and both countries are expanding. Brazil, with a $796 billion economy, for example, comprises 50 percent of South America’s total GDP, according to a recent report from Prudential Real Estate Investors. By 2025, its GDP could double. Last year GDP grew 3.7 percent in Brazil. Mexico, meanwhile posted GDP growth of 4.8 percent. As a result, the middle class, and disposable incomes, in both countries are on an upswing, boosting retail sales. In Brazil, for example, sales rose 8.5 percent in the first quarter of 2006, higher than the total 6.2 percent increase of 2005, according to Prudential.

The upshot: There’s been a flood of shopping center development. In Mexico, there are 374 shopping centers greater than 100,000 rentable square feet, with 42 new ones built in 2006 and another 40 to go up this year. Brazil has 346 regional malls, with another 12 expected to be built in 2007 alone, according to ICSC.

Much of that development has happened thanks to financing from REITs, private equity firms, and other foreign investors. But some U.S. and Canadian developers have also started to enter the market, forming partnerships with local developers, in which they plan to help run existing malls and develop new ones. In 2006, for example, Developers Diversified Realty invested about $150 million to form a 50/50 joint venture with the Brazilian unit of Portuguese shopping mall developer Sonae Sierra. And some players, like Jones Lang LaSalle, which is eyeing the market in Brazil, plan to go in as third-party managers, leasing space to retailers. “We see a tremendous opportunity to bring U.S. retailers to Latin America,� says Karen Riquet, Jones Lang LaSalle director of client relationship management and executive vice president.

It’s not without some risk, of course. Back in the 1990s, a handful of U.S. developers attempted to set up shop in Mexico and Argentina when those economies were showing huge promise. Moreover, talks had begun in earnest to expand NAFTA, the free trade agreement between the United States, Mexico and Canada, through the rest of South America in the form of the Free Trade Area of the Americas. Both the Argentine and Mexican economies suffered debilitating meltdowns. Meanwhile, the Free Trade Area of the Americas ran into resistance from mass protests throughout the continent and a wave of new, more left-leaning presidents swept into office throughout South America over the past 10 years.
Although the climate has turned around in many countries, there’s always the chance that inflation, currency devaluation or political crises could happen again. Furthermore, there are other obstacles, such as red tape and complex tax requirements. That’s led to a more tempered approach.

Most notable may be Venezuela. Despite rapid GDP growth and booming local shopping center development activity, U.S. companies have been loath to enter the market, thanks to President Hugo Chavez’s policies. “There is a lack of interest, mainly because of the perception they have of Mr. Chavez’s administration,â€? says Jorge Lizan, director of business development at ICSC. “But they are missing a huge opportunity.â€?

In addition, companies have also been reluctant to enter Argentina. That’s partly because of fears about the country’s economy. But, it’s also a demographic question. With a population of about 40 million, “It’s a far cry from Mexico and Brazil,â€? says David Jacobstein, a senior advisor with Deloitte & Touche and formerly chief development officer of DDR.

Building from the past

Shopping centers aren’t a new phenomenon in Brazil. In fact, the first mall opened in São Paulo in the 1960s. Development didn’t pick up for another 20 years, however, until a number of pension funds started financing centers. When that slowed, after the economy tanked, so did construction.
But over the past three years, a series of international investors and developers, many from North America, have entered the market, including Cadillac Fairview, Ivanhoe Cambridge, General Growth Properties, and DDR. About $2.5 billion will be invested in new projects and expansion over the next three years, according to Prudential. These players are anticipating that consumer spending in shopping centers will skyrocket. Only about 18 percent to 20 percent is spent in shopping centers now. “With consumer spending continuing to increase, a lot of retail will be consolidated into enclosed malls,� says Richard Brown, executive vice president of international operations at DDR.

They’re also expecting to see more international retailers start flocking to the country. There are at least a handful of international players in the market. Wal-Mart entered the country in 1995, and expects to have 28 stores this year and double that number over the next two to three years. And such brands as Zara and Tommy Hilfiger are there, although many of them are licensed. But most retail is local, and shopping mall anchors are usually local supermarkets or hypermarkets.

Generally, these new entrants aren’t going in solo, but are teaming up with local developers. In some cases, they’re acting as passive investors. In June, Toronto-based Cadillac Fairview, which manages the real estate portfolio of Ontario Teachers’ Pension Plan, for example, acquired a 46 percent interest in Multiplan Empreendimentos Imobiliarios, a major real estate company in Rio de Janeiro, which manages 14 shopping centers, nine of which it owns. In others, they’re more active. In 2004, for example, GGP invested $32 million into a 50/50 partnership with locally based Nacional Iguatemi Group (NIG), which owns and manages nine properties totaling 3.2 million square feet. As for DDR, it intends to co-manage their shopping centers with their partners. With their $150 million investment and a similar investment from Sonae, over the next three to five years, they plan to build new centers and buy existing ones.

For DDR, the real potential isn’t in the most populated areas around São Paolo and Rio de Janeiro, where most shopping centers are located now. It’s in secondary cities. Their first effort: They recently broke ground on a new site in Manaus, a remote city of about two million in the Amazon, for a 450,000-square-foot enclosed mall.

For now, cap rates are high, too, compared to the U.S. According to Jacobstein, DDR was able to buy in at around a 12-percent cap rate. “They believe that, at that time, those same properties in the U.S. would have traded somewhere between a 5.75 to 6.75 rate,� he says. Since then, he says those rates have come down to about 10 percent. “So you gained 200 basis points in value in a very short time,� he says.
The moves by international players are also helping along another trend: consolidation among local developers. For example, DDR’s partner, Sonae Sierra, recently announced plans to triple its size from eight shopping malls, through acquisition. Until a year ago, no operator controlled a portfolio of more than six or seven regional malls, according to Paulo Gomes, head of research for Latin America at Prudential Financial. Now some firms own as many as 20 centers.

At the same time, these local companies have also been involved in a number of IPOs. The Iguetemi Group, for example, recently raised $260 million in an IPO. In 2006, two private equity firms, Equity International and Brazil-based GP Investments, bought a controlling interest in BR Malls, a major Brazilian shopping center owner. In July, they took it public. Also in July, BR Malls purchased stakes in four shopping centers, for $430 million. The company now owns 26 shopping centers and manages 41.

What about Mexico?

Back in 1994, when Mexico’s peso devaluation decimated the economy, the possibility that U.S. investors would be interested in that country seemed remote. Since then, interest rates that once were almost 100 percent have declined precipitously, inflation is at about 4 percent, and there’s been a flood of activity by U.S. companies. So far, it’s mostly been in the form of capital infusions, from such players as Kimco Realty Corp., Prudential, GE Real Estate and the Black Creek Group. About 16 largely U.S. funds are investing in joint ventures in partnerships worth a total of $6.5 billion over the next four to five years, according to ICSC.

Take Kimco, which has been steadily increasing its interests since entering the market in 2002, when it bought two centers. In 2006 alone it closed on three new projects at a total cost of $87 million. It now owns interests in 110 properties totaling 16 million square feet, with 31 core properties and 17 under development, for a total investment of about $600 million.

Prudential also got its toes wet in the market about five years ago. Since then, it’s been building a network of joint venture partners, who are local developers and managers of shopping centers, according to Gomes — he won’t say how many — nationwide. They’ve opened three centers and acquired two, although the focus is on development. Total investment: about $1 billion so far. As for GE Real Estate, it has made about $800 million in investments, and is planning another $350 million over the next three to five years.

Companies have been slower to take a more active role in the country, largely, according to Andrew Strenk, president of Strategic Planning Concepts International, a retail consulting firm in Tustin, Calif., because they’re gunshy after several disastrous joint ventures in the 1990s. Still, he says, “A lot of guys are looking at the market and doing a lot of research.â€? DDR is a case in point. According to Brown, the company is currently in the process of evaluating the market as a possible next step into the region.
There seems to be plenty of room for everyone. About ten cities have 70 percent of all shopping centers, according to ICSC. And there are at least 28 medium-sized cities with a population of 300,000 to one million with few, or no, centers. Plus, up to 70 percent of sales come from street vendors.

Like Brazil, most retailers are local — and they’ve been expanding furiously. The eight largest supermarkets opened 142 stores in 2006, according to ICSC. Four major department stores opened 21 sites. It all means there’s another opportunity for U.S investors, to help serve as intermediaries between developers and retailers.

One big drawing point for retailers could be the greater sophistication of mall developers. According to Brown, until recently, banks were cautious about lending to developers. The upshot: They tended to sell space to retailers condominium-style, resulting in the usual hodgepodge of tenants. Now, “the newer centers going up are more sophisticated,� he says, with a better tenant mix.

In Mexico, for now, the focus is on middle- and lower-income consumers, where there seems to be the most growth. The middle-income population grew from 29.8 percent of the population in 2000 to 33 percent in 2006, according to ICSC. Most of the development underway is in neighborhood shopping centers, anchored by convenience and grocery stores, according to Lizan. They’re mostly going up in underserved markets in the suburbs of big cities and in smaller metropolitan areas. At the same time, there is a demand for regional malls, both building new ones and expanding existing properties, mostly in smaller cities or underserved neighborhoods of larger urban areas. That tends to mean malls anchored by Wal-Mart and other big-box retailers.

Facing the challenges

Of course, U.S. companies entering Brazil or Mexico face a number of challenges. For one thing, there’s still the possibility that the current stability could collapse. But there’s more. In Mexico, winding your way through the government bureaucracy and getting the necessary approvals is an especially laborious process, according to Strenk. There’s also a problem in purchasing land, thanks to communal property laws dating back to 1917. It wasn’t until 1992 that the government allowed families holding communal land to sell their holdings.

Now, in order to purchase land, developers often have to deal with groups of 10 or more family members. Successful negotiation requires a lot of savvy and close relationships with the locals, one reason why working with the right partner is of crucial importance.

Cap rates could also pose a problem. While they’re still a few points higher than in the U.S., they’ve been coming down precipitously. In 2002, they were 15 percent. Earlier this year, they had dropped to 9 percent, according to ICSC.

Brazil has its own problems. For one thing, there’s a complex system of federal, state, and municipal taxes, as well as tough environmental rules. If you don’t follow them correctly, it can mean big delays. “When we’re involved in real estate deals, we always include in our forecast postponements that can arise because of problems complying with environmental laws,â€? says Luis Claudio Campos, senior manager of transaction advisory services for Ernst & Young.

There’s also no debt market to speak of, as a result of the runaway inflation of past years. That means developers have to finance their properties through equity, making it difficult for any one entity to build the whole thing alone. “You have to buy part of it and then increase your ownership,â€? says Jacobstein. He feels there will be a debt market soon, as investors feel more confident in the long-term prospects of continued low inflation.

The bottom line: There’s plenty of opportunity in Latin America. Just make sure you team up with an organization that knows the lay of the land.

THIS ARTICLE APPEARED IN THE AUGUST 2007 ISSUE OF “RETAIL TRAFFIC�