10 Cities Boasting Mini Sales Booms

Some cities that were hardest hit by the real downturn are experiencing mini sales booms.

Las Vegas real estate properties are down 28 percent in price, but sales of homes are up 15 percent.

Motivated buyers accounted for 64 percent of Las Vegas sales in October, says Radar Logic, a derivatives firm. That’s the highest rate in the country.

"There's a pretty active housing market, it's simply at a lower-priced inventory," says Michael Feder, chief executive of Radar Logic. "And there are now bidding wars taking place over homes in foreclosure."

Phoenix and San Diego are reporting similar experiences.

"We're clearing out the bad news," says Kiva Patten, a director at Merrill Lynch specializing in housing derivatives.

"By the end of 2010 – that's where we're calling the bottom in the forward market. You're going to get a small price appreciation in 2011," says Patten. "It's not like the turn is 10 percent per year, it'll be something like 3 percent or 4 percent."

Here are the cities where experts say it makes the most sense to buy now.

1. Las Vegas
2. Sacramento, Calif.
3. San Diego, Calif.
4. Los Angeles
5. Detroit
6. Phoenix
7. San Francisco
8. Washington, D.C.
9. San Jose
10. Atlanta

Source: Forbes, Matt Woolsey (01/12/09)

More foreclosures predicted for 2009

by Catherine Reagor - Jan. 15, 2009 01:00 PM
The Arizona Republic

Foreclosures in metropolitan Phoenix will continue to climb in 2009, says prominent Wall Street housing analyst Ivy Zelman, a factor that will continue to hold back any recovery of the Valley's housing market and overall economy. Zelman said lenders need to find more ways to help struggling homeowners find lasting solutions.

Zelman's assessment was one of several predictions from national economists and real estate analysts at Urban Land Institute Arizona's Real Estate Trends Conference today at the Phoenix Convention Center.

This annual conference has become a must-attend event for people involved in Arizona real estate because of the expert speakers and their honest, even startling projections. Last year, there was stunned silence when analysts predicted home prices would fall 30 to 35 percent off their 2006 peak and any recovery was years away. So far home prices are more than 40 percent off the peak.

Two other national experts predict Valley home prices may not begin to rise again until 2012. They said prices will continue to drop this year and in 2010, and either level off or climb slightly in 2011. That's because metropolitan Phoenix's economy was hit harder than most cities because of its dependence on housing, construction and financial services, three industries at the center of the current economic downturn.

“Those industries are the three ground zeros for problems the American economy is having right now,” said New York-based economist Arthur Margon of Rosen Consulting.

“Foreclosures are the bugaboo for Phoenix's housing market,” said Tim Sullivan, a housing analyst with Sullivan Group Real Estate Advisors of San Diego. “Home prices are a neighborhood by neighborhood indicator. Prices can depend on how many foreclosures are in a neighborhood.”

This year's conference has drawn more than 1,000 real estate executives, analysts, government officials and consultants.

Foreclosures remain the pressing issue for metropolitan Phoenix's housing market recovery. All agree home prices won't stabilize until foreclosure rates fall for several months in a row. Lower priced foreclosure sales depress home values overall. Valley foreclosures topped 40,000 in 2008, a new record.

 

Housing resales in Valley were up in 2008

Rocketing foreclosures dragged down prices

by J. Craig Anderson - Jan. 15, 2009 12:00 AM
The Arizona Republic

Valley home-resale transactions increased slightly in 2008 from the previous year, but foreclosure activity more than quadrupled, dragging the median resale price down 23 percent, the latest Arizona State University report shows.

Resales totaled 46,745 in 2008, up nearly 2 percent from 46,035 the previous year, according to a report issued Wednesday by ASU's realty studies in the Morrison School of Management and Agribusiness.

The median resale price for detached single-family homes fell 23 percent from 2007 to 2008 without including foreclosed-on home prices. The decline was 27 percent with foreclosures factored into the total.

The median resale price for condominiums and town homes decreased by 11 percent in 2008, without including foreclosures, and by 15 percent with foreclosures included.

Foreclosure activity on detached, single-family homes, also known as trustee sales, increased 310 percent, from 8,535 in 2007 to 34,955 the following year, according to ASU.

Realty-studies Director Jay Butler predicted the housing slump will continue well into 2010 with "eroding consumer confidence, possibly additional job losses and tighter mortgage-underwriting guidelines."

The market's best hope is that more homeowners will receive loan-modification agreements from their lenders in 2009 to help them prevent foreclosure, Butler said.

"Unfortunately, the extremely weak economy is leading to mounting job losses that could severely impact the ability of a troubled household to have the needed income to qualify for one of the possible programs," he said.

Foreclosure activity has skyrocketed as home equity has evaporated and many homeowners' monthly mortgage payments have reset to higher interest rates.

Butler noted that price declines and trustee-sale activity varied considerably throughout the Valley in 2008.

El Mirage in the West Valley suffered the sharpest decline in home-resale prices, with the median falling 38 percent to $120,000 from $195,000.

Homes in Sun City West retained the greatest percentage of their resale value from 2007 to 2008, with the median price decreasing 11 percent.

The age-restricted West Valley community also had the fewest foreclosures by far, with only 35 trustee sales for the entire year, up from 15 foreclosures in 2007.

 

Study Predicts Riskiest Markets for Price Drops

Home prices are likely to fall still more, according to a new study by mortgage insurer PMI Group Inc.

The study predicts that home prices will be lower than they are now in 97 percent of 381 metro areas by the third quarter of 2010.

The riskiest markets for falling home prices are California’s Inland Empire; the greater Miami, Fla., area; Lake Havasu City-Kingman, Ariz.; and the Cape Coral-Fort Myers, Fla., areas.

The cities with the lowest risk of further declines include the Dallas-Fort Worth area, greater Houston and Pittsburgh.

Home prices showed signs of recovery in the third quarter of 2008, but with rising unemployment rates, home prices fell further in the fourth quarter, says PMI chief economist David Berson.

Source: The Wall Street Journal, Ruth Simon (01/13/09)

Program to expedite short-sale process of homes

by Catherine Reagor - Jan. 14, 2009 12:00 AM
The Arizona Republic

Struggling Valley homeowners could get some relief through a new pilot program from Fannie Mae. The initiative won't help people keep their homes, but it could help them avoid foreclosure.

Mortgage giant Fannie Mae is testing a program to pre-approve short sales in Phoenix and Orlando, two of the areas hardest hit by foreclosures. The goal is to expedite the often difficult short-sale process by Fannie Mae agreeing on a sales price for a home on the brink of foreclosure and the loss it will take before a deal is even done.

Short sales allow homeowners, who can no longer afford their payments, to sell their house for less than they owe the lender to avoid foreclosure. The deal must be pre-approved by the lender, and usually the remaining debt owed on the home is forgiven.

Foreclosures in the Valley have soared during the past year even as many real-estate agents and homeowners tried to negotiate short sales. The problem has been that short sales take too long and often don't go through because an agreement over price can't be reached with lenders in time.

The Arizona Regional Multiple Listing Service is working with Fannie Mae to launch the expedited short-sale program.

Brett Barry, a Valley real-estate agent with Realty Executives, is concerned about Fannie Mae's reputation for overpricing homes. He said it will help to have a pre-approved price on houses in the program, but if the price is much higher than values in the area, it won't help the house sell before foreclosure.

Fannie Mae's short-sale program focuses on homes listed to sell for less then the mortgage balance and that are being serviced by Countrywide Financial.

This is one more move to mitigate foreclosures. In December, foreclosures and pre-foreclosures dipped, according to Information Market. But analysts are concerned that the drop is due to a foreclosure moratorium by Fannie Mae and Freddie Mac during the holidays and that many of the loans will go back into foreclosure. If the program is successful, it will be expanded to other parts of the country.

CityScape update

During these tough economic times, developments able to get financing and move forward are to be lauded.

Downtown Phoenix's $900 million CityScape project is one example. The development has been downsized because of the recession, but that's so much better than being put on hold. Construction is under way on CityScape's first skyscraper. The high-rise, across from US Airways Center, already has several tenants. Most recently the law firm Ballard Spahr Andrews & Ingersoll signed to move into the project.

Construction of the CityScape's condominiums is on hold for now. Some leaders are disappointed, but it seems like a wise business move considering the many other downtown condo projects competing for buyers now.

If you know of any sizeable developments that construction has recently started on, please send me information.

 

Builder Outrage Delays RESPA Rule Change

In response to a suit over the Real Estate Settlement Procedures Act (RESPA) by the National Association of Home Builders, Housing and Urban Development has delayed implementation of a controversial rule change for 90 days until April 16.

The new rule would have barred home builders from offering incentives to buyers when they agree to use builders’ affiliated mortgage and title companies. It was set to take effect Jan. 16.

NAHB argues that the new rule is arbitrary because it only applies to businesses operated by home builders. Affiliated businesses run by title insurers could still offer discounts.

Home builders say their incentives programs increase competition and offer consumers "a full range of options to explore the best possible deal to purchase a home."

William P. Killmer, vice president of NAHB's advocacy group, said in a court filing that the new rule would "greatly obstruct NAHB's members from stimulating consumer demand and moving excess supply."

Source: Inman News, Matt Carter (01/12/09)

Building boom continues for SE Valley medical facilities

by Angelique Soenarie - Jan. 8, 2009 07:48 AM
The Arizona Republic

While most of the Valley is mired in a building slump, one industry appears to be bucking the trend.

Twenty five years ago, John Kressaty had only one choice for medical care in East Mesa. Now he has nearly a dozen.

Kressaty, who has had two open-heart surgeries, volunteers at Banner Heart Hospital, just a few miles from his home.

The specialty hospital, formerly Lutheran Heart Hospital, opened about eight years ago, pioneering a trend of hospitals opening or expanding along the U. S. 60 corridor, following the population boom as it moves east.

Since 1990, Mesa has seen 58 percent population increase, according to the U.S. Census, and healthcare is now the state's second largest employer.

"Hospitals tend to follow population and tend not to be built unless there is a place to support that," said John Rivers, chief executive officer of Arizona Hospital and Healthcare Association. The state's bed ratio is 1.9 beds per 1,000 population, which is actually lower than the national ratio of 2.7 beds, according to the American Hospital Association.

But the Southeast Valley is catching up.

In the last year, two community hospitals opened, and four specialty hospitals are on the drawing board. In addition, several existing hospitals are adding more beds and operating rooms.

"The demand for health services won't change because of the down economy," said John Harrington, chief executive officer at Banner Heart Hospital. He added that the two new hospitals in east Mesa, Mountain Vista Medical Center and Banner Gateway Medical Center, have helped meet more an increased demand for medical care.

"The need to construct was there," said Harrington, who recalls that in the mid 1980s, the Leisure World retirement community was the only major business in East Mesa.

Now, Mesa and Gilbert are benefitting from the number of jobs the healthcare industry is bringing. Banner Baywood Medical Center employs 997 Mesa residents and 323 Gilbert residents in its 2,113-member workforce.

That number doesn't include other jobs provided by community and specialized medical facilities in Mesa.

Banner Health is Mesa's second largest employer, with 9,100 jobs. That number will grow with the opening of the new Banner Children's Hospital in the fall.

For Kressaty, who moved his family from Wisconsin, quality medical care and education were at the top of his list in checking out places to live.

Little did he know, those preferences would pay off. He is now a volunteer at Banner Heart Hospital.

"I chose Banner Medical Center because it was highly rated. I always look for medical facilities to be close by," he said.

 

Office occupancies post major decline

by J. Craig Anderson - Jan. 8, 2009 12:00 AM
The Arizona Republic

Valley businesses abandoned their offices in the final three months of 2008 at a rate that one large commercial real-estate brokerage said it has not seen in its nearly 30 years of tracking the statistic.

It's alarming evidence that supports accounts of plans on hold, continued layoffs and bankruptcies in a market that is accustomed to uninterrupted growth.

CB Richard Ellis released its fourth-quarter report Wednesday on the absorption rate for office, retail and industrial space, with all three sectors showing unusually poor results.

Office properties suffered the most, losing a net 548,334 square feet of occupied space in the last quarter of the year. That's 10 times the amount of negative absorption seen in the previous three quarters.

CB Richard Ellis broker Jerry Noble said nothing in the first three quarters of 2008 prepared him for the office-market freefall he saw in the final quarter.

"It was probably one of the worst quarters Phoenix has ever experienced," he said.

Office projects in the Phoenix metro area lost a total of 603,112 square feet of occupancy in 2008, making it the first year of negative absorption CB Richard Ellis has reported since it began tracking the market in 1981.

The vacancy rate increased by more than 5 percentage points to 19.1 percent, up from 13.9 percent a year earlier.

In the retail sector, vacancy increased to 7.5 percent from 6.2 percent at the end of 2007. The increase was caused by store closings, and commercial brokers say more of those are on the way after a dismal holiday shopping season.

Retail finished the year ahead by 3.4 million square feet in terms of absorption, but the fourth quarter saw a loss of 232,798 square feet, the report said.

Occupancy of industrial space increased by 629,838 square feet in 2008, according to the report. It was the first year since 1990 in which less than a million square feet of additional industrial space was occupied by businesses in a single year.

 

LDS temples boost property values

Home values often rise near LDS sites

by Chelsea Schneider - Jan. 8, 2009 12:00 AM
The Arizona Republic

Homeowners near the proposed site of a Church of Jesus Christ of Latter-day Saints temple in Gilbert could see their property values increase, even in this depressed real-estate market.

As the focal point of the Mormon faith, a new temple tends to raise property values because church members like to live nearby. And for those outside the faith, temples have a reputation of being good neighbors and can anchor the long-term quality of an area.

The newest LDS temple in the U.S. opened in August in Twin Falls, Idaho. As has happened elsewhere, lots around the temple are now bringing higher prices than other places in the city.

Plans for the Gilbert temple were announced in April for a site on the corner of Pecos and Greenfield roads near Loop 202. Temples are also in the works for Phoenix and the Gila Valley in eastern Arizona. The site for the Phoenix temple will be announced soon.

Construction of three new temples reflects the growth of the LDS community in Arizona.

The new Gilbert temple is 13 miles south of the 81-year-old Mesa temple and is intended to serve the growing Mormon population in the southeast Valley, where about 100,000 Mormons live. The church recently built two Gilbert meetinghouses, where members gather on Sundays, and it expects to build more as Gilbert grows.

The Mormons hope to break ground for the Gilbert temple in about a year.

The new temple in Twin Falls provides a glimpse of what can happen in the surrounding neighborhoods.

Twin Falls' experience

When the site of the Twin Falls temple was announced, property values of houses across the street doubled overnight, Idaho developer Ken Edmunds said. This "temple effect" on a real-estate market is typical, Edmunds said.

Temples are considered houses of the Lord, and many of the Mormon faithful like to live in the shadows of their most sacred religious buildings.

Mormon temples also are relatively rare, so they attract people from wide areas. There are only 128 in the world. In recent years, the church's leadership has pushed for more temples to be built. Eight are under construction and 10 have been announced, including the three for Arizona. The state now has two temples, in Mesa and Snowflake.

A temple isn't a guarantee of desirable surroundings. The Mesa temple, the seventh-oldest still in operation, is surrounded by an area many say has deteriorated over time. The church and the city have worked on long-term rejuvenation plans.

But given the sprawling size of a temple's grounds, along with the quality of design and landscaping, many temples form a desirable and stable center for surrounding residential areas.

Twin Falls, with a population of more than 41,000, is about 20 percent Mormon and serves as the commercial hub for several bedroom communities surrounding the southeastern Idaho city. Before the temple was built, Twin Falls' previous claim to fame was being the site of Evel Knievel's unsuccessful 1974 motorcycle jump across the Snake River Canyon.

In Twin Falls, demand for homes near the temple was high as soon as the site was announced. There were even rumors that investors were knocking on doors around the site with offers to buy. Today, lots in a three-block radius of the temple are still priced higher than comparable land elsewhere in the city. Values range from $115,000 to $150,000 near the temple but drop by up to $40,000 in areas farther out, according to Terry McCurdy, spokesman for the church in Twin Falls.

Up to five families already have moved into Ensign Point, a custom-home neighborhood around the temple. Before the temple was built, Twin Falls-area Mormons traveled two hours to Boise for temple work.

Temples are different from meetinghouses, where church members gather on Sundays. Only members in good standing with the church can enter the temple. Sacred ordinances, such as marriages (called sealings) and proxy baptisms for the dead, are performed there.

Dick and JoAnn Irwin were among the first to move into the neighborhood across the street from the temple site 2 1/2 years ago. The Irwins, who are not Mormon, sold their farmhouse on the outskirts of Twin Falls because they were eager to move to an area that had a better setting than a typical suburban development.

"We couldn't ask for better neighbors," JoAnn said. "They did such a great job on the landscaping. It is beautiful and well taken care of."

The economic downtown has reduced demand lately, said Gayle Anderson, a Twin Falls real-estate agent. Still, she said, "in a market that's a little slower, I do feel (the temple) is a positive influence" and will still raise values once the market returns to normal.

In addition to raising home values, the temple has attracted three new major chain hotels in the area and plans for a fourth. About 160,000 people came to Twin Falls for a two-week public open house of the temple before it was dedicated. Now, 500 Mormons visit the temple every day, and weddings are held almost every weekend.

Spiritual attraction

Although some are drawn to the temple area for good home values, more may move close for spiritual reasons.

In the neighborhood near the Twin Falls temple, several couples said they didn't even consider property values. Instead, they wanted to live near a sacred space.

Dennis Brown and his wife, Valerie, live next to the temple in the Ensign Point development, the fulfillment of a dream that began four years ago when they heard the church would build a temple in Twin Falls.

"I couldn't believe it," Dennis said. "To me, it's such a blessing in my life. We wanted our kids and grandchildren when they came to visit to literally come to the temple."

The Browns' neighbors, Steve and Sally Victor, moved into their Ensign Point home in November. They never intended to sell their home in Twin Falls, but the draw of the temple was too strong.

"When I wake up in the morning and look out that window, I have the resolve and determination to live through the day and keep the covenants of being an honest and hardworking person," Steve said.

Brent and Marilyn Rasmussen live across the street from Ensign Point. They moved back to Idaho to be near the temple. Both grew up east of Twin Falls and lived in Portland, Ore., for 17 years. Brent, a retired FBI agent, says the temple serves as a visual reminder that he needs to keep his life in tune.

"(The temple) brings people closer together," Marilyn said. "Members of the church got really excited and drew closer together. It's the house of the Lord. It's a beautiful edifice and a symbol of good in the community."

Plans in Gilbert

Back in Gilbert, final plans for the temple still need town approval. The church hopes to begin construction in about a year. Temples can take up to two years to build.

The temple grounds will occupy about 10 acres. There have been talks about developing a custom-home neighborhood nearby.

If Gilbert mirrors Twin Falls, homeowners can expect gains even in a depressed housing market. The median home price for the area near the Gilbert temple site is now $255,000, down $20,000 from last year.

A few months ago, about 30 people filled a room in the Mormon meetinghouse near Pecos and Greenfield roads to learn about the Gilbert temple. Several neighbors from Whitewing at Higley Estates attended the meeting. They hoped the temple would keep houses occupied in the upscale Gilbert development, which borders the temple site.

Paul Gilbert, an attorney handling the temple project for the church, told the crowd he expects the temple to benefit property values, especially once construction begins.

"From our experiences, temples have definitely raised property values of surrounding residential areas," Gilbert said. "It's an extremely quiet use. You'll never hear noise emanating from the temple, and the church is very careful to use very generous setbacks from the street."

Kris Thompson, chairman of Gilbert's economic-advisory board, said that property values have at least stabilized around the temple site and that he expects to see more growth, especially after construction begins.

"There is an undercurrent or buzz taking place around the area the temple is set to be constructed," Thompson said. "Once we see ground break, property values will likely increase."

 

Federal Reserve Drives Rates Even Lower

The Federal Reserve announced a plan last week to spend a half-trillion dollar buying up mortgage-backed securities.

As the new year dawns, the Fed's action has driven down interest rates on new mortgages and rates are expected to fall further.

The Fed said that it would start buying mortgage bonds early this month.

“The program stands to drive mortgage rates even lower, possibly to 4.5 percent," said Derek Chan and Nicholas Strand, strategists at Barclays Capital in a note.

"That's a huge deal for this mortgage market," said Kevin Cavin, a mortgage strategist with FTN Financial.

Source: The Wall Street Journal, Prabha Nataraian (01/02/2009)

Economy stalls Waveyard project, but developers optimistic

by Gary Nelson - Jan. 4, 2009 12:00 AM
The Arizona Republic

Thirteen months ago, Mesa voters gave overwhelming approval to the idea of selling Riverview Golf Course and four nearby ball fields to a company that wants to build a water-sports paradise on the land.

In the aftermath of that election, the founders of Waveyard Development LLC said they would move quickly to build what they said would be Arizona's most popular man-made destination. They hoped to be turning dirt by this past summer and opening the mixed-use resort by early 2010.

Now, early 2010 is a little less than a year away. Instead of promising an opening day, it looms as the deadline for Waveyard to either close the deal or walk away from Mesa.

From the start, the project hinged on whether Waveyard founders Richard Mladick and Jerry Hug could prove to the city that they had hundreds of millions of dollars in solid financing. Until that happens, Mesa retains ownership of the land.

To no one's surprise, those loans haven't materialized amid the worst worldwide financial crisis since the Great Depression.

"We're talking about the worst credit cycle in the last 100 years," Hug told The Arizona Republic. "It's not like (other) things are getting done and Waveyard is not."

Although the Mesa project is stalled, Hug and Mladick said several things are working in their favor:

• Creditors who have kept them afloat for more than five years during the company's infancy are still supplying money, and the firm has not had to lay off staff.

• Negotiations and design work are under way to build Waveyards in Dubai and South Korea.

• Waveyard has been able to sell licensing agreements for amusement-park technology it has developed as it works on the Mesa project.

• Entertainment-oriented projects are more attractive to investors right now than traditional developments such as recession-stricken housing subdivisions and shopping malls.

• A down economic cycle might actually help the project in the long run.

"We're very fortunate that we're not opening our doors today," Mladick said. With commodity and labor costs falling, he said, "the cost to execute on our vision is coming down almost daily."

Earlier this year Mladick said the Mesa project could cost $750 million. That was up from the initial estimate of $250 million, partly because of soaring costs at that time and partly because some parts of the project had grown larger than originally planned.

Mladick said Waveyard could have been in big trouble had it started construction with financing from companies that imploded because of the subprime mortgage crisis. Instead, he said, "We'll let the markets settle and play out," and the company is working with several possible lenders to fund the Mesa project.

Mayor Scott Smith said he and City Manager Chris Brady are in regular contact with Waveyard and planned to meet with Hug and Mladick this week.

"We recognize that with the financial markets the way they are, things aren't going to change overnight," Smith said.

Meanwhile, he said, Waveyard still has time to pull things together before the agreement to buy Riverview expires on Jan. 11, 2010.

Mladick said Waveyard could ask for an extension of that deadline, but such a request would be accompanied by an enormous site plan and other paperwork showing the project was moving ahead.

He promised that despite the delay, Waveyard will get built.

"It's just a matter of timing, when the credit markets free up to provide us that opportunity," Mladick said.

 

IRS touts real estate tax breaks

BY SHANNON BUGGS / Houston Chronicle

Published: January 3, 2009

Home is where the tax relief is. The Internal Revenue Service and the U.S. Department of Energy are touting the following real estate-related tax breaks Congress recently created or extended for individual taxpayers:

→Mortgage Forgiveness Debt Relief Act of 2007.

For taxpayers who lose their homes in foreclosure.

What: Allows homeowners to exclude from income any debt forgiven in a home foreclosure.

→First-time home-buyers' credit.

For first-time home buyers who purchase homes between April 9, 2008, and June 30, 2009.

What: The credit is 10 percent of the purchase price up to $7,500 for either single taxpayers or married couples filing jointly. The tax credit must be paid back in equal payments over 15 years. The IRS defines first-time home buyers as people who have not owned a home in the three years prior to a home purchase.

→Property tax deduction.

For taxpayers who pay real estate taxes but do not qualify to itemize other tax deductions.

What: Increase your standard deduction by as much as $500, or $1,000 if you are married and filing jointly, without having to itemize.

→Energy-saving home improvement credit.

For homeowners who purchase and install energy-efficient windows, insulation, doors, roofs and heating and cooling systems.

What: Save your receipts to file for a tax credit for the amount you spent on the improvements up to $500. However, to qualify, the improvements can't be "placed in service" before Jan. 1, 2009 or after Dec. 31, 2009.

→Residential renewable energy credit:

For homeowners who install solar electric systems, small wind systems or geothermal heat pumps.

What: A 30-percent credit for solar electric systems placed in service between Jan. 1, 2006, and Dec. 31, 2016.

 

Office Demand Is Down, and So Are the Deals

New York TImes

By VIVIAN MARINO

Published: January 3, 2009

BY most accounts, the commercial property market reached its pinnacle in early 2007 with the Blackstone Group’s acquisition of Equity Office Properties Trust and its prized cache of more than 500 office buildings.

The $39 billion deal was the largest of a spate of mergers and acquisitions. Back then, trophy towers were a hot commodity for large investors with seemingly insatiable appetites for commercial properties and copious credit to buy them.

(In fact, with the ink barely dry on its agreement, Blackstone, a private equity firm, was able to resell a big chunk of the E.O.P. portfolio.)

But the credit crisis and recession crushed deal making in office buildings in 2008.

From January through December, there were just 1,410 transactions nationwide, valued at $49.3 billion, versus 4,410, valued at $207.2 billion, for the corresponding period in 2007, according to the latest data from Real Capital Analytics, a research company. It predicted that sales would total $53 billion to $55 billion for all of 2008, further below a recently reduced forecast of $61 billion.

At the same time, demand for offices has softened as companies have cut back or consolidated operations; many of them are already subleasing space that they no longer need. Office vacancies nationwide rose to around 13.5 percent by mid-December from about 12.5 percent, on average, in 2007, according to Reis Inc., another research company.

Of course, all these negative conditions are taking a toll on investors.

Some property owners are dealing with tighter cash flows and reduced profits from lost tenants or falling rental rates. In Manhattan alone, rents are expected to plunge 10 to 20 percent by 2010, and nationally by 5 to 15 percent, according to Cushman & Wakefield, the commercial broker.

Shareholders in real estate investment trusts that focus on office properties have watched their returns plummet as well.

Industry analysts expect little improvement this year. “It’s safe to say that it’s going to get worse before it gets better,” said Maria Sicola, the executive managing director of research at Cushman & Wakefield, noting, too, that the office market tends to lag the overall economy because of its long leases. She said, “2009 will be a difficult year — we’ll continue to see job losses in many regions of the country.”

About 1.9 million jobs have been lost since January 2008, about a third of them among office workers, and many of those are in the troubled financial services industry, according to Raymond G. Torto, the global chief economist for CB Richard Ellis, the commercial brokerage firm. He predicted that as many as two million more jobs could vanish by the end of 2009.

On the positive side, new development remains under control. “This was our saving grace,” said Sheila K. McGrath, a real estate analyst at Keefe Bruyette & Woods, explaining that high construction costs and tighter financing had helped to curtail new projects.

So what can investors do to minimize their losses until the next growth cycle?

For landlords, whether they own trophy towers or modest suburban buildings, the advice is simple. “You will need to maintain cash flow and tenants and minimize expense — that’s your only strategy right now,” Mr. Torto said. “As an owner in a highly illiquid market, it’s too late to sell,” except at distressed prices.

But what about buying? That question seems harder to answer.

“If you’re a buyer, you’re looking for prices to settle lower,” Mr. Torto said. “Some buyers cautiously see this as an opportunity. This is a time when core trophy properties become available, and they would never be able to get in that market before.”

Indeed, a big investor could find deals in distressed or potentially troubled properties; in a recent report, Real Capital Analytics identified 649 of them nationwide. Those on the list included several Manhattan office buildings that were acquired through Blackstone two years ago by Macklowe Properties. Macklowe, in turn, gave them up because of financing problems.

“Blackstone was extremely savvy — or very lucky — by disposing of the E.O.P. property as quickly as it acquired it,” said Paul E. Adornato, a senior real estate analyst at BMO Capital Markets.

For the smaller investor, there may be some buying opportunities in modest buildings outside urban areas, as well as in office REITs, which are dividend-paying companies that hold portfolios of properties. The office REIT sector over all was trading at a discount of nearly 36 percent to net asset value in mid-December, according to Mr. Adornato.

Office REITs had a 44 percent loss, on average, for the year through Dec. 30, according to the latest data from the National Association of Real Estate Investment Trusts, compared with a 40.5 percent loss for all property REITs during that same period.

Industry analysts urge investors to exercise caution when picking REITs, however. “While we acknowledge deep discounts available, we don’t necessarily see a catalyst now to get the stocks moving,” Mr. Adornato said.

Still, he and others maintain that some office REITs are better positioned to weather the anemic economy and tight lending environment, and they advised investors to pay close attention to company balance sheets, focusing on cash reserves and debt levels.

“You want to look at who’s got loans coming due,” said Ritson Ferguson of ING Clarion, explaining that refinancing can be dicey these days.

Because of their lower-than-average leverage, Mr. Ferguson said, he is relatively optimistic about Vornado Realty Trust, Highwoods Properties Inc. and Office Property Trust. He said he also preferred Boston Properties Inc. because it has longer-than-average lease terms — “north of seven years” — on its buildings.

Ms. McGrath, meanwhile, said she favored Alexandria Real Estate Equities, which specializes in laboratory space. While the REIT was not immune to the economic slowdown, she said, she viewed its “concentration in life science and lack of exposure to financial tenants as a positive.”

Mr. Adornato also ventured from the plain-vanilla office companies. He was positive about Douglas Emmett Inc., which owns office space, along with apartments, in “high-barrier-to-entry markets,” where there are often obstacles to new development. He singled out another REIT hybrid, Liberty Property Trust, which owns office and industrial property in diverse regions.

While most analysts see few regions as particularly strong, some are upbeat about the Washington area, given the continuing demand from the federal government and the incoming Obama administration. “I think defense intelligence will remain a top priority for the country,” Mr. Adornato said, “and you need office space for that.”

He was also more bullish about so-called Class A buildings, which are often in superior locations and attract the highest-quality tenants and rental rates. “I would think that the Class A property will likely do better,” he said. “The tenants who could not afford Class A before would be able to move up from Class B as prices are lowered.”

 

The Fastest-Growing States Include Surprises

Forbes magazine examined census population estimates from July 1, 2007, to July 1, 2008, to determine which states had the largest year-over-year increases.

States where jobs are the most plentiful are the places that are growing fastest.

Only two states lost population: Michigan and Rhode Island. Michigan was hurt by the auto industry; Rhode Island was affected by the declining housing industry.

Here’s the list of the 10 fastest-growing states:

Utah, 2.53 percent
Arizona, 2.31 percent
Texas, 2.03 percent
North Carolina, 2 percent
Colorado, 2 percent
Idaho, 1.85 percent
Wyoming, 1.8 percent
Nevada, 1.79 percent
Georgia, 1.71 percent
South Carolina, 1.7 percent

Source: Forbes, Lauren Sherman (12/22/2008)

Optimism mounting for 2009 rebound

by Russ Wiles - Jan. 1, 2009 12:00 AM
The Arizona Republic

Enough, already.

Investors are hoping for a better time in 2009, if only because 2008 couldn't have been much worse.

As the housing slump morphed into an unprecedented credit crunch that unleashed a full-blown recession, investment values sank through the floor.

The stock market suffered its worst year since the Depression and, at one point, was down more than 50 percent from its 2007 highs. Bond prices also slumped as investors worried about mounting defaults. Even oil, gold and other commodities reversed course dramatically, sliding late in the year after a frothy early rally.

As the dust settled on 2008, the Dow Jones industrial average finished the year down 33.8 percent, excluding dividends, while the Standard and Poor's 500 index stumbled 38.5 percent and Nasdaq 40.5 percent. The broadest market measure, the Dow Jones Wilshire 5000, slumped 38.7 percent, equal to a $6.9 trillion loss in wealth for the year.

The stock market has stabilized in recent weeks after a stretch of incredible selling pressure from September through November. But if prices are going to rally strongly from here, investors will need to look over the abyss for several more months, as statistics on unemployment, consumer spending and the like could worsen.

"I think we've made the bottom for the Dow and S&P 500," said David Daughtrey, an investment adviser at Copperwynd Financial in Scottsdale. "But we still have some ugly economic numbers ahead."

Barbara Walchli, Phoenix-based manager of the Aquila Rocky Mountain Equity Fund, thinks the just-concluded quarter will be the weakest of the cycle, with positive economic growth not resuming until the second half of 2009. But she, too, thinks stocks have bottomed.

Although consumer sentiment still is sliding, professional money managers as a group are growing more optimistic.

About three in four investment advisers polled recently in a national survey expect higher stock prices in the coming year.

"Managers believe that the market has overshot the damage done by the ongoing recession and is now oversold and undervalued," said Erik Ristuben, an investment officer at Russell Investments, the Tacoma, Wash., firm that conducted the survey.

In a year when investors craved safety, small stocks, foreign shares, junk bonds and other speculative instruments got tossed out the window.

Only four of 50 stocks in the Bloomberg Arizona Stock Index gained ground in the fourth quarter, and 14 of Arizona's stocks lost at least half of their value just since Oct. 1.

"Historically, small stocks fare well coming out of a recession," said Walchli, who expects better performance ahead now that year-end tax-loss selling has concluded.

Foreign stocks also got hammered, with most European and Asian markets getting hit worse than the Dow and S&P 500.

"(Investment) managers see the financial crises facing other nations as taking longer to resolve than those faced by the U.S.," Ristuben said.

Other analysts disagree. Foreign markets now are more compelling than U.S. equities in terms of average dividend yields, price-earning ratios and other measures, said Thomas Melendez, a portfolio manager at MFS Investment Management.

"Global equities are down about 45 percent off their highs, and markets have already factored in a fair amount of bad news," he said. "(Yet) investors are still wary."

For stocks in general to advance, Daughtrey sees the need for further thawing in lending conditions. Although overborrowing is at the root of the economy's current ills, the backlash cut off credit even for healthy borrowers.

Daughtrey also hopes to see an easing in new jobless claims, continuing low energy prices and better corporate profits, although he expects those won't materialize until the second half of 2009.

As another plus, Walchli believes some investor uncertainty will clear up when the Obama administration assumes power.

Larry Adam, chief U.S. investment strategist for Deutsche Bank, cited several potential trends to watch in 2009, including these:

• A temporary deflation scare hastened by the recent slide in oil and other commodity prices.

• Bond market recovery as jittery investors start migrating away from Treasuries in favor of high-quality corporates.

• Commodity-price stability after the sharp retreat for oil, copper and other resources in 2008.

Adam also cited the growing importance of dividend yields as a means of luring skittish investors back into stocks.

After lagging for decades, yields on blue-chip stocks now parallel yields on 10-year Treasury bonds.

Everything is yielding more than Treasuries, including corporate and municipal bonds.

"This market is effectively pricing in a depression today where investors expect default rates (on non-Treasury bonds) to rise substantially," said Michael Roberge, an investment officer at MFS.

Consequently, higher-quality corporate bonds are attractive to many professional investors. In the Russell survey, 60 percent of managers expressed enthusiasm for corporate bonds, up from 37 percent in the third quarter and 8 percent in 2006.

Assuming the economy stabilizes and investor confidence improves, both the stock and bond markets could be bolstered by trillions of dollars of cash coming out of safe havens.

For example, investors have stockpiled a record $3.8 trillion in money-market mutual funds paying yields barely above 1 percent on average.

"At some point, we will see all this cash waiting on the sidelines start to come back into (other) markets," Melendez said.

Walchli cautions the rebound could take longer compared with prior downturns.

"It will be a slow-growth economy for a while due to deleveraging (shedding of debt)," she said.

"And a lot of investors have been traumatized."