New Collaboration for MMI Advisors

The ink is barely dry on an agreement between MMI Advisors, LLC (www.mmiadvisors.com), my company, and Allegro Advisors, LLC (www.allegrocompanies.com). Allego is the new name for two merged real estate advisory companies, Farragut Capital of New York, and Kalorama Realty Capital of Washington, DC. The principals of Allegro are Tom Boytinck (NY), Sam Glass (DC), Brian Gill (DC), Erik Binkowski (DC) and Jonathan Glick (Chicago). MMI and Allegro are implementing capital markets solutions for real estate operators and investment managers seeking growth or investment capital, structured as holding company entity investments, joint ventures, separate accounts and closed-end commingled funds.

Allego already has five client mandates, Alex Brown Realty of Baltimore, Hayman Woods of Dallas, The Adler Companies of Miami, Wakefield Capital of Chevy Chase and Hungerford Properties of Vancouver, Canada. Others potential assignments are in the works. SEC Regulation D, private placement securities offerings are offered through the group's affiliate, Allegro Securities, LLC, a broker dealer and member of FINRA and SIPC.

More to come.......

Single-Family Residential - Where Are We Now?

I owe it to those investing the time to read this to get more specific on the residential collapse. We all know how important the single-family market is to the US economy and to the American psyche. So I did some soft research. It continues to be scary.

Look at one of the worst statistics out there: home pricing in Las Vegas peaked in August 2006 and reached a new low in March 2011. The National Association of Realtors (NAR) index for Las Vegas over this period dropped from 234.78 to 98.28, a decline of 58.1%. In the interest of presenting data that is less pessimistic - the home price index for a composite of 20 US cities dropped 32.6% over the same time period. We are back to home price levels reached in 2002 and 2003 before the bubble. We have known this for a while, but this magnitude of decline is unprecedented since the Great Depression.

It is no wonder then why 40% of previously owned home sales in March 2011 were distressed sales, meaning that they were re-sales of foreclosed homes or short sales of homes that were heading to foreclosure. Even four and one-half years after the peak, 10.1% of all currently existing Nevada mortgages are in foreclosure, compared to 7.3% in New Jersey, 6.5% in Illinois, 5.2% in New York, 4.5% in California, and 4.2% in Florida. These are still very big numbers.

The good news, if you can call it good, is that the number of delinquencies and mortgages going to foreclosure in most states is moderately declining. But, foreclosure inventory is still rising in most states, and that is one of the reasons that home prices continue to drop.

Home prices in February 2011 fell 3.3% below levels of a year ago, if you follow Case Schiller, or 5.7% if you follow the Federal Housing Finance Agency. Only Washington, DC showed a positive monthly change (+1.0%). One argument is that a year ago we were coming off the housing credit for first-time buyers. However, we have seen consecutive new lows in housing prices for each of the last six months. It is not getting better.

I thought I would look to homebuilders for further indications. Builder sentiment slipped from 17 to 16 in March 2011, on a scale of 100! The record low for this index was 8 in January 2009, when the economic world was at the precipice. A reading below 50 indicates that more builders view sales conditions as poor than good. Not so good, obviously.

Thirty-year, fixed-rate mortgage rates in March 2011 were still around 5.0%, above their low in mid 2010 of roughly 4.5%. Interest rates are still very attractive. With all the concern about rising interest rates, and I agree that such concerns are valid, it appears that the interest rate impact on future single-family residential sales and price momentum, as rates rise, will also be negative.

There is talk about the expanding number of households, but also about the attractiveness of renting versus owning. Unemployment does not appear to be getting much better, and GDP expansion has slowed down (1st Qtr. 2011). I do not see that there is much gas in the tank for the residential marketplace (speaking of gas, I filled up my tank last weekend at a cost of $4.89 per gallon or over $85.00. That was a first for me).

We are definitely in a new economic space. Most people in the US today have never experienced this type of setback. I think we are in for continued tough going, and my recommendation for individuals is to maintain prudent fiscal conservatism. Tighten the belt, again, and hang on.

Single Family Residential Trends - How Long Until the Rebound?

I had every intention of researching this issue more than I have. For example, I would have liked to know whether the roughly 400,000 in annualized new home starts in the last reporting period were really the lowest since 1963 or whether I had misunderstood or mis-remembered what I had read. Of if the continuing decline in housing prices of roughly 2% was from this time last year or a month-over-month figure. I also wanted to confirm if the REO inventory was still at an all-time high notwithstanding the slow down in the foreclosure rate.  I am also curious if the really overbuilt markets such as Las Vegas, communities in Arizona, subdivisions that shouldn't have been built in Riverside County and other parts of California, most of Florida, much of the Carolinas and others have simply brought the averages down. If you talk to people in Los Angeles, home prices in the really nice areas are on the rise. There are no cheap deals in Manhattan, and I hear Washington, DC is still an expensive place to buy a new home. Of course, these are not normal places. But I am actually pretty confused by all the data. But it is clear that we still have a very large residential mess, and while this mess may not be the root cause of the current sideways economic drift, it has to be a big part of it. Remember, consumer spending has represented roughly 70% of our economy. The consumer is on his or her ass, by and large.

I have previously reported on how investors are snapping up distressed residential subdivisions, primarily from the banks that have foreclosed upon them. One cannot rely on investors to predict the future.  Just remember how we got here in the first place. The global investor community, institutions and individuals, bought the residential story hook, line and sinker. (Mental note to research total losses from residential mortgage backed securities, whole loan mortgages held by banks and other investors, and homeowner cash equity. Multiple $trillions, I suspect.) I am encouraged however that investment in land banking is underway.  I personally believe that land banking, and not just residential, is one of the better investments today.

We have been into this residential cascade for about five years now. The residential pricing peak was in 2006, at least a year for two, if the Lehman Brothers bankruptcy is your trigger, before the broader financial fabric began to become unglued. As we look back, it is nearly unimaginable have we could have been so off track. You can pull out the histories of manias, panics and crashes, and you realize that all the technology and sophistication simply accentuated the scale of this calamity.

I wonder whether the pain and suffering that many are enduring will influence successive generations the way that the great depression did.  My grandparents and my mother were greatly influenced by the great depression.  They became big savers. Will Americans revert to the craziness that we witnesses before all this, when third and fourth cars, second and third homes, multiple country club memberships, flashy watches and jewelry and the whole array of conspicuous consumption were the American entitlement? Or will we see a smarter survivor, where prudence and caution prevail?

The good news about all this is that entrepreneurs are working through this dislocation, identifying opportunities that are not obvious to rear-view mirror business minds. I am very encouraged by the formation of new businesses that are emerging from this chaos. (I try to ignore the mindless bickering on the political front).

I am sure I have not provided any useful guidance on the question of this piece, "How Long Until the Rebound." The answer is, nobody really knows. 

Real Estate Investment Managers - Rough Water Ahead

Both institutional and private investors have pulled in their horns for real estate investment. They are more cautious, resulting in lengthier evaluation, broadened due diligence and conservatism. And they are focusing better, strategically on where to place their investment bets. 

Most managers have less money under management than they did three to four years ago. AUM has been reduced by realized investments, and new investor commitments are more difficult or impossible to obtain. Consequently, managers have reduced staff, lowered compensation for the remaining professionals and are looking for alternative survival solutions. Financial and functional viability then comes into question. Mergers and windups of managers are steadily taking place. In retrospect, it is easy to conclude that there were too many managers, including many poor ones.

We are approached by managers who are caught in the apex of this survival conundrum. They are asking for help in raising capital. They are also attempting to reinvent themselves with alternative investment strategies, organization charts containing phantom employees who do not really work for them and stretches of the truth about track record, AUM or capabilities. Enough time has passed and enough bad news have been received for them to be well on their way through the seven stages of grief. It is not difficult to triage between confident and desperate managers.

It is not an overstatement that the real estate investment management community is undergoing a massive restructuring, just as the assets are that they are managing. Both assets and employees will graviate to stronger and more capable hands.  The industry will be resized.  The emerging survivors will be more capable and more financially secure. And it will be obvious why they have made it through the gauntlet.

Special Servicers = special conflcits (click for article)

Although it is old news, the Wall Street Journal has chosen to write today about the inherent conflicts a commercial mortgage backed securities (CMBS) special servicer straddles between his obligation as a fiduciary to bond holders that hire them and their own shareholders that want to buy assets under the special servicer's management.

I have thought from the first special servicer acquisition by Cerberus (LNR) to the most recent one by Fortress (CW Capital) that they were lawsuit magnets if the new owners pursued this self-dealing, asset purchase agenda.

This group of investors, that also include Andrew Farkus (see article) and Berkadia (a JV between Berkshire Hathaway and Leucadia Insurance), are too smart for this litigation risk. They have bought these companies for other reasons, but I will be surprised if they ultimately get what they paid for.

Residential Land - Back in Vogue

Who would have thought so soon after the housing tsunami in the US, accompanied by the lowest number of new housing starts since 1963, that institutional investors would be investing in residential land, even land that is not fully entitled? Partially developed subdivisions are in vogue, attracting capital at prices that are a fraction of the historic development costs with the land thrown in for free. The mid Atlantic region and Southern California are very popular, with competitive bidding now the norm. Lenders have smartened up, offering foreclosed assets and even mortgage notes locked in complex legal webs through sophisticated national brokerage firms that have formed specialized units for this purpose.

I am working with an institutional investor that launched a grand program to buy infill multi-family sites in major coastal markets. Again, some of the sites are not fully entitled and/or are in breach of entitlement provisions with local municipalities.

I think these strategies are certainly riskier than buying fully leased commercial properties, but the going-in unleveraged yields of 4% to 7% have become boring. Institutions have decided to take more risk.

Highrise Residential Project in Williamsburg, Brooklyn

My first and last question, before and after I toured the property, was would you consider living there? The Edge is on the East River in Williamsburg, Brooklyn, on top of the L subway line that connects under 14th Street to Manhattan.  The Edge is 5 to 7 minutes away from the L stop, which is the first stop in Brooklyn. This stop is three stops from Union Square, which is where I started my trip. The property is 20 to 30 minutes from Union Square if the trains are running properly.

Amenities include a parking garage (rental rate of $250 per month), large swimming pool with lap lanes, his and her dressing rooms that have two massage therapy rooms each, a exercise facility, screening room, basketball court, lounge, library and ground level, outdoor sun deck facing the East River. The Edge even has a refrigerated room to accept deliveries from Fresh Direct, the online grocer, a point distinctively highlighted by the salesperson. (Must mean there is no good grocery store in the area. I didn't see one.) Very nice amenity package! Rivals anything I have seen in Manhattan.

The units are large and nicely appointed, but the bedrooms are small. Space is generous in the kitchen, dining and living room areas. Closets are simply OK, not great. Most units have very good views of either Manhattan or the low urbanscape looking east over Brooklyn. Prices hover around $1,000 per foot, which is 30% to 50% below comparable new product in good locations in Manhattan.

Bedford Street is the major retail corridor, and it is a raw collection of trendy pizza shops, Japanese and other ethnic restaurants, clothing stores, bars, tea rooms and healthy food stores. It is however several years before this area really arrives, and one doesn't walk more than several blocks away from Bedford Street to the east or north before the gentrification fades to the neighborhood's industrial and blighted residential past. The subway is the key and this area is very close to civilization.

The Edge is 50% sold, according to the broker, having been completed last summer.  I suspect there is a mound of hurt happening between the developer and the lender, but it is not obvious from the number or marketing and service people running around.

I guess I have answered my question. I would not live there, as the neighborhood is too rough but there clearly are others who would.