Bloomberg Brief Real Estate Special

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introductionWelcome to Bloomberg Brief’s special edition on real estate. Investors have flocked back to the residential and commercial property markets as the economy has showed signs of recovering. The issuance of bonds backed by commercial properties is on track to beat last year’s supply and yield premiums for bonds backed by commercial property loans have narrowed.

Our special edition will help shed light on where we go next. Jefferies CMBS veteran Lisa Pendergast says she expects CMBS spreads to narrow by year end, while Fannie Mae economists Douglas Duncan and Patrick Simmons argue that a slowdown in the growth of the labor force suggests more modest prospects for the demand for new housing and construction. Emile J. Brinkmann, the chief economist of the Mortgage Bankers Association of America, probes how state regulations will affect the pace of foreclosures and delinquencies. Nicolas Retsinas of Harvard’s Joint Center for Housing has some advice for lawmakers on GSE reform: Be careful that new rules and regulations don’t raise borrowing costs. And Donald Trump offers a characteristically confident view that the recovery in real estate is for real.

Video introductionClick on or Scan the QR code below with your smartphone to watch our video introduction

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real estate By the numBers

12.2 million Number of U.S. homeowners who owed more than their properties were worth at the end of the second quarter 2013.

15.3 million Homeowners owed more than their properties were worth at the end of the second quarter 2012.

4.50% Average rate for 30-year fixed rate residential mortgage loans in September 2013.

3.31% Average rate for 30-year fixed rate residential mortgages in November 2012.

5.35% Average rate for conventional mortgages between 1900 and 1909.

12.68% Average rate for conventional mortgages between 1980 and 1989.

$88.1 billion Total amount of commercial mortgage bonds sold year to date.

$117.6 billion Total CMBS sold in 2012.

$253.9 billion Amount of commercial mortgage securities sold in 2007.

1,027 Number of real estate M&A deals unveiled year to date.

$101.4 billion Value of real estate mergers unveiled year to date.

8 Number of acquisitions announced by Advance Residence Investment year to date, making it the most acquisitive company within real estate M&A.

9% Projected decline in total residential mortgage loans underwritten in 2013 from 2012.

$619 billion Total amount of loans expected to be underwritten by lenders for residential home purchases in 2013.

$973 billion Total amount of applications expected to be processed by lenders for residential home mortgage refinancings in 2013.

$10.5 billion Total amount of non-agency residential mortgage debt sold year-to-date.

$3.5 billion Non-agency residential mortgage debt sold in 2012.

$1.2 trillion Non-agency residential mortgage debt sold in 2006.

$1,528 Average profit earned on each loan underwritten by independent mortgage banks and mortgage subsidiaries of chartered banks in the second quarter of 2013.

$1,772 Average profit earned on each loan underwritten by independent mortgage banks and mortgage subsidiaries of chartered banks in the first quarter of 2013.

52% Share of all home loans processed by lenders that are used to buy homes in the second quarter of 2013.

12.1% June gain in home prices from year-earlier level.

Source: Bloomberg LP, Brean Capital, Freddie Mac, Mortgage Bankers Association, Zillow, “A History of Interest Rates” (John Wiley & Sons.)

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the housing outlook will Brighten, But for how long?Demographic and labor market fundamentals point to brighter days ahead for housing, but par-ticipants in housing and mortgage finance should keep their umbrellas handy, say economists at Fannie Mae. Page 1

liquidity returns to cmBs marketCommercial and multifamily real estate inves-tors now look to life companies, pension funds, the government sponsored enterprises, private equity, and CMBS lenders to finance asset pur-chases and loan refinancings. Page 3

interView: goodwin procter’s gil mennaReal estate investment trust mergers might have picked up if there hadn’t been a wave of stock exchange listings by non-listed REITs seeking liquidity for their shareholders. Page 5

data Commercial real estate foreclosures, delinquen-cies, REO properties and CMBS spreads. Page 6, 7, 9, 11-14

retailers stick to Bricks and mortar Despite the popularity of online shopping, brick-and-mortar stores still command the lion’s share of shoppers’ dollars and serve as the cornerstone for a retailer’s strategic growth plans, says A&G’s Jonathon Graub. Page 15

higher rates and spending The issue of higher borrowing costs for home buyers has already made it into earnings confer-ence calls, with several businesses voicing concerns about how higher rates will impact consumer spending on goods and services, says Bloomberg’s Richard Yamarone. Page 16

data Real estate owned properties. Page 17-19

data Commercial real estate lenders with the most delinquent property loans. Page 22

malls and sluggish retail sales Mall REITs have enjoyed strong tenant-sales growth since the credit crisis and recession, let-ting them increase rents. Now they face difficult comparisons to past results and limited avenues for external expansion. Page 23-24

dataIO loans in CMBS, agency collateral, CMBS issu-ance. Page 25-26

data Florida had the most single family home loans that are 90 days or more delinquent or are in the process of foreclosure in the first quarter of 2013. Page 30

a menu for gse reformMarket distortions and higher borrowing costs are just two factors that should be considered by lawmakers crafting GSE reform legislation. Page 31-32

dataHigher rates have eroded demand for home loan refinancings. In September 57 percent of all loan applications were for refinancings; in December 2012 they accounted for 84 percent of all loans processed by lenders. Page 33

delinquencies Growth in the nation’s economy has not been uniform and regulations vary with each state.

These are just two factors that will determine which single family home loans will go delinquent, according to the Mortgage Bankers Association of America’s chief economist. Page 34

interView: Marinus’ najib CanaanThe veteran mortgage bond market participant and co-founder of Marinus Capital looks back at how the mortgage bond world has changed after the credit crisis. Page 35

dataForty New York businesses with Chapter 11 peti-tions involving debt of $1 million or more identified themselves as single asset real estate, while 29 such filings were California businesses in the first half of 2013. Page 36

interView: prime lending’s steVen la dueConsumer sentiment has improved, driving up demand for loans to buy homes and much of the lending is being done by large well-capitalized firms as opposed to independent brokers. Page 37

mapping out home pricesNational home price trends could be misleading for investors, according to Clear Capital’s Dr. Alex Villacorta. Page 38-39

interView: donald trumpCommercial and residential real estate mar-kets are making a comeback but President Obama’s healthcare legislation threatens the U.S. recovery and has limited real estate investments, says Trump. Page 40

contents

bloomberg brief real Estate supplement

newsletter Ted Merz Executive Editor [email protected] 212-617-2309

real Estate Aleksandrs Rozens Editor [email protected] 212-617-5211

CMbs/CrE Product Cheryl Lopez-Collins Manager [email protected] 415-617-7026

CMbs analyst Mohit Malhotra [email protected] 212-617-4159

real Estate Jennifer Prince Data Editor [email protected] 212-617-4589

art Director Lesia (Alexandra) Kuziw [email protected] 212-617-5113

newsletter Nick Ferris business Manager [email protected] 212-617-6975

advertising Jeff Maniatty [email protected] 203-550-2446

reprints & Lori Husted Permissions [email protected] 717-505-9701

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the housing outlook will Brighten, But for how long? Over the next sev-

eral years, the two biggest influences on the residential real estate market – household formation and job growth – are signaling a brighter outlook for the hous-ing market. Longer term, however, the likelihood of less immigration and the continued retirement of Baby Boomers may damp demand for housing.

In the short run there are reasons to be optimistic. House-hold formation rates,

which lagged during the economic slowdown, should recover along with employment rates, creating demand for new housing units. Based on the Census Bureau’s most recent popula-tion projections and our view that new household formation will pick up with continued labor market improvement, we forecast that almost 1.4 million households will form when housing markets return to “normal” in 2016.

This forecast represents substantial im-provement from recent household growth, which bottomed at less than half a million during the Great Recession and is still running at a sub-million annual pace.

When combined with demand from few vacant units, our household growth fore-cast implies a need for more than 1.6 mil-lion housing starts in 2016. Although well below housing construction at the peak of the boom, this forecast represents twice the level of housing production recorded last year.

Part of the reason for our optimistic outlook is that household formation rates should begin to recover as labor markets improve, unlocking “pent-up” demand for housing, particularly among young adults. During the Great Recession, unemploy-ment among young adults shot up: The unemployment rate for people between 18 and 34 increased to 12.7 percent in 2010 from 6.5 percent in 2007.

Facing stormy employment prospects, many young adults, who otherwise would have gone to work and formed indepen-dent households, took shelter in Mom and Dad’s basement or in college dormitories.

Fortunately, recent data suggest some thawing of the deep freeze in youth em-ployment. The unemployment rate among young adults has declined by about 3 percentage points from its peak.

Although Fannie Mae’s Economic and Strategic Research Group doesn’t forecast unemployment rates by age, our latest Economic Outlook calls for the overall rate

to decline from 7.5 percent this year to 6.0 percent in 2016, steady improvement that bodes well for the employment prospects of young adults.

As labor market conditions continue to improve for young adults, the boost to household formation could be substantial. Recent estimates suggest that the release of pent-up demand alone could lead to a couple of million household formations, spread out over several years. That would create a relatively sunny housing outlook for the next several years.

Patrick Simmons

Doug Duncan

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Total Housing Starts (000s of units) Forecast

Housing starts are Expected to Double between 2012 and 2016

residential real estate

www.bloombergbriefs.com Bloomberg Brief | REAL ESTATE SPECIAL EDITION 1

Over the longer term, however, dark clouds could be forming on the demo-graphic and labor market horizons.

Specifically, as described in our recent edition of Housing Insights, we anticipate a long-term slowdown in labor force expan-sion that suggests more modest prospects for new housing demand and construction than we have seen historically.

Underlying the workforce growth slow-down there are two other powerful trends: a decline in immigration and the contin-ued retirement of Baby Boomers.

Even using optimistic assumptions about future labor force participation rates (the proportion of the population in a given age and gender that is either employed or actively looking for work), we forecast that workforce growth, after rebounding somewhat from recessionary lows, will be slow next decade.

During the first half of next decade, we project that the labor force will grow by only 0.4 percent to 0.8 percent per year, a substantial decline from the average growth rate of 1.5 percent per year experi-enced between 1948 and 2012.

The implications for housing demand are substantial. Reviewing five decades of historical data, we find that the number of new housing units produced is closely correlated with labor force growth. The

association between housing produc-tion and labor force growth is at least as strong as the correlation between housing production and growth in households, payroll employment, or population. Given the positive correlation between housing production and labor force growth, the anticipated marked slowdown in work-force expansion implies weaker housing demand and homebuilding activity than observed in the past.

As a result, we expect demographic and labor market fundamentals point to brighter days ahead for housing, but that players in the housing and mortgage finance industries should keep their um-brellas handy.

— Patrick Simmons is director of the strategic planning economic and strategic research group at Fannie Mae. Doug Duncan is senior vice presi-

dent and chief economist of the economic and strategic research group at Fannie Mae.

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History Historical AverageMost Recent BLS Labor Force Projections ESR Base ScenarioESR Optimistic Scenario

Labor Force Growth is Expected to remain subdued For Years

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improved liquidity propels commercial mortgage Bond issuance to post-crisis highThe recovery in the

commercial mortgage backed securities market is evident on a number of fronts.

Most importantly, major commercial real estate property markets have seen rents and valuations approach and – at times – ex-ceed pre-crisis peaks.

The better conditions in the commercial real estate (CRE) market are also tied to improved liquidity.

In spite of these positive factors, the recovery remains uneven across property markets and asset classes, with weaker markets only recently garnering attention as CRE investors broaden their reach into value-added assets.

Unlike the CRE downturn in the late-1980s and early-1990s brought on by overbuilding, macro economic forces and the drying up of liquidity in the capital markets fueled the latest downturn.

The recovery in the property markets is aided by plentiful capital from both U.S. and non-U.S. equity and debt markets.

Commercial and multifamily real estate investors now look to life companies, pension funds, the government spon-sored enterprises, private equity, and CMBS lenders to finance asset purchas-es and loan refinancings.

Increased conduit lending has led to higher volumes of new-issue CMBS.

Through August 2013, CMBS supply totals a post-crisis peak of $56.7 billion, already surpassing 2012’s full-year tally of $48.4 billion but well shy of the 2007 peak of $243 billion.

After a number of fits and starts, CMBS issuance is now more consistent in terms of structure, issuing partners, and collateral.

In 2010, the ten largest loans in a “con-

duit” pool made up over 67% of the pool and retail loans on average made up about 40% of a pool.

Both metrics fell in 2012 and in 2013, making for more diverse bond pools.

CMBS post-crisis underwriting is far more conservative than was the case in 2007, with rating agency stressed loan to values and debt service coverage ratios, or DSCRs, now averaging 95.3% and 1.08 times, respectively versus 111.2% and 0.91 times in 2007.

Some slippage in underwriting is evi-dent recently. Stressed loan to values, or LTVs, and DSCRs are softer versus 2010 levels and the percentage of partial IO loans has climbed to 30% versus just 6% in 2010.

The majority of loans are still sized based on in-place cash flows, and loan-level disclosure is better than it has been in the history of this market. Importantly, credit-enhancement levels remain substantially higher than those of pre-crisis deals and increased in recent years in response to the modest slippage in underwriting.

Proposed risk-retention rules do not provide an exemption to single-borrower/single-asset CMBS so investors should expect large trophy assets sprinkled pari-passu in CMBS conduits.

The lower leverage that character-izes these loans means that, with some tweaking, many will make the cut as ‘qualified commercial real estate’ loans under Dodd-Frank. This is positive for both investors due to the improved credit quality of the pool – all else equal – and retainers. These loans reduce the overall retention obligation by the proportionate percentage of the loan principal balance for “qualified” loans.

As for relative value, macro factors may fan CMBS spread volatility in the coming months as the market awaits further data

that offers clues to the pace of economic growth, potential QE tapering, the debate over the debt ceiling, events unfolding in Syria, bond outflows, and the effect of all these factors on benchmark rates.

CMBS spreads likely will widen amidst the volatility and uncertainty, but yield pre-miums should tighten into year-end due to the sector’s attractive relative value versus competing sectors, sound underwriting of mortgage loans resold as bonds, and a slowdown in CMBS issuance.

CMBS bonds up the credit stack will continue to garner focus given their heightened liquidity and almost ‘cash-surrogate’ quality. Spreads on LCF bonds – at about 103 basis points or more over swaps – are well off 2013’s tights of 72 basis points over swaps and may widen even further near term given projected heavy conduit supply this month.

LCF spreads at 103 to 110 basis points over swaps should prove a very attractive entry point.

For now, multifamily directed class sales of over $7 billion from Fannie Mae and Freddie Mac dominate the high-grade legacy space.

The shorter average lives and improved convexity of these bonds make them bet-ter relative value plays than legacy super senior AAA securities.

Look to AAA-rated mezzanine bonds and select legacy AAA-rated junior bonds for added risk-adjusted yields once mar-kets stabilize.

Finally, recently issued BBB- mezza-nine classes in the 420 basis point over swaps area are attractive; more conser-vative investors should focus on better underwritten 2012 BBB- bonds at still attractive spreads in the 400 basis points or more area.

—Lisa Pendergast is a debt strategist at Jefferies group Inc.

commercial real estate

Lisa Pendergast

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Based: Boston and New York Hometown: Fishkill, New York

hobbies: Flying (private pilot), skiing, tennis, cycling, pickleball

education: Syracuse University, BA, Georgetown University, JD and MLT

Books: “Crossing to Safety” and “Angle of Repose” by Wallace Stegner

restaurant: Hakkasan in New York

Q: What do you expect from rEiT M&a in the second half of this year?a: We’ve seen those non-exchange-trad-ed REITs address the need for liquidity for their shareholders by making the strategic decision to list on the NYSE. If they’re list-ing, they’re not selling their company. The more listings we see in the non-exchange-traded REIT space, especially in the last half of the year, the more likely we are to see less M&A.

We represented Cole Credit Property Trust II in its sale to SRC [Spirit Realty Capital Inc.] and that’s because Cole Credit Property Trust II is looking for liquidity in 2017 for its investors and Cole wanted to demonstrate to its investors that they could effect a liquidity event because others in the industry, including ARC [American Realty Capital], were putting points on the board in providing liquidity.

That was a $7.1 billion merger, a sig-nificant transaction, and that’s the kind of thing I think you’ll see less of. Cole, for example, decided to list CCPT III and re-name it Cole Real Estate Investments Inc.

The exception to that are a couple of non-exchange-traded REITs and a big one called Inland American [Real Estate Trust Inc.] that has an array of different assets in it. Dedicated REIT investors make their asset allocations based on what asset class they want to go into. They don’t like diversi-fied REITs. So Inland American is not likely to list. That’s likely to get broken up.

The REIT industry has a lot of players in it and you see a lot of M&A at the smaller levels too, for example we represented Mid-America [Apartment Communities Inc.] its acquisition of Colonial [Properties Trust], that was a smaller deal.Q: so we shouldn’t conclude from that transaction that we’ll see more deals in apartments?a: It was a unique transaction. Colonial is

a good example of why Inland American couldn’t list. It was one of the first diversified REITs. It had apartments, it had retail, it had office, and they tried to switch their strategy to become more of a pure apartment play. But it really didn’t work. So it was a great op-portunity for MAA, which is a darling on Wall Street in the apartment sector, to buy that company because Colonial couldn’t get out of its own way. It always had a depressed multiple. Why would you buy it because it’s not just a pure apartment play? They’re buying Colonial’s retail and office assets and they may have to find homes for them.

Q:

The public rEiT landscape isn’t espe-cially consolidated, so why is it so hard to compel M&a to happen?a: It’s an excellent question — one that we keep asking ourselves. If you look back at the history of apartment REITs, you’ll see that the sea changes, they come and they go, they get absorbed. I think that’s likely to happen, for example, in retail. Arguably, there are too many retail REITs. Brixmor

[Property Group], for example, is buying assets and Brixmor’s going to be coming public now. It’s a 600-pound gorilla. When they get out it’s going to be interesting to see what happens to the retail sector. Retail is a good example of one where it would be logical. Why doesn’t that hap-pen? It has to do with social issues. Those that sit in the executive suite of many of these REITs see themselves as buyers, first and foremost, and not sellers. If every-one sees themselves as a buyer there’s not likely to be a seller, right?

Q: is the CommonWealth rEiT struggle with activist investors a bellwether for the industry in any way?a: Clearly it’s a one-off. The REIT is spon-sored by the Portnoy-affiliated listed com-panies, the Portnoy family, it was externally advised. Most equity REITs are not exter-nally advised. When Corvex [Management LP] and Related [Cos.] saw the opportunity to internalize management by taking a run at the public company, you saw an immedi-ate pop in the stock. There’s such a drain on the cash flow available for distribution to shareholders from the contract with the external manager.

It’s almost no different than the rage that’s happening in REIT conversions, where companies can convert to a REIT platform and save significant corporate tax.

I believe that the activism in the case of CommonWealth, personally, and I say this very carefully, was not surprising. And I might actually err on the side of saying that it was almost justified, and highly unusual and not likely to be repeated in the context of the mainstream REIT industry.

Real estate investment trust mergers might have picked up if there hadn’t been a wave of stock exchange listings by non-listed REITs seeking liquidity for their shareholders, says Gil Menna, co-chair of the real estate, REITs and real estate capital markets group at Goodwin Procter LLP. He spoke with Will Robinson.

commercial real estateexchange listings, management attitudes limit reit m&a, says goodwin’s menna

Those that sit in the executive suite of many

of these REITs see themselves as buyers,

first and foremost.

commercial real estateJuly commercial mortgage debt foreclosure rate at lowest since oct. 2009

Foreclosures of securitized commercial real estate mortgage loans tracked by Bloomberg fell in July to a level not seen since Oct. 2009. The rate of commercial mortgage debt foreclosures involving all property types in July was 0.76 percent – the lowest since Oct. 2009 when it was at 0.72 percent.

Foreclosures of commercial mortgage debt peaked in July 2011 when they hit a rate of 1.92 percent.

The 30-day delinquency rate of commercial mortgage debt involving all property types, which peaked in June 2009 when it was at 1.33 percent, declined to 0.33 percent in July, according to data compiled by Bloomberg LP. That’s a low not seen since

December 2008 when they were at 0.36 percent.Commercial mortgage debt delinquent 60 days was at a rate of

0.21 percent in July, down from 0.22 percent in June and May. In April it was at 0.21 percent.

Sixty-day delinquency rates were as high as 0.72 percent in April 2010.

Ninety-day delinquencies of commercial mortgage debt were at their highest in June 2010 when the rate was 4.06 percent. In July they were at 1.46 percent.

— Aleksandrs Rozens

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Source: Bloomberg LP Source: CRE <GO>, REDQ <GO>

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commercial real estatehospitality property foreclosures drop Below one percent for first time since Jan. 2010

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Foreclosures of mortgage debt secured by hospitality proper-ties fell in July to their lowest rate since January 2010. The foreclosure rate of mortgages for hospitality was at 0.9 percent in July, down from 1.06 percent in June. This is the first time they have been below 1 percent since January 2010 when the figure was 0.95 percent.

Foreclosure rates for other commercial real estate also fell in July.Retail property foreclosure rates were at 1.02 percent in July,

down from 1.09 percent in June. In July mortgage debt secured by office properties saw foreclosure rates of 1.32 percent, down from 1.56 percent in June and a low not seen since March 2011 when they were at 1.3 percent.

Foreclosures of mortgage loans backed by industrial proper-ties were 0.83 percent, down from 0.88 percent in June. They peaked at 2.08 percent in July 2011.

– Aleksandrs Rozens

retail Property Foreclosures Office Property Foreclosures

Hospitality Property Foreclosures industrial Warehouse Property Foreclosures

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commercial real estatesouth carolina among top states with 30-, 60- and 90-day or more delinquenciesSouth Carolina and Georgia commercial properties were among the most delinquent as of Aug. 2, according to Bloomberg LP. South Carolina had 161 properties with debt 90 days or more delinquent accounting for 3.45 percent of the state’s securitized commercial mortgage debt; 12 properties were 30 days delinquent and five were 60 days delinquent.

30-day delinquencies 60-day delinquencies 90-plus-day deliquencies

rank state% of Bal

dqs ($m)

state total

Bal ($B)

no. of props

state% of Bal

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state total

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no. of props

state% of Bal

dqs ($m)

state total

Bal ($B)

no. of props

1 West Virginia 7.64 111.94 1.46 4 Wyoming 2.95 12.92 0.44 1 South Carolina 3.45 278.85 8.08 161

2 South Dakota 1.83 13.63 0.74 2 Connecticut 1.33 135.43 10.17 2 New Mexico 3.45 99.51 2.89 21

3 Rhode Island 1.58 23.03 1.46 1 Tennessee 0.87 97.32 11.13 15 Virginia 3.22 1,036.83 32.18 122

4 Mississippi 1.20 34.14 2.83 9 Georgia 0.68 174.73 25.57 27 Michigan 3.00 476.96 15.91 44

5 New Hampshire 1.14 22.51 1.98 3 Ohio 0.64 125.12 19.60 14 Arizona 2.88 540.83 18.75 66

6 South Carolina 1.08 86.98 8.08 12 Massachusetts 0.49 99.87 20.53 5 Georgia 2.69 688.52 25.57 195

7 Tennessee 0.96 106.55 11.13 18 Texas 0.48 349.52 72.38 35 Delaware 2.69 87.83 3.27 4

8 Colorado 0.85 139.79 16.45 6 Michigan 0.43 68.00 15.91 9 Wyoming 2.68 11.74 0.44 3

9 Pennsylvania 0.69 168.77 24.30 12 South Carolina 0.39 31.26 8.08 5 Nevada 2.53 338.04 13.35 47

10 Indiana 0.68 76.00 11.18 6 Illinois 0.38 121.43 32.24 10 Nebraska 2.53 67.03 2.65 6

11 Michigan 0.49 77.72 15.91 10 Nevada 0.38 50.36 13.35 7 Wisconsin 2.52 193.76 7.68 150

12 Georgia 0.46 118.89 25.57 33 Alabama 0.37 28.02 7.60 9 Idaho 2.41 29.66 1.23 17

13 New Jersey 0.46 104.24 22.55 9 Pennsylvania 0.35 85.92 24.30 8 South Dakota 2.36 17.58 0.74 2

14 New Mexico 0.45 13.06 2.89 2 Wisconsin 0.35 26.52 7.68 8 Indiana 2.29 255.69 11.18 43

15 Arizona 0.42 79.20 18.75 14 Louisiana 0.30 21.30 7.07 2 Massachusetts 2.27 466.03 20.53 25

16 Wisconsin 0.37 28.40 7.68 20 Delaware 0.18 5.83 3.27 1 Mississippi 2.20 62.30 2.83 50

17 North Carolina 0.36 79.83 22.34 37 North Carolina 0.17 37.86 22.34 10 Ohio 2.19 429.23 19.60 48

18 Utah 0.35 19.50 5.52 1 Arkansas 0.16 5.09 3.10 3 Louisiana 2.18 154.15 7.07 20

19 Florida 0.34 178.96 51.95 41 Indiana 0.16 17.86 11.18 5 Florida 2.17 1,126.67 51.95 267

20 Virginia 0.31 99.58 32.18 14 New Jersey 0.14 31.56 22.55 3 Connecticut 2.10 213.63 10.17 23

21 Missouri 0.31 29.10 9.43 9 Arizona 0.14 25.49 18.75 3 Pennsylvania 2.10 510.04 24.30 55

22 California 0.30 358.15 119.37 27 Virginia 0.13 41.13 32.18 8 North Carolina 1.93 430.88 22.34 148

23 Kentucky 0.29 16.18 5.61 2 Florida 0.12 63.95 51.95 15 Oklahoma 1.81 83.93 4.64 16

24 Maine 0.29 3.52 1.20 2 Idaho 0.12 1.46 1.23 2 Missouri 1.59 150.39 9.43 39

25 Texas 0.26 187.09 72.38 134 Colorado 0.10 16.06 16.45 3 Alabama 1.50 113.86 7.60 165

* Ties in rank are broken by number of properties and total delinquent balance.


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AAA five-year CMBS spreads hit 1,500 basis points over swaps, while U.S. Treasury 10-year notes fell to 2.60 percent on Dec. 12, 2008.

Legacy AAA-rated five-year commercial mortgage bond yield premiums over swaps are wider from June when the spread was at 120 basis points, accord-ing to data compiled by Commercial Real Estate Direct – crenews.com. In July 2012 these five-year AAA CMBS spreads were at 185 basis points, compared with 150 basis points this summer. Yield premiums of these securities were as high as 1,500 basis points in December 2008. To get this data on your terminal, please type in CMB <GO>


aaa five-year cmBs wider from June, narrower from year-ago

AAA five-year CMBS

spreads hit 1,500 basis

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note yields fell to 2.60%

on Dec. 12, 2008.

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commercial real estatetwelve properties make iowa top state for commercial real estate foreclosuresTwelve Iowa properties in foreclosure accounted for 3.53 percent of the state’s commercial mortgage debt as of Aug. 2, according to Bloomberg LP data. In Nevada, 3.11 percent of the commercial mortgage debt in the state was in fore-closure, while 2.46 percent of the com-mercial mortgage debt in New Jersey was in foreclosure, as of Aug. 2. Twenty-four Nevada properties were foreclosed on and 41 New Jersey commercial properties were being foreclosed on as of Aug. 2, according to Bloomberg LP. To access this data on your Bloomberg terminal, please type in CRE <GO> or REDQ <GO>


(Percentage of state’s commercial mortgage debt in foreclosure)

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commercial real estatenevada has highest percentage of real estate owned property in u.s.Nevada was the state with the highest percentage of real estate owned property as of Aug. 2; 7.89 percent of its securi-tized commercial mortgage debt was real estate owned, according to Bloomberg LP Data. Nevada had 62 properties with a real estate owned balance of $1.05 billion. Vermont had one property that was real estate owned accounting for 6.64 percent of the state’s securitized commercial mort-gage debt and Georgia’s 122 properties accounted for 6.08 percent of the state’s securitized commercial real estate debt. To get this data on your terminal, please type in CRE <GO> or REDQ <GO>


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(Percentage of state’s securitized commercial mortgage debt that is real estate owned)


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commercial real estatenevada has highest percentage of real estate owned hospitality properties

rank state % of Bal reo Bal (usd) total Bal (usd) numBer of properties

1 Nevada 14.82 143,217,628 966,393,864 2

2 New Mexico 13.43 58,926,129 438,786,517 3

3 Idaho 11.03 8,737,433 79,239,792 1

4 Maryland 8.34 149,782,029 1,795,100,833 2

5 Alabama 7.07 45,718,463 646,657,281 2

6 Arizona 5.31 98,152,805 1,849,334,251 7

7 Illinois 5.18 184,291,716 3,561,032,250 11

8 Wisconsin 4.55 31,691,534 695,967,486 3

9 Tennessee 4.21 62,581,243 1,485,392,700 4

10 Texas 4.19 277,007,958 6,608,532,933 11

11 South Carolina 3.98 52,197,846 1,311,796,016 7

12 Missouri 3.93 39,482,217 1,005,861,764 2

13 Utah 3.76 17,341,467 461,566,087 2

14 Florida 3.61 314,388,402 8,705,776,590 20

15 Louisiana 3.24 24,534,974 757,992,488 3

16 Nebraska 2.71 4,799,648 177,239,006 3

17 Michigan 2.46 24,626,344 1,001,801,064 8

18 Pennsylvania 2.29 56,539,643 2,472,250,095 3

19 Georgia 2.20 47,385,077 2,154,791,752 5

20 Massachusetts 2.07 51,000,000 2,457,982,932 1

21 Kentucky 1.84 12,635,508 688,345,326 1

22 California 1.83 267,182,198 14,574,149,450 14

23 Washington 1.54 31,585,246 2,047,399,066 4

24 Mississippi 1.54 5,263,158 341,264,656 1

25 Oregon 1.53 14,550,535 952,553,115 1


Two of Nevada’s commercial real estate loans backed by hospitality were real estate owned, accounting for 14 percent of all of the state’s securitized commercial mortgage debt as of Aug. 2, according to Bloomberg. Florida, with 20 real estate owned hotels, had the most hotel property loans that fell into the REO category.


retailers fend off online competition by revamping physical store locationsBesieged by cost-

conscious shoppers, stiff competition, the proliferation of mobile payment and Internet shopping, U.S. retailers are looking to extract value from brick-and-mortar store locations.

Video rental busi-nesses, book sellers

and electronic equip-ment sellers have been

hard hit and businesses such as block-buster inc., borders Group and Circuit City stores inc. have been forced to seek out bankruptcy court protection; many eventually liquidated their assets. In spite of their varied products and business models, Borders, Circuit City and Blockbuster shared one commonality: too many underperform-ing stores that needed to be closed well before the companies embarked on a restructuring process.

Despite the popularity of online shopping, brick-and-mortar stores still command the lion’s share of shoppers’ dollars and serve as the cornerstone for a retailer’s strate-gic growth plans. Although it faces new challenges the retail industry offers strong growth opportunities for executives who are willing to take advantage of their own real estate and other retail properties that come up for sale when these businesses fail.

The current response among retailers to changing market conditions in terms of managing their real estate could be one of the most significant periods in the retail industry’s history since the shopping center concept was developed in the 1950’s.

With retail spending exhibiting little growth at a mere 0.2 percent uptick last month from July, based on Commerce Depart-ment data, retail executives are looking at how to get the most out of their brick and mortar locations along with traditional methods aimed at managing a downturn in consumer spending: merchandising, product line overhaul and better seasonal inventory management.

Take, for example, the $2.9 billion, $16-per-share acquisition of saks inc. by Toronto’s Hudson’s bay Company an-nounced on July 29. The deal is predicated in large part on unlocking the inherent value

of real estate owned by both businesses, which operate their respective stores under the Hudson’s Bay, Lord & Taylor and Saks Fifth Avenue brand names.

As Hudson’s Bay pointed out in an an-nouncement unveiling the acquisition, the companies’ combination will create an unrivaled coast-to-coast North American real estate portfolio comprised of stores located in major shopping areas within New York, Beverly Hills, Toronto, Van-couver and Montreal, among others. Its store base will mushroom to 320 includ-ing 179 full-line department stores, 72 outlet stores and 69 home stores spread between the U.S. and Canada.

The Canadian retailer said it plans to evaluate strategic alternatives to fully realize the value of the combined companies’ real estate portfolio, including the creation of a real estate investment trust.

In addition to managing inventory, how retailers use their physical space has come under greater scrutiny. Some big box play-ers are moving to use their existing store space in creative ways, such as forming joint ventures that allow another company to lease its space. Best Buy, for example, has teamed with Microsoft to allow the software giant to establish 500 stores within its own stores. Microsoft will be able to obtain retail store exposure at a fraction of the cost required to develop or open its own stand-alone locations, while Best Buy diversifies its revenue stream and take advantage of excess floor space.

Others have moved to consolidate their real estate in order to trim costs amidst re-jiggering product lines and making price point adjustments on merchandise. Publicly traded jones Group inc., for example, has moved to prune underperforming stores from its portfolio. The New York-based com-pany, which manages the Nine West and Anne Klein brands, announced in April that it would shutter 170 stores in order to save $40 million to $60 million over 15 months.

Rationalizing store size, the number of units in a market, and making sure whether the stores are situated in high traffic areas such as shopping centers should be of paramount concern for retailers. Having the correct store footprint is crucial to being an efficient and successful merchant.

When store comps and margins are under

pressure due to the impact of economic issues the ability to find alternative uses for space, whether expanding assortments, establishing branding departments, or other means of utilizing space becomes more important than ever. Downsizing, while un-appealing as it is, or relocating a business to another location of better size must be a serious consideration.

If retail real estate executives are going to be successful in the New Millennium they must look further down the road than the next quarter’s projected revenues or switch-ing the line up on seasonable fashions as apparel sellers must do. They must be willing to adjust their thinking and strategy for growth. For those unable to evolve quickly enough, there looms the unattractive prospect of having to close stores and start restructuring its business.

Adapting is important but, so too, are long term planning and real estate consider-ations. Strategic decisions about managing properties should be made at least three years in advance to best position brick-and-mortar stores for the future.

Significant thought and analysis must also come into play when it becomes time to engage in the lease renewal process. Often, relocating a store to the proper size is cheaper and easier than other tough decisions, such as implementing a down-sizing and store closure plan.

At the same time strategic market re-views held at least once a year will help ensure a retailer understands changing market conditions and adjusts to devel-oping trends more effectively. Implement-ing efficient processes, using analytics and formulating the right strategy can determine how well retailers manage their costs. Occupancy must be kept un-der control for retailers to be successful and grow, which in the long run, is better for everyone.

— Jonathon graub is a principal in the commercial real estate, advisory and

investment group at A&g Realty Partners, where he focuses on retail real estate.

Jonathon Graub



richard yamaroneBloomberg Economist

commercial & residential real estate

TO sEE ORanGE BOOk pOsTinGs On ThE BlOOMBERG TERMinal TypE ni ORanGEBOOk <GO>

boston Properties [BXP] Earnings Call, 7/31/13: “In the markets that we are in, primarily, San Francisco, and Washing-ton, and Boston, and Cambridge in the Boston area – these markets are not just the downtown areas, but markets in general, and of course, New York have all been performing relatively better than the overall national economy. In fact, these are perhaps the four best cities or among the four best cities – these four markets and the cities in general have done better than the overall economy.”

starwood Hotels [HOT] Earnings Call, 7/25/13: “We continue to see a great deal of confidence among real estate investors and developers in Mexico, for Mexican markets and that’s been the source of our pipeline for our business there. At the same time, there’s been an overall growth in the Latin American business, and when you look at markets like Brazil, for example, you see a massive growth in the middle class, very much along the lines of what we’ve seen in other parts of the world, including Asia.”

Weyerhaeuser [WY] Earnings Call, 7/26/13: “In Real Estate, we expect con-tinued improvement in our single-family homebuilding business as a result of a strengthening housing recovery, espe-cially in Southern California, as well as a seasonally stronger third quarter com-pared to the second quarter. Sales have continued at a brisk pace and we expect to close over 700 homes in the third quarter compared to the 636 closed in the second quarter.”

simon Property Group [SPG] Earnings Call, 7/29/13: “There’s nothing more than buying something cheap that excites me and the team here. So we love to buy things really cheap. And if that can be done on a distressed basis, we like it as long as – ultimately we’ve got to believe in the real estate because we’re not, well, I wouldn’t say we’re traders. So at the end of the day we’ve got to have a long-term view that we like the cash flow that’s being generated from the real estate.”

Wynn resorts [WYNN] Earnings Call, 7/31/13: “The amount of money that’s been lost in Las Vegas in the last four years, in terms of abandoned projects, and marked down values from the Frontier and the Stardust property to Fontaineb-leau and Cosmopolitan and CityCenter and places like that has been astro-nomical. I don’t even like to think what that number is, but Las Vegas is perking along,

because there’s tremendous choices that are available to people of every income level. The infrastructure in Las Vegas is almost impossible to duplicate. And that’s the reason why it survives California Indian gaming and all these other jurisdic-tions. It doesn’t get any easier, but Las Vegas is managing to hold its head up.”

Kimco realty [KIM] Earnings Call, 7/31/13: “Overall, our industry maintains its quarter-by-quarter recovery. Retail-ers continue to grow their expansion plans and coupled with a 35-year low in new supply, effective rents are moving up materially. Consumer spending and retail sales are also doing well, despite the sequester and the beginning of rising interest rates.”

beazer Homes [BZH] Earnings Call, 8/1/13: “But there is an elephant in the room, and that’s rising mortgage rates. Ordinarily an uptick in mortgage rates acts as a bit of an accelerant, pulling demand forward as buyers worry about getting hurt by future rate increases. And when the rates started moving in May, that’s what we anticipated. But it’s turned out a little differently, at least in our communities. While traffic levels are still up year-over-year, our sales pace particularly in June and July has been a little bit softer than we expected.”

D.r. Horton [DHI] Earnings Call, 7/25/13: “I think everybody is just going to have to get accustomed to the fact that we’re in a slightly rising interest rate envi-ronment. You’re not going to see anybody for a while because people are frankly a little freaked out about, well I missed the low. And why didn’t I buy a home when the rates were an eighth of a percent lower? But those people come back and they’re ultimately – most of them going to buy.”

The issue of higher borrowing costs for home buyers has already made it into earnings con-ference calls, with several businesses voicing concerns about how higher rates will impact consumer spending on goods and services. Other issues hanging over Corporate America include sequestration, a soft household sector and the need for a heavily promotional envi-ronment. The Bloomberg Orange Book Senti-ment Index, a measure of sentiment among the most economically U.S. companies, has been below 50 for 31 consecutive weeks – a signal of economic contraction.

There is an elephant in the room and that’s rising

mortgage rates.

where are people buying in the municipal bond market? mFlo <

go

>


commercial real estatearkansas has highest percentage of real estate owned retail properties


1 Arkansas 14.28 130,967,404 917,373,551 2

2 Vermont 13.62 36,437,434 267,615,103 1

3 Colorado 8.86 304,148,666 3,431,695,484 14

4 Georgia 6.14 399,010,185 6,503,181,590 33

5 South Carolina 5.98 115,801,622 1,938,258,497 8

6 Michigan 5.35 218,992,927 4,094,773,062 17

7 Nevada 4.77 244,936,543 5,137,492,753 15

8 Indiana 4.57 127,620,594 2,794,771,079 13

9 Arizona 4.47 245,074,051 5,479,113,247 20

10 Missouri 4.28 105,934,075 2,474,641,329 5

11 Maryland 4.13 199,032,904 4,821,239,212 9

12 Illinois 4.05 251,809,290 6,218,307,124 21

13 Kansas 3.87 43,283,957 1,119,717,813 3

14 Mississippi 3.87 22,330,195 577,794,448 4

15 California 3.84 1,068,224,673 27,843,126,895 53

16 New Mexico 3.32 25,009,852 753,285,866 4

17 Massachusetts 3.14 112,130,370 3,567,967,425 5

18 Tennessee 3.01 65,447,297 2,172,421,254 15

19 Louisiana 2.99 58,820,310 1,963,432,338 4

20 Florida 2.86 397,032,373 13,868,537,428 30

21 Wisconsin 2.82 58,454,750 2,069,659,906 7

22 Washington 2.46 61,522,372 2,503,647,156 6

23 North Carolina 2.36 131,507,934 5,569,210,259 14

24 Virginia 2.33 150,778,475 6,477,111,460 9

25 Utah 2.32 28,381,355 1,222,765,588 7


Mortgages for two retail properties in Arkansas made up 14.28 percent of the state’s securitized commercial mortgage debt as of Aug. 2, according to Bloomberg LP. The REO balance of the two retail property loans is $131 million. California’s 53 real estate owned retail properties made up 3.8 percent of the state’s securitized commercial mortgage debt.


commercial real estatearizona has highest percentage of real estate owned office properties


1 Arizona 19.26 488,826,982 2,537,906,626 29

2 Minnesota 18.33 225,841,866 1,231,918,436 8

3 Georgia 17.83 741,346,358 4,157,608,649 31

4 Rhode Island 16.49 43,500,001 263,720,471 1

5 Nevada 15.44 227,182,798 1,470,937,608 19

6 Arkansas 14.59 38,304,669 262,620,543 2

7 Kansas 13.42 86,431,126 643,910,153 7

8 Michigan 12.16 271,998,735 2,236,676,095 31

9 Iowa 11.55 6,348,661 54,990,475 1

10 Alabama 11.43 106,655,345 933,319,566 8

11 New Jersey 9.83 516,338,548 5,254,180,878 16

12 Indiana 9.14 92,138,565 1,008,533,320 5

13 Missouri 8.39 120,500,349 1,436,694,464 10

14 Maryland 7.06 287,313,709 4,068,257,793 14

15 Florida 5.94 396,870,191 6,684,633,907 37

16 California 5.92 1,634,075,368 27,622,006,523 55

17 South Carolina 5.71 35,595,481 623,033,298 7

18 Ohio 5.43 126,541,727 2,328,637,968 7

19 Tennessee 5.40 77,880,054 1,441,502,480 5

20 Idaho 4.49 9,100,002 202,454,865 2

21 North Carolina 4.49 121,931,252 2,716,988,067 14

22 Hawaii 4.10 26,228,668 638,955,142 2

23 Pennsylvania 3.85 185,686,842 4,822,749,257 10

24 New Mexico 3.66 11,747,823 320,972,905 2

25 Colorado 3.11 79,487,222 2,555,930,742 8


Arizona has mortgage debt on 29 office properties that are real estate owned, which accounts for 19.26 percent of the state’s securitized commer-cial mortgage debt as of Aug. 2. California’s 55 REO properties accounted for 5.92 percent of the state’s securitized commercial mortgage debt.


commercial real estaterhode island has highest percentage of reo warehouse properties


1 Rhode Island 40.85 2,959,237 7,243,517 1

2 Tennessee 32.35 269,154,851 832,080,911 47

3 Colorado 14.27 49,060,384 343,838,720 8

4 North Carolina 13.17 95,209,844 722,813,312 10

5 Missouri 11.85 50,682,970 427,873,949 6

6 West Virginia 8.58 3,043,348 35,468,108 1

7 Iowa 8.27 12,464,479 150,734,157 1

8 Ohio 7.99 79,888,531 999,507,320 7

9 Minnesota 7.91 25,588,684 323,572,925 6

10 Georgia 7.74 73,878,262 954,798,412 10

11 Michigan 7.68 51,459,351 669,733,792 16

12 Pennsylvania 7.11 97,565,621 1,371,958,302 9

13 New Jersey 5.47 87,871,829 1,606,782,412 16

14 Florida 5.41 73,827,769 1,365,000,942 14

15 Texas 4.88 89,171,681 1,828,815,683 10

16 Arizona 4.68 25,177,573 538,332,130 5

17 Nevada 4.50 20,034,523 445,012,948 5

18 New Mexico 3.73 2,268,379 60,787,837 1

19 Illinois 3.04 30,698,937 1,011,398,795 3

20 Indiana 2.82 19,550,732 692,646,566 4

21 California 2.66 141,678,660 5,331,081,424 16

22 Louisiana 2.24 4,721,394 210,336,223 1

23 Wisconsin 2.21 12,727,489 575,284,921 5

24 Massachusetts 2.04 17,013,591 833,348,815 3

25 Virginia 1.03 8,410,001 812,706,519 1


A single real estate warehouse property accounted for 40.85 percent of the state’s securitized commercial mortgage debt as of Aug. 2, according to Bloomberg LP. Real estate owned loans on 47 Tennessee warehouse properties made up 32.35 percent of the state’s com-mercial mortgage debt as of Aug. 2.


Henderson Property and TIAA-CREF Global Real Estate recently announced the formation of a new $63bn global investment management company. Here James Darkins and Mike Sales of Henderson’s Property team and Tom Garbutt, Mark Wood and Phil McAndrews of TIAA-CREF speak about joining forces to create the fourth largest real estate investment management business.

What is the purpose of the new joint venture (“JV”)?Darkins: The JV will be an investment management company that will pursue core and value-add investments in all major sectors of real estate, and will focus on providing clients with increased global access to new opportunities, particularly in Europe and the growing Asia Pacific region.

What was the reasoning behind TIAA-CREF and Henderson Property coming together to form this JV?Garbutt: TIAA-CREF and Henderson both recognize that meeting the needs of today’s institutional real estate investors requires the appropriate scale and expertise to successfully pursue opportunities around the globe.

Darkins: The JV will provide a platform with significant global scale and a deep pool of experienced regional and sector specialists, leading to improved access to opportunities and greater capacity to innovate and deliver new investment products and solutions for our clients.

Sales: It provides the optimum opportunity to drive the growth of both businesses. Henderson wants to build on its expertise in providing institutional blue-chip quality real estate investment opportunities, and grow its key franchises from a predominantly European base, while TIAA-CREF has a large pool of real estate assets, skills and capabilities, primarily in North America, which it is seeking to diversify.

Wood: Internationally, a major resource that Henderson is bringing to the deal is its local ‘feet on the ground’ presence in markets where we see long-term potential and value for clients, but currently have

henderson gloBal inVestors and tiaa-cref to create gloBal real estate giant

limited exposure. TIAA-CREF is looking to regionally diversify its real estate portfolio and product offerings, which are currently centered in North America. We are particularly focused on the fast-growing Asia Pacific region, where Henderson has already begun to establish a strong presence and growing business.

How will the new company be structured and who will be the leadership team?Wood: TIAA-CREF will hold a 60 percent interest and Henderson will hold a 40 percent interest in the new JV. The senior management team will consist of Tom Garbutt as Chairman, currently TIAA-CREF’s head of global real estate; James Darkins as CEO, currently Henderson’s head of global property; myself as COO, currently TIAA-CREF’s head of European real estate; Mike Sales as managing director for Europe, currently Henderson’s managing director and CIO of global property; and Phil McAndrews as managing director for North America, currently TIAA-CREF’s head of global real estate transactions and JVs.

Sales: The company will be headquartered in London and will have approximately 225 employees across Europe, Asia Pacific and North America. International locations will include Henderson’s existing offices in Beijing, Frankfurt, Hamburg, Hong Kong, London, Luxembourg, Madrid, Milan, Paris, Singapore, Stockholm, Sydney and Vienna, as well as additional new representation in New York.

How will the JV fit with the North American business?McAndrews: TIAA-CREF is fully acquiring Henderson’s existing North American real estate business, in a separate but related

transaction to the JV. The combined North American business, under TIAA-CREF, will be fully aligned with the JV and provide domestic investment management on its behalf. Overall, there will be approximately 150 total real estate staff in the U.S. across seven locations: New York, Newport Beach, Charlotte, San Francisco, Boston, and, with the addition of Henderson’s U.S. team, Chicago and Hartford. Total U.S. real estate assets under management, when combining Henderson’s with TIAA-CREF’s, currently represents approximately $43.5 billion.

Garbutt: While the JV will focus on opportunities in Europe and Asia Pacific, TIAA-CREF will focus on North American investments and opportunities on behalf of the JV. The teams will all work together in developing, distributing and servicing real estate investment solutions for our clients worldwide, as one seamless global organization.

How do the firms’ investment philosophies compare?Darkins: Both firms emphasize a disciplined investment process centered around top-down fundamental research coupled with bottom-up local market knowledge, and both believe in global reach as an overall diversification strategy. Both businesses are managed based on a proprietary research process, disciplined portfolio construction, and focused risk management.

McAndrews: We believe consistent results are built on a reliably solid investment process involving proprietary analysis of top-down research, a disciplined portfolio construction methodology, and focused risk management. Consistent

Mark Wood, James Darkins, Tom Garbutt, Phil McAndrews and Mike Sales

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results are also dependent on bottom-up expertise through local market presence and maintaining active long-standing relationships with local developers, property management firms and real estate brokers, as well as, of course, a rigorous underwriting process.

Will there be a sustainability focus?Sales: Both firms are committed to sustainability measures. Both recognize that sustainability underpins the embedded value of assets and the long-term performance delivered. Henderson’s Responsible Property Investment (RPI) philosophy is based on continuous, measurable improvement, and the property business works to a clearly defined RPI policy designed to protect and hopefully enhance returns to investors over the long term. Current initiatives range from employing renewable energy incentives via the installation of PV panels to encouraging biodiversity through the installation of beehives at several retail and office properties.

Wood: TIAA-CREF’s commitment to sustainability measures includes seeking ways to enhance the value and competitiveness of our real estate assets through portfolio-wide opportunities to realize high returns on investments in those measures. From mandating LEED certification for all new development projects to pursuing Energy Star certification for all eligible properties, TIAA-CREF’s activities to drive greater energy efficiency help our real estate assets to stand out in the market. With sustainability being as important to our clients as us, the JV will definitely have a sustainability focus imbedded in its investment philosophy.

In what other ways do the firms complement each other? Darkins: TIAA-CREF’s investments have historically been concentrated in North America, while Henderson’s biggest presence has been in Europe, and more recently in Asia Pacific, which, when combined, provides a solid base on which to build and expand the JV’s global platform. Also, while both firms primarily invest in the four major property types, TIAA-CREF is more heavily weighted toward the debt sector, while Henderson’s assets mainly comprise private equity investments. In addition, about 80

percent of TIAA-CREF’s investments are in the core space with the remainder in the value-add and opportunistic spaces, while Henderson’s assets are approximately 55 percent core, 45 percent value-add. These variations will combine well to create a diversified platform on which to further build.

Garbutt: Henderson was identified as a firm that aligned with our global aspirations, had a similar approach to risk and offered an excellent cultural fit. TIAA-CREF also brings a strong balance sheet to the JV with available capital to be deployed into the business. We anticipate investing $1.5bn in real estate in Europe and Asia over the next few years which will be managed by the JV. The capital will be utilised both for seed capital and for co-investment purposes and will help position the JV to take maximum advantage of the opportunities in the current market environment and boost its assets under management.

McAndrews: Both companies are well respected investors and are focused on growing their core businesses and serving their clients. We are strategically aligned in our investment approach, using research to identify assets that have the potential for growth. Having greater access to capital and expertise will enhance the JV’s ability to build scale, to innovate and to deliver a number of compelling new investment opportunities to new and existing clients.

Where do you see the biggest opportunities for the JV in Europe and Asia Pacific today?Sales: In Europe, the challenges faced by banks still dealing with the repercussions of the global financial crisis have created an attractive lending environment as they continue to shrink their balance sheets, most notably to commercial real estate. As a result, we believe there is an opportunity for institutional investors to enhance their investment portfolios by widening their exposure to a broad range of senior secured asset classes such as real estate debt.

Wood: The new venture will offer commercial real estate debt investment opportunities to clients and will leverage the resources, track record and experience of TIAA-CREF’s U.S. real estate debt team to augment a new dedicated team in Europe. In many ways, this transaction is

a specific response to the evolution of the property investment landscape; in recent years, scale and access to capital have become increasingly important factors to success in real estate asset management. We’ve seen an increasing expectation on the part of investors for the investment manager to demonstrate an alignment of interest through co-investment or seeding.

Garbutt: In Europe, we see the U.K., Germany and France as strong opportunities due to their high levels of liquidity and transparency, and robust legal structures. In Asia Pacific, we believe Singapore and Australia offer similar favorable characteristics along with the added benefit of direct exposure to Asia’s growth cycle. Top-quality, well-located office and retail properties in the “gateway” cities of London, Paris, Munich, Berlin, Singapore, Sydney and Melbourne are considered to be well positioned to benefit from the ongoing global economic recovery.

Darkins: In the coming year, apart from major changes yet to come for fiscal and sovereign debt situations in the U.S. and Europe, a number of key socio-political events are expected to have significant impacts on the Asia Pacific region’s capital and property markets. We believe China is a particularly attractive growth market for luxury goods retailers due to its large population, high number of densely populated large cities, growing affluence and local consumers’ appetite for luxury as well as for globally recognized brands. Any scheme that brings like-minded retailers together and provides the quality of shopping experience the discerning Chinese consumers will increasingly demand, while offering attractive prices, should perform very well.

For any questions relating to the JV, pleasecontact: Andrew Friend, Head of InvestorRelations, Property - Henderson Global InvestorsT: +44 (0)20 7818 2439E: [email protected]

For questions regarding TIAA-CREF Asset Management, please contact: Kevin Maxwell (east coast), Managing DirectorT: 212 916-4812 E: [email protected]

Deborah Ulian (west coast), Senior DirectorT: 415 882-3507 E: [email protected]

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commercial real estatecolumn financial commercial property loans most delinquent as of aug. 2

rank loan originator current Balance delinquent Balance

total numBer of loans

numer of delinquent

numBer of Bankrupt

1 Column Financial 29,366,675,496 3,233,804,152 6,415 287 16

2 Wachovia Bank NA 46,465,858,224 7,833,052,008 3,486 231 9

3 LaSalle Bank National Association 17,135,605,143 2,324,031,022 5,156 216 11

4 Lehman Brothers 23,530,325,065 2,278,242,796 3,950 158 5

5 JPMorgan Chase & Co. 51,992,587,189 3,527,980,464 4,855 157 8

6 Bank of America, NA 43,011,202,850 3,410,532,832 4,155 146 3

7 Greenwich Capital 19,679,316,023 4,030,009,384 1,866 138 5

8 Merrill Lynch & Co. Inc. 14,100,565,160 3,038,100,534 2,301 102 4

9 CRF 9,506,658,567 1,329,518,433 1,293 101 10

10 CIBC 10,948,935,231 1,247,228,870 1,805 90 7

11 Morgan Stanley Mortgage Capital Holding 18,240,019,611 1,042,089,212 1,712 89 2

12 German American Capital 25,143,967,646 1,951,012,769 1,678 86 7

13 UBS AG 22,436,757,586 2,053,776,839 2,408 83 2

14 CGM 12,225,137,579 1,277,988,375 1,057 81 2

15 PNC 11,542,619,170 778,350,868 1,768 77 5

16 Bridger Commercial Funding 2,779,294,513 439,441,887 966 72 2

17 General Electric Capital Corp. 8,601,960,168 719,135,715 2,849 69 1

18 Wells Fargo Bank, NA 34,975,724,086 684,907,343 5,399 68 3

19 Goldman Sachs 31,705,921,459 1,727,559,887 1,602 67 1

20 Washington Mutual Bank 1,725,023,265 81,645,298 2,353 66 5

21 Bear Stearns Co. Inc. 15,816,020,847 1,543,315,183 2,394 59 2

22 NCCI 5,674,999,555 587,565,507 963 43 6

22 Barclays 8,232,716,011 878,304,641 790 43 2

24 Artesia Mortgage Capital Corporation 2,861,581,774 515,409,629 937 38 1

24 Morgan Stanley 14,084,460,475 319,590,862 2,171 38 0

Among underwriters of commerical mortgage loans resold as CMBS Column Financial had the most number of delinquent mortgage loans as of Aug. 2, according to Bloomberg LP. The underwriter had 287 delinquent loans for commercial real estate properties. Com-mercial mortgages underwritten by Wachovia Bank and LaSalle Bank NA were also more likely to see delinquencies; Wachovia had 231 of 3,486 mortgages delinquent and LaSalle had 216 of 3,486 delinquent as of Aug. 2.


Mall owners, the best-performing U.S. property stocks for four years, have tumbled to the worst as sluggish retail sales and limited opportunities to expand drive investors to look elsewhere for earnings growth.

Real estate investment trusts that own regional malls reported the smallest increase in tenant sales per square foot in three years in the second quarter, ac-cording to data compiled by Bloomberg. nordstrom inc. cut its revenue fore-cast for the year and Macy’s inc. and aeropostale inc. disclosed declines in consumer purchases.

Slowing sales among retailers and rising borrowing costs are sparking concern that mall landlords, including the two largest, simon Property Group inc. and General Growth Properties inc., could be hurt too.

Mall REITs have enjoyed strong ten-ant- sales growth since the credit crisis and recession, letting them increase rents. Now they face difficult compari-sons to past results and limited avenues for external expansion.

“REITs have had a tough year across the board, and the mall REITs have had a tougher year in general,” said benja-min Yang, an analyst at Evercore Part-ners in San Francisco. “Fundamentals are good but they’re slowing down.”

The Bloomberg mall REIT index has fallen 5.2 percent this year, the worst performing part of the industry, after posting the biggest increases from the start of 2009 through 2012. Even shares of outlet-center operator Tanger Factory Outlet Centers inc., whose sole business is in one of the best-per-forming segments of the retail-property market, are down 5.2 percent this year.

Growth in mall-tenant sales, which rose 4.3 percent in the second quarter from a year earlier, peaked in the three months through June 2012 and has slowed each quarter since, according to Bloomberg Industries.

Simon Property and General Growth last quarter beat analysts’ estimates for funds from operations, a measure of cash flow used by the REIT industry.

While results have been positive for mall REITs overall, they’ve been over-

shadowed by the potential impact of higher borrowing costs on property valu-ations, said Keith bokota, an analyst at Principal Global Investors, part of insur-ance and financial services company Principal Financial Group inc.

“When we look at the fundamentals that these companies are delivering, they’re strong,” said Bokota, whose Des Moines, Iowa-based firm owned shares of mall REITs including Simon and Taubman Centers inc. at the end of July. “The rising interest rates have impacted the way REITs have traded recently.”

The 10-year Treasury yield has climbed to 2.9 percent from 1.63 percent on May 2, its low for the year, while the Bloom-berg mall REIT index has fallen 18 per-cent since May 21, its high for 2013.

The cost of raising money from the commercial mortgage-backed securities market has also increased.

Top-ranked bonds linked to commer-cial mortgages are yielding 129 basis points more than Treasuries from 88 basis points on Jan. 14, according to a Bank of America Merrill Lynch index. The spread peaked at 153 basis points, or 1.53 percentage points, on July 8.

Simon shares have fallen 18 percent since May 21, even as the company on July 29 reported an increase in second-quarter funds from operations and raised its FFO forecast for the year

as it redevelops centers domestically and expands overseas. “Our business is strong and our cash flow is growing,” Chairman and Chief Executive Officer David simon said.

Aside from higher borrowing costs, REITs have few chances to buy high-quality malls because those properties rarely come on the market, with pub-licly traded landlords owning most of the best-performing centers, said rich Moore, an analyst at rbC Capital Mar-kets in Solon, Ohio.

“They’re so lucrative that no one gets rid of them,” he said.

Regional-mall transactions are down 49 percent to $4.5 billion this year from the same period in 2012, according to real Capital analytics inc., a commer-cial-property research firm in New York.

“There continues to be robust demand from investors for these high-quality assets,” Bokota said. “There’s just a scarcity characteristic.”

Slowing sales in the second quarter were reported by retailers including tra-ditional mall anchor Macy’s, and apparel chains Aeropostale and abercrombie & Fitch Co. said traffic at stores declined.

Nordstrom, the Seattle-based depart-ment-store chain, last month lowered its total-sales forecast for the year to an increase of 3 percent to 4 percent, down from a previous estimate of 4 percent to 6 percent. Cincinnati-based Macy’s cut its forecast for earnings for the year ending in January as sales at stores open at least a year fell 0.8 percent in the second quarter from a year earlier.

Aeropostale, a New York-based cloth-ing store that targets young people, said on Aug. 22 that second-quarter net sales fell 6 percent and comparable sales, including online sales, dropped 15 percent.

Mall owners may be cushioned from the impact of their tenants’ slowing sales because occupancies are high, said Cedrik Lachance, an analyst at Green street advisors inc. in Newport Beach, California.

At regional malls, which typically include department stores, vacancies fell to 8.3 percent in the second quar-

mall owners go from first to last as spending slows



The malls are currently better occupied than they’e ever been.That does pro-vide some pricing power to the landlords despite

some softness emerging in retailer sales.

ter from 8.9 percent a year earlier, and rents rose to $39.62 a square foot from $39.12, according to data from New York-based research firm Reis Inc.

“The malls currently are better occu-pied than they’ve ever been,” Lachance said. “That does provide some pricing power to the landlords despite some softness emerging in retailer sales and retailer profitability.”

The struggles of j.C. Penney Co. have led to questions about the health of malls. While the decline in sales has slowed under new CEO Mike ullman, they were down 12 percent in the second quarter. That compared with a 23 percent decline a year earlier, when former CEO ron johnson led the company.

The company owns 429 of the 1,104 department stores it operates in the U.S. and Puerto Rico, according to the company’s latest annual report.

Even if J.C. Penney got into more seri-ous trouble, the impact on mall REITs would be minimal – and “it’s highly unlikely” it will disappear, said Moore of RBC Capital Markets.

“Most of the landlords would tell you they would love to get their J.C. Pen-ney box back,” Moore said, adding that the stores could be rented to another department-store chain or torn down and replaced with smaller shops, movie theaters or restaurants. “Most of these guys would say, ‘Great.’”

Outlet centers, where brand-name retailers sell goods at discounted prices, are performing better than other retail property types as consumers seek more-affordable apparel and other goods, according to Craig Guttenplan, a REIT analyst at Creditsights inc. in London.

“Consumers like the bargains still,” he said. “They’re still cautious on spending.”

The popularity of outlet centers has led some traditional-mall REITs, including CbL & associates Properties inc., Taubman and Macerich Co., to enter the business.

Chudi aguanunu, who works at Street Talk, a mobile-phone accessories kiosk in Macerich’s Shops at North Bridge on Chicago’s Michigan Avenue, goes to out-let malls or online when he wants some-thing. The Shops at North Bridge, which caters in part to tourists, has stores including Nordstrom and Hugo Boss.

“It’s got to be at a good price,” said Aguanunu, 25, a former walk-on of-fensive lineman with the University of Illinois football team. “I’m not going to spend $100 for a T-shirt.”

The shares of Tanger, which operates only outlet malls, may be under pres-sure because of increased competition from other landlords expanding into the business, said Yang of Evercore.

Greensboro, North Carolina-based Tanger owned and operated 36 outlet centers as of June 30, and held stakes in seven other properties, including three in Canada, according to a regula-tory filing.

“There’s clearly an abundance of new players in a sector that for the most part is much healthier than the malls,” Yang said. “During and following the recession, consumers were clearly looking for value.”

Hoteliers and self-storage landlords are the top-performing REIT sectors this year. Since REIT shares peaked on May 21, lodging and storage companies have fallen less than other groups, while the performance of single-tenant, health-care and mall REITs – which have longer leases, giving them less flexibility to raise rents – has been among the worst as other REIT types become more appealing to investors.

“It’s all about choices,” Yang said. “There appear to be more-attractive, better-accelerating core growth stories, perhaps, in some of the other sectors.”

With few high-quality malls for sale, landlords are focusing on sprucing up their existing properties to boost

traffic and rents at their properties.“The one other growth avenue that a

lot of the companies are pursuing is ac-tive redevelopment,” Bokota said. “That’s where they’re putting a lot of their cash flow and new dollars to work.”

Simon, based in Indianapolis, had $212 million in mall redevelopment proj-ects in progress in the second quarter, with a projected rate of return of 8 per-cent, according to a regulatory filing.

The figure is Simon’s share of con-struction costs at properties it owns outright or has an ownership stake. Chicago-based General Growth has invested $356 million on redevelopment and expansion with an expected return of as much as 11 percent, according to a regulatory filing.

General Growth said it spent $567 million repurchasing shares at an average price of $20, mostly from bill ackman’s Pershing square Capital Management LP.

Pershing was the second-largest in-vestor in General Growth, holding about 68 million shares as of June 30, accord-ing to data compiled by Bloomberg.

The New York-based hedge-fund firm previously sold about 7 million shares of the mall landlord in June, the data show. “This is a discount to private-market valuation for high-quality U.S. retail properties,” General Growth Chief Executive Officer sandeep Mathrani said in the statement.

Shares of Simon – which has 22 buy ratings from analysts, five hold s and no sells, according to data compiled by Bloomberg, and is the largest U.S. out-let-mall owner – have fallen 18 percent since the REIT slide began in May.

That decline led Paul Adornato, an analyst at BMO Capital Markets in New York to upgrade Simon’s shares on Aug. 23 to outperform, the equivalent of a buy, based on the company’s valuation.

“We like their business mix,” Adornato said in a telephone interview. “They have the greatest exposure to the outlet business.”

— Brian Louis (Bloomberg News)

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commercial real estateio commercial real estate loans account for 28.32 percent of this year’s cmBs

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This year, 28.32 percent of all commer-cial mortgage debt bundled in securities are interest only mortgages, according to Bloomberg LP. Balloon mortgages account for 28 percent of commercial property debt resold into securities and fully amortizing commercial property mortgages – just over 40 percent of all commercial mortgage debt resold as bonds in 2011 – account for 22.81 percent of all commercial property mortgages resold in securities.


BLOOMBERG IS THEPREFERRED SOLUTIONFOR CMBSMARKET LEADING ANALYTICSRobust loan and property performance-driven cashflow analysis and predictive modeling.

MOST TRUSTED DATAHigh quality loan and property CMBS data, complemented with data from trusted CRE data providers.

BREADTH AND DEPTHBreadth of Bloomberg tools for tenant and borrower company analysis, staying ahead with real-timenews and pricing, and much more...

LEARN MORETo learn more about commercial real estate data, news and analytics on the BloombergProfessional® service, email our Mortgage Sales Specialist Group at [email protected]

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New York +1-212-318-2000 San Francisco +1-415-912-2960


mailto:mtgegroup%40bloomberg.net?subject=mortgage%20speicalist

commercial real estate use of agency collateral in cmBs grows after credit crisis

While commercial mortgage bond transactions have come to rely more on conduit debt, this source of collateral for bonds has not returned to pre-crisis levels. At the same time, agency debt is accounting for more collateral in the post-crisis market.

Year to date, agency debt in CMBS is at $38.02 billion, according to data compiled by Bloomberg LP.

In 2012, $51.68 billion worth of agency debt was bundled in CMBS and $32.31 bil-lion of conduit debt was resold in CMBS.

In 2007, $157.7 billion of conduit debt was resold into CMBS and $1.4 billion of agency debt was resold into CMBS.

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cmBs issuance on track to Beat 2012 levels Year-to-date, $88.1 billion worth of

commercial mortgage bonds has been is-sued in the U.S. and $5.8 billion worth of CMBS have been issued in Europe.

In 2012 issuance of commercial mort-gage backed bonds in the U.S. totaled $117.6 billion, up from $67.8 billion, accord-ing to data compiled by Bloomberg LP.

The issuance of bonds backed by com-mercial real estate debt hit a historic high of $253.9 billion in the U.S. in 2007; in Eu-rope, the historic high was seen in 2006 when $89.1 billion worth of commercial mortgage backed bonds was sold.


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residential real estateflorida is Busiest with residential home foreclosures, delinquencies in q1Florida had the most single family home loans that are 90 days or more delinquent or are in the process of foreclosure in the first three months of 2013, according to the Mortgage Bankers Association. Ac-cording to the MBA, 14.97 percent of the state’s one to four unit residences were 90 days or more delinquent or in the process of foreclosure.


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(Percentage of a state’s one-to-four unit homes 90 days or more delinquent)


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gse reform should factor in the possibility of market distortions, higher mortgage rates Given the recent

flurry of activity in Washington, it looks like housing finance reform is finally getting out of the legisla-tive dugout and into the on-deck circle.

Following the February release of a reform plan by the Bipartisan Policy Center’s Housing Com-mission, Sena-tors Bob Corker (R-TN) and Mark Warner (D-VA) introduced their own far-reaching

proposal. Con-gressman Jeb Hensarling (R-TX) also drafted a comprehensive plan -- the Pro-tecting American Taxpayers and Home-owners (PATH) Act -- that has already been approved by the House Financial Services Committee.

More recently, President Obama injected a jolt of energy into the debate by announcing his “core principles” for reform.

What is striking about these proposals are their many common elements:

■ A recognition that the overwhelming government footprint in the mortgage market is unsustainable;

■ A desire to introduce far more risk-bearing private capital into the mortgage system to enhance consumer choice and reduce taxpayer exposure;

■ The elimination of Fannie Mae and Fred-die Mac over a multiyear transition period;

■ The promotion of higher levels of transparency in the mortgage market to encourage greater involvement by the private sector; and

■ A recognition of the importance of com-munity banks and other small lenders in meeting America’s mortgage needs.

Unlike the PATH Act, both the Obama plan and the Corker-Warner bill also

support the idea that the government must function as the insurer of last resort in the secondary market for mortgage-backed securities to preserve widespread access to the 30-year fixed rate mortgage.

Here, too, the details are similar: Under both plans, the government role is explicit, private capital must be wiped out before the government guarantee is triggered, and the government must collect actuarially fair premiums for the insurance it provides.

Both plans call for a strong indepen-dent regulator to enforce rules consis-tent with these objectives.

Final passage of comprehensive legisla-tion is unlikely by year’s end. Since nego-tiations over the federal budget are bound to consume Congress’ attention this Fall, the most optimistic scenario is passage of a reform bill sometime in 2014.

This timetable provides the opportunity for a more rigorous examination of some fundamental questions:

1. Will Private Capital step up?There is broad agreement that more pri-vate risk-bearing capital must enter the system, but what is the evidence that private capital will, in fact, assume more risk? After all, private-label mortgage-backed securities still account for less than one percent of the overall market. And if risk-bearing private capital is to play a more prominent role, what form will it take – a capital markets struc-ture, private mortgage insurance, or a combination of approaches? How much additional private capital is needed to replace the $5 trillion in credit risk as-sumed by Fannie and Freddie?

2. are We Prepared for Higher Mort-gage rates and Tougher underwriting standards? If private capital bears more risk in a new system, it will insist on some com-pensation to offset this risk. This ad-ditional cost will be passed along to con-sumers in the form of higher mortgage rates. These rates are likely to increase once the Federal Reserve dials back on its asset purchase program. Private in-

vestors may also impose more stringent underwriting requirements for loans if expected to assume the “first loss” on securities comprised of these loans. Are American consumers prepared to accept these changes?

3. Can the Government Effectively Price risk?The Corker-Warner bill calls for the creation of a “mortgage insurance fund” that is built up over time by charging a fee for each mortgage-backed security benefiting from the government guaran-tee. The goal is for the fund to accu-mulate enough reserves so it absorbs all losses in a severe market downturn before the taxpayers are ever tapped. But is the government capable of effec-tively pricing risk and gauging what is an “actuarially fair” fee? Alternatively, is the private sector any better at pricing risk than the government?

4. How Do We Encourage access to Credit Without Distorting the Market?A stated aim of the reform plans is to ensure broad access to mortgage credit in all communities. But the plans also reject the “affordable housing goals” that were imposed on Fannie and Freddie on the grounds they distorted the market in harmful ways. How can we have confidence that our new housing finance system will be inclusive and fair consis-tent with sound risk management? In addition, how do we ensure that access to the government-guaranteed second-ary market is open on equal terms to mortgage lenders of all types and sizes?

5. is There anything Worth Preserving from the Current system? As we transition to a new system, what parts (if any) of Fannie and Freddie should we maintain? Over the years, the two institutions have assembled talented teams and developed their own securitiza-tion platforms to which market participants have grown accustomed. The Federal Housing Finance Agency, their regula-tor, has now directed them to develop a single, common platform that will serve as the infrastructure of a new secondary market. Is this the right way to go?

Nicolas Retsinas

Robert M. Couch



6. What are the First Transition steps?Even the harshest critics of Fannie and Freddie acknowledge they cannot be eliminated overnight without creating immense market turbulence. But what precisely are those first few steps in the transition to a new system? To reduce taxpayer exposure to credit risk, should Fannie and Freddie offer risk-sharing options to mortgage lenders at the “point of sale,” as some have sug-

gested? Should they develop a common security in the To-Be-Announced (TBA) market, a step some consider necessary for a more efficient secondary market?

A thorough examination of these issues will improve the legislation that Congress ultimately passes. If done in a transparent and bipartisan manner, the American people will benefit from a more complete understanding of what’s at stake and will have greater confi-

dence that the judgments reached were the right ones.

— Nicolas P. Retsinas and Robert M. Couch are members of the Bipartisan Policy Center’s Housing Commission. Retsinas served as FHA

Commissioner in the Clinton Administration and Couch, counsel to Bradley Arant Boult Cum-

mings LLP, served as ginnie Mae President in the george W. Bush Administration.

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30-year fixed mortgage rates hit 4.57 percent, according to Freddie Mac.

Source: Mortgage Bankers Association OMBAREFI <INDEX> <GO>

requests for home loan refinancings fall to lowest since april 2011Requests from homeowners who want to

cut borrowing costs via a home loan refi-nancing have declined as mortgage rates have risen from historic lows, according to data compiled by the Mortgage Bankers Association.

The industry group’s mortgage refinance index - a measure of applications for single family home loan refinancings - fell to 1,528.5 in the week ended Sept. 6.

That’s down from a historic high reading of 5,888 on Sept. 28, 2012. This measure of requests for home loan refinancings was last this low on April 15, 2011 when it was 1,872.0.

The index’s all time high was on May 30, 2003, when it hit 9,977.

—Aleksandrs Rozens

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Refis as Percentage of All Loan Applications 30-Year Mortgage Rate

Source: Mortgage Bankers Association

for mortgage lenders focus is now on supplying credit to Buy homes

Mortgage lenders likely will focus more on loans to buy homes now that the pace of refinancings has slowed.

Fifty-seven percent of all home loan ap-plications in the Sept. 6, 2013 week were requests to refinance an existing mort-gage loan, down from the previous week when they were 61.3 percent of all loan applications, according to data compiled by the Mortgage Bankers Association.

Mortgage rates for 30-year fixed loans in the Sept. 6 week were at 4.57 percent; in November 2012 they were as low as 3.31 percent.

A year ago, 79.7 percent of all mort-gage loan applications were for refinanc-ings and they were as high as 84 in the Dec. 7, 2012 week.


30-year fixed mort-gage rates hit 4.57 percent, in the week ended 9/12/13, accord-ing to Freddie Mac.


regional economies, local regulations are Biggest determinants of delinquenciesHow soon will

be get back to normal?

That is the key question for many of the participants in the real estate market who have watched the meltdown in the mortgage and housing markets that began in 2007

show signs of a slow, gradual recovery. The percentage of seriously delinquent

mortgages (three payments or more past due or in the process of foreclosure) has declined to just under 6 percent in the MBA report for the second quarter of 2013, down from almost 10 percent in the fourth quarter of 2009.

Before the market meltdown the seriously delinquent rate averaged about 2 percent.

Whether the seriously delinquent rate remains close to three times its historical average or returns to historical levels will likely be determined by five key factors, all of which now suggest it will be challenging.

The first: uneven economic growth across the country. While the housing market has been helped by a growing economy and job creation, the growth has not been uniform across the country. The energy boom we have seen in Texas, parts of the Midwest and North Dakota has no impact on inland California.

The manufacturing resurgence we have seen in the Carolinas and Tennes-see has no effect on New Jersey, New York or Connecticut.

Second, there are a large number of

loans still outstanding to subprime bor-rowers. The number of loans to borrowers with subprime credit has fallen by almost a third since the peak of the subprime market in mid-2007, but there are still more than four million such borrowers and they continue to dominate ever segment of delinquency measures.

While lending standards are tighter for new loans, we have a large number of sub-prime borrowers who continue to default at rates almost five times those of their prime counterparts. Compounding the problem is that the share of FHA loans in the market has been growing rapidly and the perfor-mance of these loans is about halfway between prime and subprime.

Third, many loans have negative equity. For a number of loans that were origi-nated in the period between 2005 and 2007, particularly in states like California and Florida that saw some of the largest jumps in home prices, the mortgages ex-ceed what the houses are currently worth.

When a borrower with an underwater mortgage suffers a sudden shock from the loss of a job, divorce or illness, the result is a mortgage in default.

Fourth, a number of states have lengthy judicial foreclosure processes. In most states, taking a defaulted loan through foreclosure is an administrative process in which lenders establish that the bor-rower has stop paying the mortgage and they have the legal right to take the house to foreclosure. In other states, the foreclosure process requires a judicial hearing and all of the potential delays that accompany the judicial process, including scheduling the court dates, intervening pleadings or actions such as bankruptcy

filings to suspend the process. As a result in states such as Alabama

and Missouri, the amount of time from the last payment on the loan to a fore-closure sale can be as little as 240 days.

In states with more complex judicial procedures it can take much longer. The process can take as many as 750 days in New Jersey, 820 days in New York state and 990 days in New York City.

According to MBA’s latest delinquency report, while the rate of new foreclosures started is essentially the same across ju-dicial and non-judicial states, the percent-age of loans in the foreclosure process in judicial states is three times that of non-judicial states.

Fifth, there has been a change in at-titudes among borrowers.

A big unknown from the last several years is whether there has been a fundamental shift in the attitudes of borrowers toward their mortgage. In an environment where mortgage modifications have become the norm, indeed where regulators require that mortgage servicers look at potential modifi-cation plans before proceeding with foreclo-sure, will the expectation of a modification lead to a decline in borrower discipline?

The mortgage market has come a long way from the levels of default recorded at the height of the recession. How much more delinquency rates can improve is the question everyone continues to ask.

— Emile J. Brinkmann is chief economist and senior vice president of research and education at the

Mortgage Bankers Association of America.

Emile J. Brinkmann


hEdGE FUndSnEwS, anaLySIS, and COMMEnTaRyBRIEF nEwSLETTERS FOR pROFESSIOnaLS, FROM pROFESSIOnaLS. BRIEF<GO> www.BLOOMBERGBRIEFS.COM


http://www.bloombergbriefs.com

The new wave of regulations set up in the wake of the credit crisis has limited the size of Wall Street dealer inventory and it has put a cap on proprietary trading in residential mortgage bonds and commercial mortgage securities, najib Canaan, founder and managing partner of Marinus Capital advisors LLC tells bloom-berg brief’s aleksandrs rozens. “That’s made the playing field fair for the investors,” says Canaan.

Q: Have we changed the way we value mortgage portfolios? is it more about credit and less about interest rate risk? a: The residential mortgage market over the last 10 years has had a big compo-nent of credit in it, a lot of non-agency pa-per. Therefore you have to introduce credit metrics. Even the agency market has a credit component because one could say prepayments are dependent on people’s credit and just because someone else is absorbing the capital loss does not mean that the prepayments are not influenced by people’s credit. There is no question there is a direct credit element in the non-agency mortgage market and there is an indirect credit element in the agency mar-ket and both of them are becoming much more important. In a strange way we have more information in the non-agency mar-ket because we now have six years worth of history since 2006 and 2007. We have more unpredictability in the agency mar-ket because of the government programs, HARP especially. Also, the fact that it (the programs) can be changed makes the overall valuation more difficult. That’s why with the recent volatility in the market you see that especially agency investments and especially derivatives within that world have not done well at all.

Q: Has this diminished issuance of structured paper?a: What it has done is it’s widened them significantly. It changed their performance against hedge ratios. There were a couple of big events the agency market: the first was the introduction of volatility from outside macro markets. The second one was the fact that there has been a lot of talk about the extension and expansion of HARP and changes we could see with

canaan: regulations limit wall street dealer inventory, proprietary trading in rmBs, cmBs

Age: 48

Education: B.S. Electrical Engineering (1986), Masters of Nuclear Engineering (1987) College of Engineering, Cornell University.

Professional Background: Blackstone/GSO Capital (head of structured finance), Brevan Howard (head of structured finance), Nomura Securities International (executive managing director, co-head of international fixed income), Nomura International PLC (co-head of fixed income, Europe), Donaldson, Lufkin & Jenrette (managing director and principal).

Pastime: Collects antique maps.

regulators. That causes a lot of stress in the market. People require a lot of risk premium to take on that risk. So while the agency inverse IO market has performed extremely well, recently it was paid a price from this uncertainty.

Q: Has the drop in the number of primary dealer firms eroded liquidity in the mortgage backed market? in the 1980s we had some 40 primary dealers.a: I’d say in pass throughs the mar-kets haven’t changed that much with the exception of the huge government intervention today. In CMOs, agency CMOs, agency structured products you have maybe fewer large banks, but you have a lot of regional banks that dabble in it and you have a lot more investors that are interested in it. I’d say the liquidity in a normalized market is pretty high. In the credit markets, the high point of liquidity was right before the crash and since then liquidity is definitely lower but it is still bet-ter than it was in 1994 and 1995 just be-cause the markets are bigger and deeper. Where things have changed a little bit is Wall Street no longer has the backbooks that it used to have.

Q: Meaning the inventory?a: Yes, the inventory and the prop books. The downsized firms don’t have the huge prop books they used to have. And, there has been a huge migration from the sell side to the buy side in terms of running risk and running proprietary positions. That’s been a change and that’s made the

playing field fair for the investors.

Q: if you put a list of bonds out for bid can you do so without using Wall street dealer firms?a: I don’t think that is going to happen any time soon. I know there are some very large buy side firms that would very much like that, but we always trade with the sell side. We do not trade directly with other buy side firms.

Q: Where are you investing within the mortgage bond market?a: We are investing in agency mortgages, these tend to be more derivative and non-derivative structures. In the non-agency market we invest in everything we see value in. Broadly speaking, we see a lot of value in the non agency market because the non agency market is fundamentally driven by real estate and consumer be-havior; real estate and consumer behavior are the two bright spots in the economy, especially the recovering real estate markets. One can look at the non-agency market as the best market where the bar-riers to entry are still quite high and where the ability to do real credit work is relatively limited to a small number of players. Given the underlying fundamental positive tone you’re getting from real estate we think that market has some of the best risk-reward characteristics. It’s also a very deep mar-ket, a market where you can tailor risk you can take and a market where the income can be high relative to other investments such as corporate markets.



Single Asset Real Estate92All Other Debtor Types377 20%

80%

Single Asset Real Estate, Q1 2013

Single Asset Real Estate

All Other Debtor Types

Source : Bloomberg LP The linked image cannot be displayed. The file may have been moved, renamed, or deleted. Verify that the link points to the correct file and location.

Single Asset Real Estate117All Other Debtor Types357

25% 75%

Single Asset Real Estate, Q2 2013 Single Asset Real Estate All Other Debtor Types

The linked image cannot be displayed. The file may have been moved, renamed, or deleted. Verify that the link points to the correct file and location.Source: Bloomberg LP

Of the second quarter's 117 single asset real estate cases, 108 involved debt of as much as $10 million, ten listed liabiliJes of as much as $50 million and one involved debt as much as $500 million.

new york, california lead single asset real estate Bankruptcies

commercial and residential real estate

real Estate accounts for 20% of Q1 bankruptcies

Single asset real estate accounted for 20 percent of the 471 Chapter 11 cases in the first quarter.

real Estate Proportion of Filings up to 25% in Q2

In the second quarter, 117 of 474 Chapter 11 petitions listing debt of $1 million or more were identified as single asset real estate.

Forty New York businesses with Chapter 11 petitions involving debt of $1 million or more identified themselves as single asset real estate, while 29 such filings were California businesses and 21 were from Florida in the first half. Other active states for single asset real estate bankruptcies in the first half were Nevada with 13 such cases, Texas with 12 filings and Georgia with eight.


Source: Bloomberg LPSource: Bloomberg LP

(Number of Chapter 11’s in which the debtor is identified as single asset real estate)



Independent mortgage brokers who once accounted for two-thirds of all home loans underwritten in the U.S. have been supplanted by large mortgage firms, steve LaDue, a loan officer at PrimeLending and a 30-year veteran of mortgage banking, tells bloomberg brief’s aleksandrs rozens. LaDue says improved consumer sentiment about the economy has stepped up demand for loans to buy homes and subprime lending likely won’t stage a comeback.

Q: before getting involved with mort-gage lending 30 years ago you man-aged rock and roll bands.a: My first company I started when I was 20. We ended up having about 100 bands under contract in a five-state region in the Midwest. We owned a recording studio and we did video in 1973. It wasn’t too sophisticated, but it was video. We bought a motor home and set the whole thing up with playback equipment and I’d take off on these road trips to every night club that booked entertainment.

Q: How did that prepare you for mort-gage lending?a: What you are really doing with these bands is you are creating branding. Learn-ing how to merchandise and market these events. I did stuff for Luther Allison, Rick Nelson, Sha Na Na.

Q: since you started in the mortgage banking industry 30 years ago, where have we seen the biggest changes in mortgage lending?a: When I started there was no technol-ogy. On the front end, origination tech-nologies – there was virtually none. Then we went through a period of an explosion of LOS [loan origination systems]. Every-thing has been more automated. Com-pany systems are all national so you have tons of people inputting to all of those platforms. Underwriting, originations and closing and servicing come off of the main platform. You have a front-to-back system tracking everything right down to individu-al documents. None of that existed when I got into the business. It was manual files, carbon paper where you manually verify,

ladue: upbeat sentiment spurs demand for loans to Buy homes, no subprime in sight

Age: 59

Education: University of Wisconsin (School of Letters & Science, 1971-1973), University of Wisconsin (School of Business Administration, 1977-1979).

Professional Background: Waterstone Mortgage Corp. (Vice president of busi-ness development), Affiliated Mortgage Corp (President & COO), Cenmortgage Corp. (Mortgage Loan Officer).

Pastimes: Reading, writing, collecting art (20th Century Spaniards)

you mailed out verification of employment, you mailed out a verification of accounts. It’s become possible to do a lot more with a lot less. That’s been the biggest change since I joined the industry; technology has changed just about everything.

Q: When did mortgage lending pick up for you after the credit crisis?a: From my perspective in the Midwest I think we saw business really surging last year and this year. Things are really rocking and rolling. I’m talking purchase volume. There’s an enormous pent up demand in the purchase side. People have been looking to buy a bigger home or move into a different school system. They’ve been waiting. The other big factor in that equation has been consumer senti-ment; if you don’t feel you’ll have a job next year, the last thing you want to do is take on 30-year or 15-year debt.

Q: What types of loans are they opting for – fixed rate or floating rate? are you seeing first-time buyers?a: Fixed rate is a huge majority of what is being done. There is a ton of pent up demand from first time buyers. They are hitting the market. Even if rates go up a point-and-a-half you still have an unprec-edented opportunity because you have depressed values at the same time you have depressed interest rates and that never happens. That’s stimulating a lot of demand; people are saying ‘Well, if we wait a year and property values go up ten percent, or five percent we’ll just pay more for the same house.’ So, they are trying to buy now.

Q: is most of your lending in the con-forming market? are you seeing any demand for subprime loans?a: Subprime is dead in my opinion. I don’t think there is much interest in being involved in it after the debacle of the last five or six years.

Q: Where is the conforming, conven-tional FiCO score cutoff?a: You have to be somewhere 700, 720-plus to be considered A grade. It used to be 640, 660 in the old days. So when you are talking about things tightening up, that’s what they are talking about. For FHA-VA, its 620, 640.

Q: in 2005, some folks estimated that 60 percent of the underwriting was done by independent brokers. Has that changed?a: I’m surprised there are any left. I don’t know that it will ever come back because of the level of due diligence that investors want now and the level of net worth to back it up. With QRM [qualified residential mortgage rules] coming down the pike that’s going to make a big difference as to who can play. The investor is not willing to accept much risk and they want high net worth on the part of anybody who is a correspondent lender with them and they want a high compliance capacity as well. Compliance is a big deal. They are requir-ing that lenders have more skin in the game and effectively that makes lenders have to have a lot more money to play in the game.


home prices: peaked or Just getting started?With home prices

on the rise for more than a year, investor and consumer focus has shifted to whether the current pace is sustainable, and if so for how long.

From a national perspective, during the run up years between 2000 and mid 2006

the U.S. saw average annual home price gains of 9.7percent.

During the period between 1970 and 2000, however, the national average yearly rate of home price appreciation measured between 4.0 percent and 5.0 percent, suggesting that mid August’s cur-rent rate of 9.9 percent is back in bubble territory. High level readings, however, don’t always reveal the true story.

Drilling down past the national trends, home prices exhibit drastically different trends and trajectories. For anyone pricing an asset to sell, these variations are key.

Regionally, the West has seen the stron-gest recovery to date, with yearly home price gains of 18.6 percent. Yet within the strongest region, price trend variation resonates. Las Vegas, now leading the recovery with 31.9 percent in yearly home price growth is far outpacing Denver, with just 11.8 percent in growth.

Drilling down past the MSA is key to truly tracking home price trends, as we see that seven zip codes within Denver have sustained home price losses over the last year. A deal with a geographic concentra-tion in Denver would likely be priced much

differently than one with a concentration in Las Vegas.

In general, the recovery has been driven by markets that were the first and hardest hit in the downturn, in a First In, First Out pattern.

These markets have three main things in common: Prices were decimated following the 2006 housing collapse; the low tier, REO (bank owned sales) sectors of their markets (home sale values represent-ing the 25th percentile) were the first to see home price gains in 2011 and 2012; and investors were likely the main driver behind the demand that fueled the gains.

It’s no surprise that the FHFA’s REO pilot sale program focused on the hard-est hit areas, like Florida, Phoenix and Las Vegas and that these markets also

led the recovery. The Miami MSA was one of the first to

show signs of life in late 2011, following 64.7 percent in declines from mid 2006. Phoenix quickly surpassed these markets, leading the recovery for nearly all of 2012.

Since the bottom in January 2011, Phoenix is up 51.3 percent, yet remains down 43.7 percent from the peak. Most recently, Las Vegas took the lead, with yearly home price gains of 31.9 percent. Median prices for this market, however, rest at just $165,000, ranking it just 20th in median home price values across the top 50 MSAs.

Considering these common threads, the double digit price gains the markets once experienced, or are currently yielding,

90

110

130

150

170

190

2003 2005 2007 2009 2011 2013

Rel

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NY MSA NY MSA 2 Yr Price Forecast: 5.2% NY ZIP 10028 NY ZIP 10028 2 Yr Price Forecast: 4.3% NY ZIP 10024 NY ZIP 10024 2 Yr Home Price Forecast: 10.2%

Source: Clear Capital Bloomberg/HDI Data


Dr. Alex Villacorta

MONITOR COMMODITY PLAYS TO FIND OPPORTUNITY CPLY <

GO

>


won’t last. Phoenix is already on a moderating tra-

jectory, where quarterly home price gains through mid August, on an annualized ba-sis, are more in line with 10.0 percent than its current 22.9 percent. Softening gains in the low tier price sector are leading the moderating trend in Phoenix.

On the other hand, early growth in the low tier price sectors of a market could indicate future growth. Either market trend would likely impact a buy and hold strat-egy and the insight into price tiers could provide additional insight as to where prices might be headed.

Over the last few years, many low tier home sales have been REO. Distressed fundamentals, however, are shifting. REO saturation, or the rate of REO sales to all sales, at the national level now sits at 13.7 percent.

In contrast, during the first bottom in the market following the downturn in April

of 2009, national REO saturation was at 40.4 percent. Declining percentages of REO sales are driven in part by the shadow inventory working its way through the pipeline, while at the same time more homeowners are coming out of negative equity and putting their non-distressed homes on the market.

These two trends should continue to drive REO saturation down, likely forcing investors to retool strategies as cap rates shift due to declining distressed inventory and rising prices.

At the end of the day, the housing market recovery should continue, but at a moderating pace. The current annual rates of home price growth, which align with bubble-like average annual growth, will again start to resemble historical aver-ages, observed pre-2000. While the new normal, in terms of price levels, will keep peak home prices seen in 2006 at bay for many years to come, investors will likely shift

allocations away from distressed real estate as cap rates are squeezed.

Forecasts echo this sentiment, with just 4.0 percent growth expected over the next year. That’s not to say the days of double digit price growth are a thing of the past.

Over the next year, five out of the top 50 MSAs are projected to see more than 10.0 percent. Las Vegas and Sacramento should rank first and second, with 15.4 percent and 15.1 percent price growth expected, respectively.

Drilling down to the ZIP code level reveals plenty of new opportunity over the next year. Forecasts indicate 980 ZIPs out of 10,000 across the country should see price gains exceed 10.0 percent over the next year.

— Dr. Alex Villacorta is Vice President of Research & Analytics at Clear Capital®. Dr. Villacorta cre-

ated the statistical models which drive the Clear Capital Home Data Index™ (HDI™) accessible to

Bloomberg subscribers (ClCa <GO>).

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Q: The commercial mortgage backed securities (CMbs) market has been a key source of financing for build-ers and developers as well as buyers of commercial real estate; while this source of financing has come back it is at a fraction of where it was in 2005 and 2006; has this impacted your investments or developments?a: Fortunately for me, it hasn’t had an impact. I have a strong and steady cash flow and the Trump Organization is very solid in that way.

Q: Your father Fred was a real estate de-veloper; what wisdom did he impart to you when it comes to real estate? What wisdom have you imparted to your children when it comes to real estate investing? How have things changed?a: We operate on a much larger scale now — and we have expanded inter-nationally. The Trump Hotel Collection has done extremely well and we’ve won many awards. My father, Fred C. Trump, always emphasized knowing everything you could about what you were doing. He was very thorough and didn’t like wasting time. His four-step formula for success was; Get in, Get it done, Get it done right, and Get out. It works. I’ve imparted to my children the same ethics, and they understand the value and importance of the Trump brand, which is much bigger than it was when my father was here. I think he’d be proud of the direction we’ve gone. I am fortunate to have had him as a mentor and father.

Q: if you had not chosen a career in business what would it be? For a while - Wilbur ross considered a career as a writer. When you studied at the new York Military academy did you consider a career in the u.s. military? also, one would imagine that the Mo-nopoly board game must have been open at home when you were a young person. Did you play the game with your father or your own children? a: I had considered going to USC to study film. I realized that I already knew a lot about real estate from my father and

decided to go to Wharton. As fate would have it, I ended up being involved in the entertainment industry anyway with the success of The Apprentice. As for Mo-nopoly, yes, we played and I loved it.

Q: . The face of new York has changed since the 1970s when you started actively participating in real estate; we’ve lost some manufacturing jobs and have come to rely more on the fi-nancial services industry for jobs. To-day we are also seeing more buyers of Manhattan properties from overseas. How does this change your approach to investment in new York and beyond the Metro area?a: The one constant we have is change. It’s good to realize that and go with the flow. What remains longer are solid buildings in solid locations. That’s my approach in New York. I’ve always been a careful investor and will be thorough with anything I am considering, whether locally, nationally, or internationally.

residential & commercial real estate

Commercial and residential real estate markets are making a comeback, says Donald Trump, president and chief executive officer of Trump Organization inc. In an e-mail interview with Bloomberg Brief’s aleksandrs rozens, Trump said President Obama’s health-care legislation threatens the U.S. recovery and is limiting real estate investments.

Q: What is your outlook for u.s. residen-tial real estate? What is your outlook for u.s. commercial real estate?a: They both run in cycles and both are recovering. There will be some changes in the landscape in both divisions. I’ve bought a great deal of land in the past few years, the Doral in Miami is 800 acres, for example, and it’s been a good time for me investing in land.

Q: What is the biggest threat to the u.s. economy’s recovery? and, what is the biggest threat to the recovery we are seeing in u.s. real estate? a: President Obama has not helped and ObamaCare is a nightmare. That will cost us dearly, and the job market has not im-proved significantly enough to make a dif-ference. People who might normally think of investing in real estate are not doing so as the risk factor is much higher. The population is operating from a place of trepidation, if not fear. It’s not a healthy environment for a full recovery.

Q: When it comes to commercial real es-tate what area do you like best: Hotels? Office buildings? retail properties? a: I like them all. Many of my properties are integrated, as in mixed-use buildings, and each comes with challenges and opportunities. I have fifteen golf courses and I’m very involved with the design and redesign of the clubhouses as well as the courses themselves. I enjoy every aspect of my work and finding creative ways to use the space.

Q: Does the Federal reserve’s taper-ing threaten the recovery in commer-cial and residential real estate?a: You live with it, whatever!

commercial and residential real estate are on the mend, says donald trump

Photographer: Ben Nelms/Bloomberg


Henderson is pleased to announce the closing of the investment phase for CASA Partners V, L.P., the latest in its established series of workforce housing funds that began in 1993.

CASA V acquired its final apartment asset in June 2013, for a total portfolio comprised of 3,254 units across 8 of the Fund’s target markets, representing a combined total purchase price of over $350 million.

Since its first investment two decades ago, the CASA Series of Funds has closed on more than $3 billion in transactions, and successfully implemented value add multi-family housing investment strategies for institutional clients throughout all market cycles. The CASA strategy consistently seeks to provide attractive total returns by generating high current income through the execution of value-enhancing strategies coupled with the team’s

expertise in specialty low-cost tax-exempt bond financing. The dedicated CASA portfolio team has worked together for 20 years, since the first fund, and has an average of 30 years of real estate investment experience.

Today, Henderson manages over $2.5 billion in total US real estate assets including 63 multi-family properties with a total of more than 20,000 units across 25 markets, on behalf of funds and separate accounts for institutional clients.

Henderson North America Property thanks its clients for 20 years of continued commitment and trust in the CASA Series of Funds.

For more information, please contactAmy [email protected]

www.henderson.com

Offices in Beijing, Chicago, Frankfurt, Hamburg, Hartford, Hong Kong, London, Luxembourg, Madrid, Milan, Paris, Singapore, Stockholm, Sydney & Vienna

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fi nancial reporting

regulations

tax jurisdictions

reportingrapid changesrapid changes

investor demands© 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member fi rm of the KPMG network of independent © 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member fi rm of the KPMG network of independent member fi rms affi liated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 130907

Need to navigate the current environment? Find someone who’s been this way before.

One constant in the current real estate environment is how swiftly things change. Keeping your business on course means being able to react quickly to challenges that arise out of nowhere.

That’s where KPMG can help.

With our industry knowledge and deep understanding of today’s marketplace, we can help you anticipate how fi nancial reporting changes, multiple jurisdictions and other challenges might impact your business goals. So you can keep heading in the right direction instead of paddling against the current.

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