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January 10, 2011 
 
 
A DISTRESSING PICK

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Delta Associates’ Distress Commercial Real Estate Journal recently named Houston its pick city. Could be our stunning skyline, but we suspect having the second-smallest amount of distress in the US might have something to do with it.

 
Transwestern's Leah Gallagher and Rudy Hubbard

We hit up a local expert (no offense, Delta), Transwestern’s Rudy Hubbard (above with partner Leah Gallagher). But first, the Delta data says Houston holds the No. 2 spot despite a rapid increase from $1.5B worth of distressed sales in June 2010 to $3.5B at year’s end. Apartments are leading the way in Houston, with 48% of our volume ($1.7B). Nationwide, the volume of distress plateaued for this cycle in the $165B to $200B range. This crest was sooner than expected because lender enthusiasm for credit extension and an unexpected early firming in CRE prices saved underwater deals. The journal predicts that distress volume will recede in earnest in 2012. Bank failures have already leveled off—it had been fluctuating between 41 and 45 failures per quarter since Q4 '09.

Distress in Houston

Rudy tells us there’s not as much distress as many predicted. Special servicers are restructuring whenever there’s a good sponsor, and because banks don’t want to (or can't) write down loans, they’re not taking properties back. Also, time is curing some ills (extend-and-pretend may actually be working). When they can’t restructure, special servicers are selling notes rather than getting in the title chain to avoid huge fees for taking back properties—Rudy tells us half of his business in 2010 was the sale of notes. The reason for the Houston jump? Overworked special servicers are finally making it through their massive portfolios and realizing what’s there. Unlike Delta, Rudy predicts an increase in distress sales volume starting in 2012 as loans made at the peak of the market come due. Although there weren’t many distress deals in 2010, Rudy and Leah wrapped up three in the last few weeks of the year—they represented the sellers of 25025 Katy Freeway, 6150 Richmond, and a note sale for JP Morgan Chase.


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SHAKE IT UP
 
Baker Botts’ Paul Landen, Ernst & Young’s Brad Williams, HFF’s Jody Thornton, Weingarten CFO Steve Richter, and Baker Botts’ Greg Nelson

Volatility may be the story of 2011, according to a superstar panel arranged by Baker Botts and Ernst & Young. We snapped moderator Baker Botts’ Paul Landen, Ernst & Young’s Brad Williams, HFF’s Jody Thornton (it’s ok if you don’t recognize him, he’s based in Dallas), Weingarten CFO Steve Richter, and Baker Botts’ Greg Nelson in the Houstonian. In good news, Jody says companies are again underwriting for rent and job growth. And he’s heard some surprising news recently: At a conference in December, every institution had a handful of multifamily starts planned for 2011, and all were predicting double-digit rent increases. He also just sold a hotel at a 4 cap, which he’s never seen before.

Mark Cover, Steve Richter, Mark Grinis, Greg Nelson

Hines’ Mark Cover and Ernst & Young Global Real Estate Funds leader Mark Grinis join Steve and Greg on stage. Now for the shaky stuff: Mark Cover believes we’re at an inflection point. Risk's been inappropriately priced for a long time, and the market will be uncertain until it’s corrected. He believes the corporate war for talent will make companies willing to pay high rents to get in Class-A buildings. Mark Grinis says global funds have singed fingers and aren’t investing in real estate. Some ’09 vintage funds are filling the void, but active funds have very focused goals. (Jody says “fund” is the new F word, since those deals are so tough to get underwritten.)

Steve Richter, Mark Grinis, Greg Nelson

Steve says that for a while public companies had the better position, but by the end of 2010 private firms were leveraging better. He and Jody are seeing investors drift away from the core properties (which have seen a bubble of their own) to chasing yield. Steve says retailers have been in good shape through the recession and want to grow. The few remaining developers should have opportunities to build this year, although most want double-digit returns. He tells us new lease rents are soft, but renewals have been more competitive with 3% to 5% increases. And last, keep your eye on DC lawmakers—according to Greg, tax issues could be significant in 2011. For example, watch the deficit reduction bill, which includes a territorial tax system. If we switch to that, the US will no longer tax worldwide income for companies based here. Greg says the current system prevents companies from headquartering in Houston, so a change could mean a big impact on CRE.


Bisnow
HERE COME THE GENERALS
 
Dollar General

Bargain-hunting Texans will be happy to know Dollar General plans to open 625 new stores across its existing 35-state operating area as well as three new states (Connecticut, Nevada, and New Hampshire) in FY ’11. While the number of new Texas stores hasn’t been determined, we already have more than 1,000, more than any other state, DG spokeswoman Tawn Earnest tells us. DG will expand its presence in new suburban, rural, and metro markets with 7,000 to 8,000 SF stores, Tawn says: “We look for advantageous population growth patterns, proximity to residences, traffic patterns, as well as where we already have stores.” The company plans to remodel or relocate 550 stores. “We've worked hard to enhance the shopping experience, adding new brands, revamping our private brands, and refining our site selection process. And now, we're comfortable with accelerating our growth,” she says. That reminds us we need more toothpaste and sunflower seeds. (Yeah, we know it’s a weird combination.)

 
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