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January 14, 2011
ABC . . . 321


Can you say the alphabet backwards? Investors in the high tranches of CMBS backed by Beacon Capital Partners' troubled Seattle and DC office portfolios might want to learn quick.


Above, Beacon CEO Alan Leventhal in a photo we snapped in Boston last year. Trepp reported today that as January data began rolling in, shortfalls in interest payments (ie, how bondholders get paid) are reaching higher up the risk ladder. High tranches have the lowest risk and thus the lowest reward, but the interest shortfalls reached the Class D tranche this month. (Before January, they'd only gone as high as M.) However, Trepp notes, “At some point these shortfalls will get paid back and the pay back could be substantial.” Recently, Beacon received a five-year extension and a rate reduction from 5.97% down to 3% (for a period of time) on its $2.6B loan, which is split across six deals closed in 2007.

Multifamily apartments ended the year with a wallop, adding over 227,000 units to occupied stock. Not since 2000 have we seen such strong absorption numbers, according to Reis experts. Vacancies fell sharply, dropping from a 30-year high of 8.0% in 2009 to 6.6% at the end of 2010. Effective rents grew by a modest 2.3%, but in 2011, because projected completions will fall by 50% versus five-year averages, rent growth should accelerate to over 4%. Some really tight submarkets may post rent growth of over 15%. The party won’t go on forever though, warns Reis’ Dr Victor Calanog. Developers are gearing up to build tens of thousands of new units, perhaps as soon as 2012. If you build too much, rent growth will not come . . .



We’re feeling quite wonky today (too much reading and carrot juice while we were snowed in). In fact, we were thinking about FASB's looming regulation changes (expected in June, into effect 2013), which will capitalize leases. And there’s actually no time to waste, according to Grubb & Ellis corporate finance’s Bob Cook whom Bisnow DFW reporter Tonie Auer snapped with colleagues Amie Sweeney and Jeff Shell Tuesday at Cowboys Stadium. Tenant rent expenses will be replaced by depreciation and interest creating a liability and an asset on the books, Jeff says. However, lenders will see it as more debt, even when expenses haven’t changed. Bob says grandfathering of existing leases is unlikely and, even with an effective date of 2013, the standard will be applied to leases starting this year.




It's an industry without a lot of moving parts. No TIs. It’s a $22B sector with modest capital expenditures required. And perhaps that’s why Axxcess Capital Ventures of Newport Beach has just launched a JV to acquire $1B of self-storage with former Universal Self Storage Acquisitions president Troy Downing, shown demonstrating how he locates new properties. (Actually, after a successful career as an Internet entrepreneur, Troy enlisted in the Air Force and did two tours of Afghanistan, flying search and rescue.) The JV, called AC Self Storage Solutions, will focus on sunbelt states in the Southeast and Southwest. Troy (who owns a demilitarized L39 Russian fighter btw) tells us the JV expects to close its first assets in the next four to six weeks. He’s seeking properties mainly in bedroom or strong satellite communities of large MSAs. Got any boxes for sale?


Q&A with NAI Global’s Peter Ruggiero


Our world is more connected than ever—but how is the rest of the globe impacting the US real estate industry? Our NY reporter Amanda Marsh asked Peter Ruggiero, who just joined NAI Global to lead its global capital markets business as managing director. He was previously with Cassidy Turley and Colliers International, and served more than 20 years at Prudential Real Estate Investors, where he managed the sale of over $7B in CRE assets.


Bisnow:  What are the top global capital market trends affecting the US right now?

Peter: There are two trends that need to come into alignment before we will see the market approach stabilization. First, the stability of the valuation of real estate is coming into alignment, as all lenders are back in the market and becoming more competitive and more aggressive, adding to the wealth of equity money already in the market. Second, investor confidence is returning, as real estate values are more easily quantifiable by the lenders, and investors are accepting lower loan-to-value ratios. The wild card in the market will be interest rates, as real estate fundamentals can now be underwritten with a higher degree of confidence.

Bisnow: How is the real estate industry responding to these trends?

Peter: The real estate industry is responding to these trends by increasing transaction volume. This is evidenced by increased pricing for prime assets in the primary markets and more aggressive lender quotes for these deals. Secondary markets are responding more slowly to the real estate recovery, as evidenced by cap rate increases well in excess of 100 basis points in most markets for most product types.

Bisnow: Regionally, how are US cities affected by these trends?

Peter: There is more demand for product in the first-tier cities, and hence more aggressive pricing. While more attention is recently being paid to the second- and third-tier markets, there is still a very clear pricing differential from the first-tier assets and a strong resistance by the lender to lend in second- and third-tier markets.

Bisnow: What are the top two or three trends to watch out for over the coming year? 

Peter: First, the resurgence of foreign investment will manifest itself later in the year. As the foreign economies stabilize, the perception of solid investments in the US will become more attractive. Second, the special servicers will be more aggressive in either selling the problem loans or pursuing the foreclosure alternative. This will be aided by a potential truce in the ongoing “traunch wars” that are holding up the resolution of these problems.

Bisnow:  Which countries and current events will have the most impact on how we do business in ‘11? 

Peter: The major clients in the United States will still lead the real estate business, but these clients will continue to expand globally and consummate transactions outside of the US. It will be these transactions that will jump-start real estate investment activity overseas. So the stability of the US economy will have the most impact on how business is transacted here and abroad. In addition, emerging markets such as China and Mexico are expecting to grow as their economies mature.




As we head into tax season, we felt it only natural to look into the territorial tax system (from the Deficit Commission Report to the US Chamber of Commerce) everyone’s been calling for. Our Houston reporter Catie Brubaker asked Ernst & Young partner Brad Williams for details. The US currently taxes worldwide income of companies based here, preventing many from HQ-ing here. Not only do we tax more earnings than most countries, Brad tells us, but our rates are higher. The rest of the industrialized world cut corporate taxes 30% to 40% in the past two decades (averaging a 25.5% rate), the US held at 39.1% (combined federal, state, and local rates), the second-highest rate in the developed world (we're comin' for ya, Japan) and the only to combine high rates with a worldwide system. The proposed tax system wouldn’t tax foreign business or branch profits but would continue to tax foreign passive income (example: rent from property).


Everyone agrees switching to a territorial system would benefit us, but Brad says there’s one problem: It won’t happen any time soon. The proposal calls for a growth in tax revenues from 18.2% to 21% of GDP, but movement to a territorial system is a revenue loser. That means raising individual taxes, removing other corporate tax expenditures, or both. Treasury Secretary Tim Geithner announced Wednesday that the Obama administration is considering a revenue-neutral reform of the corporate tax system. Geithner said the government wants to “improve incentives for investing in the US and make the tax code more competitive with other developed nations, but that any changes cannot result in a reduction in tax revenues.” And now we’re confused.


This week, snow was on the ground in 49 out of 50 states, and many of our markets were hit by the massive wave of snow and ice including Atlanta, Dallas, New York, Boston. Here's a quick recap: In Atlanta (which got up to eight inches), Highwood’s Mike Wells tells us the firm de-iced the parking lots of all its buildings—especially at 1800 Century Center where the Georgia Department of Revenue stayed open (you're welcome, taxpayers). Across town, Ackerman's Kris Miller tells us his company's office portfolio was also open for business, which meant putting building engineers up in local hotels in case of trouble. In fact, one employee, Jimmy Halford, drove in Sunday to Premier Plaza and slept in a sleeping bag in the management office, Kris says.


NYC didn’t care that it got well over a foot of the white stuff in the second wallop (the first was Dec. 26), only that Mayor Bloomberg cleaned it up this time. But even the lenders—who never miss an opportunity to do a deal—saw the rescheduling of the Real Estate Lenders Association’s 20th anniversary celebration.


Amazingly in Boston, which got the most snow in all of Bisneyland (up to two feet), Logan Airport closed only briefly, canceling 503 departures and 466 arrivals. Why? Boston gets it, according to Commodore Builders’ Joe Albanese, who had all of the company’s 14 job sites going full tilt on Wednesday. “Thanks to four-wheel drive and technology, it’s snow schmoe.” At Atlantic Wharf, where they’re building out 41k SF for architectural firm Payette Associates, the entire eight-person crew showed up to lay out the electrical system and relocate sprinkler piping, project superintendent Craig Reedy tells us.



Could we be looking at a Maryland rebuttal to the 1,100 who showed up in July at Bisnow’s Future of Tysons Corner and the Dulles Corridor event? Through this morning, more than 700 of you have signed up for The Future of Rockville Pike, with another 10 days remaining (do your part, MD, and sign up now). After that event, the floodgates open on our 2011 event season. See below for the event in your city:

The Future of Rockville Pike. Jan. 24. Bethesda North Marriott. Sign up.

Dallas Power Networking. Jan 25. Trece Restaurant. Sign up.

Houston Hot Topics: The Future of Fort Bend County. Jan. 27. Sugar Land Town Square. Sign up.

NY Multifamily Summit. Jan. 28. NY Bar Association. Sign up.

Student Housing Summit. Feb. 1. Grand Hyatt Washington, DC. Sign up.

Second Annual Back to Business Total Schmoozarama. Feb. 9. DC. Sign up.

Atlanta Health Care Real Estate Summit 2011. Feb. 9. Grand Hyatt Buckhead. Sign up.

Dallas Health Care Real Estate Summit 2011. Feb. 17. Sign up.

Second Annual Washington Real Estate Summit. March. 1. Sign up

Reminder: we'll be closed in observance of Dr. Martin Luther King day on Monday. But you can still send news to sibley@bisnow.com.
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