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November 7, 2008



We're tempted to stay in our semi-optimistic New York bubble, but we thought we'd better find out what's going on in the rest of the U.S. That's why we have the Urban Land Institute and Pricewaterhouse Coopers, which gave us a national reality check via their annual report presented yesterday at the Roosevelt. Over 700 real estate professionals put their two cents into predictions for '09: a lot trending downwards, but some glimmers of hope.


Esteemed speakers: Citadel Realty Advisor's Joel Ross, PWC U.S. real estate leader Tim Conlon, Apollo Global Management's Joseph Azrack, Barclays Capital U.S. head of real estate investment banking Schecky Schechner, Bank of America global head of commercial real estate Mark Patterson, Cornerstone Real Estate Advisors CEO David Reilly, PWC director of research Susan Smith, and ULI senior resident fellow Steve Blank.


We're in our worst commercial real estate period since the early 1990s, Steve said, seeing a dramatic drop in values, increases in delinquencies and foreclosures, lenders without money, and reduced tenant demand, thanks to a "minefield of issues" from the credit crisis to rising unemployment and stock volatility. Trophy will have less erosion in the downturn, while Class B and C face more risk. Total returns in '09 will be negative, while cap rates should increase across the board. There's a financing gap that needs to be filled, and equity will not fill it all. Please, the good news? Next year should be a good one to buy; cash-heavy-low-leverage buyers will come out on top; there's a lack of oversupply in many markets; and CMBS will slowly be revived. Hopefully Steve got some rest after his presentation; he's off to London on Tuesday to give it again—and then Asia.


Major pathway cities are making out like bandits, thanks to a flight to quality and 24/7 markets, according to Susan. Although the forecast's city ratings have gone down since last year, most coastal markets are expected to ride out the storm, including Seattle, San Francisco, Los Angeles, Washington, D.C., New York and Boston. Very few Sun Belt and Midwest cities are strong, except Houston, Austin and Chicago. Expect struggles in San Diego, Orange County, New Orleans, Phoenix, Las Vegas, Atlanta, most of Florida and smaller metros like Charlotte. On the property side, moderately-priced apartments, warehouses, CBD offices and high-income apartments are poised to do well, while regional malls and limited-service hotels are expected to do worst. She suggests investors buy or hold apartment buildings and industrial; buy residential building lots and distressed condos; hold hotels and office; and pray for retail. Overall, she predicts that 2009 will be a downer, 2010 will flounder and 2011 will see recovery underway.


Then, the panel of investment experts. Schecky said life firms are using a 7.5-8% cap rate, but that it wasn't long ago we saw 9% rates and perhaps we're just returning to historic levels. And while CMBS is not the next subprime, we should come up with ideas on how to regulate the industry and relay that to Washington. Dan Abrams, EVP of iStar Financial, said he believes real estate still has inherent value; yet many investors will be sitting on the sidelines, and he doesn't know how long that money can sit.


Mark predicted it will be a long time before we get back to the normal debt market of 5-6 years ago, saying the outlook is grim in the near future; even though Latin America and Asia have been doing much better than the US and Europe, clouds will be heading their way soon. NYC, overall, will fare better than the U.S. Even though this is a tough period for the city with increasing lay-offs, more sublease space and a predicted vacancy rate of up to 12%, it is one of the best markets to be in and will rebound. Foreign interest, in particular, will always exist, David said.


Even with the slightly depressing forecast, some of the attendees report that deals are getting done, like AKRF's Peter Liebowitz, right, with Center Partners' Glen Vetromile, Meridian Development's Howard Weitzman and Weitzman Group's Randee Weitzman, who's been quite busy moving his firm's big (and undisclosed) projects forward.


No predictions were made on the popularity of parking garages, but Becker Brothers' Scott Sherman (second to right, with Wells Fargo's Mike Chi, Ignacio Diego and NYU Stern's Matthew Grabler) said his company has been actively investing in them. With the exorbitant prices of many of today's Manhattan spots, no wonder investors want to park their money there.

Investors Still (Heart) NY

Later, it was off to REBNY's quarterly members' lunch at the Sheraton New York to hear from JPMorgan Chase's Greg Reimers, Goldman Sachs' Stuart Rothenberg and Apollo's Lee Neibart. Their take: it remains to be seen whether interest rate cuts are enough to stimulate commercial real estate; concerns that the cap markets will get worse are refocusing firms on credit tenants, quality, and location. Panelists stressed the need for liquidity and Obama's selection of a reassuring Treasury Secretary. They said Mayor Bloomberg and Governor Patterson should not compromise city services as they seek fiscal order. On the more optimistic side, they think residential will remain strong, and investor interest will increase. The city is still the world's financial capital and affordable compared to many foreign cities. "New York City is the city you want to stand by in bad times," said Newmark Knight Frank president and moderator James Kuhn.


Monday Properties' Scott Egarian, Craig Panzirer and Drew Odabashian. If you think Craig's good at making deals, try trick-or-treating with him. He reports that 20% of his kids' candy went to Mom and Dad this year—not a bad commission. Hey, we need the sugar rush to get through this market, too.


The market certainly has been opportunistic for some people, like Rhode Associates' Graham Beatty, Jane Lyons and Eric Goldstein, who say that the firm has been doing a lot of capital restructuring and consulting for clients. Good, we like all smiles for our camera.

Arent Fox
Leo A Daly
Reznick Group
Casa Noble
Pride and Glory
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