Peter Pays Paul

Here are a few tidbits from around the web.

• The WSJ covers the Treasuries new plan in: Treasury Releases Details on Program to Buy Troubled Assets
• Calculated risk writes CRE: Cap Rate Expansion
• Retail News Blog explains: The Role Of An Appraiser
• CoStar warns of: The Return of the Miserly Lender
• Square Feet informs us that Moody’s Commercial Property Price Index Posts Large Declines
• Bloomberg. com is reporting that Defaulting Commercial Properties Hit Banks on Vacancy-Rate Rise

Mish has all the details regarding the latest ruling in the Vallejo bankruptcy case in Judge Rules Vallejo Can Void Union Contracts.

In a groundbreaking ruling as well as a rare victory for common sense and the overall good of taxpayers, Bankruptcy Judge Rules Calif. City Can Void Union Contracts.

In the first ruling of its kind, a bankruptcy judge held the city of Vallejo, Calif. has the authority to void its existing union contracts in its effort to reorganize, holding public workers do not enjoy the same protections Congress gave union workers at private companies.

If you recall, the city of Vallejo, CA filed bankruptcy over the high costs that it was having to pay for public services. I wrote more about the problems facing California’s cities here and here.

CoStar.com is reporting that Opportunities Mount for Distressed Office Buildings, But Few Are Trading.

According to the report there are currently 19,600 office buildings with vacancy ranging from 60-100% of the office space. According to the chart compiled by CoStar San Francisco has 125 buildings in this category and the Oakland/East Bay has 208 buildings.

The article also reports few if any sales of these distressed assets.

The reasons for the dearth of deals appear to come down to three primary factors: the pricing disconnect that exists due to rapidly declining market fundamentals, tightened credit conditions, and a lack of appetite for risk on the part of [both] lenders and investors.

A Matter of Perspective

The answer CoStar provides is exactly correct and comes down to a matter of perspective.

Sellers tend to be optimistic about the future value of assets and buyers tend to be pessimistic or at least realistic. Sellers foresee rental rates rising and demand picking up for commercial office properties. This perspective motivates sellers to hang on to the property until a buyer who recognizes the “true value” of their property or they are forced to sell through foreclosure.

Buyers realize that though the seller may expect rents to increase, there is no guarantee that this will actually happen. Buyers want to pay a price based on actual rents, if not decreased rental rates due to the over abundance of office space. Buyers with this perspective will hold out until they can buy a property that meets their criteria.

Leverage Has Left the Building

A lot of the value attributed to office buildings in the past five years was a product of the ability of buyers to leverage the properties to such a degree that even a slight increase in rents or occupancy gave a nice bump to their rates of return.

With 80-90% loan to value leverage, unavailable buyers need to have a greater upside in relation to the purchase price to get a compensating return commensurate to the risk they are taking on.

A Staring Match

It has become a staring match of sorts. Neither side wants to show weakness and neither side is ready to admit defeat.

Until one side concedes defeat, the staring will continue and properties will remain unsold.

Who will blink first? Will it be they buyers or the sellers?

Do you believe in luck? Are you “unlucky”? Do you miss good opportunities?

Your response to this question may play a role in how “lucky” you are according to What It Takes To Survive from Newsweek. (HT: Get Rich Slowly)

Only 10% of Life is Chance

“Luck is not a magical ability or a gift from the gods,” Wiseman writes. “Instead, it is a state of mind—a way of thinking and behaving.” Above all, he insists that we have far more control over our lives—and our luck—than we realize. Going back to the Italian Renaissance philosopher Niccolò Machiavelli, great thinkers and writers have argued that 50 percent or more of what happens in life is determined entirely by chance (or Fortuna, the Roman goddess of fortune). Wiseman says no way. He believes that only 10 percent of life is purely random. The remaining 90 percent is “actually defined by the way you think.” In other words, your attitude and behavior determine nine tenths of what happens in your life. Wiseman has concluded that there are four reasons why good things happen to certain people. [Emphasis mine.]

If only 10% of life is purely random, it removes a lot of excuses.

Sure we can’t change the family we were born into, but we can choose how to live with them. We can’t choose the boss we work under, but we can choose how we respond to them.

We didn’t choose to get into this economic mess, but we can choose how we will act in spite of it.

Characteristics of the “Lucky”

Prof. Wiseman says the four reasons good thing happen to certain people are:

1. First, lucky people frequently happen upon chance opportunities.
2. Second, lucky people listen to their hunches and make good decisions without really knowing why.
3. Third, lucky people persevere in the face of failure and have an uncanny knack for making their wishes come true.
4. Fourth, lucky people have a special ability to turn bad luck into good fortune.

One of the key factors detailed in the article is that survivors and “lucky” people tend to have a great awareness of what is happening around them.

I can attest to the truth of this statement. I found a $100 bill in the parking lot of a major theme park. Other people had obviously walked past it. However, I reached down and picked it up.

Was I “luckier” than these other people? Probably not, I just had my eyes open.

Making Your Own Luck

Based on Prof. Wiseman’s observations here are a few suggestions for making your own luck.

1. Keep your eyes up and your ears open. Notice what is going on in the world around you. When you walk down the street do you notice differences in the buildings? Would you be likely to spot a friend on the street or would you walk past them?
   Listen to what is being said around you. Ignore the gossip and useless banter of fools. Listen for ideas and opportunities. Listen to learn about new markets or ideas you may have previously missed.
2. Learn to make good decisions. Wisdom does not happen on accident. People are not born wise, they become wise.
   Pick up a book or take a class that will help you to make wise decisions. (The Biblical book of Proverbs is full of wisdom.) Learning from your own mistakes and the mistakes of others plays a major part in wisdom.
3. Don’t let adversity or failure discourage you. Thomas Edison had 10,000 “failures” before he found the right filament to make the light bulb work.
4. Look for opportunities instead of obstacles. If our responses determine 90% of what life is, we have greater control over our lives than we know.

In the words of Dirty Harry, “You’ve got to ask yourself one question: Do I feel lucky? Well, do ya, punk?”

Here are a couple of items from around the web on commercial real estate:

• Is this a sign of things to come? Mish comments on Commercial Real Estate Mutiny In Downtown LA where retail tenants held a two week “rent strike”, while they demanded their landlord lower rents and stop charging for advertising.
• Square Feet has noticed that January Unemployment Shoots to 10.1% in California.
  
• The Dirt Lawyer  cautions that Before you think there’s no money out there… Blackstone claims to have $12 Billion sitting on the sidelines.
• Ever wonder how to determine a market cap rate? Lucas Rotter Grant Norling has written Scarcity in Capitalization Rate Examples? An In Depth Approach To Find The Right Cap Rate to help answer your question.
• CoStar.com proclaims Market Turmoil Takes Aim at Life Insurers

The weather here in Northern California has been wet and overcast for the past few days. But this morning the sun is shining brightly, the hills are green with fresh growth, and the sky is a brilliant dark blue.

I know that in many parts of the country it can be overcast for weeks not days, but in California a few days of clouds is a big deal.

When the clouds are ominous, the lightning is flashing, the rain is beating down, and the wind is howling forgetting about the sun’s warmth, light, and energy is easy to do.

Stormy Financial Times

At the current time we are living in stormy financial times. The stock market is tumbling, companies are filing bankruptcy, unemployment is rising, and fear is on everyone’s minds.

It is easy to forget in times like this that “this too will pass.” The sunny times will return eventually.

Change Is Difficult

The financial system as we know it is undergoing a cataclysmic change.

Personal finance is undergoing a huge change as well. We are changing from a consuming society, to one that saves.

Change is difficult. It takes discipline. We will hit bumps, plateaus, and  valleys.

On the bright side, adversity breeds character. What will it produce in the generation that experiences this?

The Lens of History Gives Perspective

As I read about the economy and some of the foolish policies proposed to solve this problem, it has been easy for me to have a doom and gloom mentality and attitude.

However, looking at history has provided me with a measure of hope. (Not as much hope as this.)

The Great Depression

My grandparents were born, raised, and survived The Great Depression. Do a search for companies started during a recession.

People were resourceful. They found ways to make it. They lived on less. Worked harder and still found ways to save a little money.

The Dark Ages

From my recollection of the era known as The Dark Ages, the life of the common people was none too pleasant. No running water, indoor plumbing was reserved for the richest of the rich if at all, and personal hygiene was yet to be invented.

Many of the peasants in Europe were serfs and had no ownership rights to the property on which they lived. They were at the whim and mercy of their lord. They worked hard on the land, but the landowner received a portion of all they produced.

Yet, for all this hardship modern Europe still exists. It is not a vast wasteland with few inhabitants.

History provides example after of example of  human ability to creatively adapt to situations and to survive.

The Sun Will Rise …

The current financial turmoil is not permanent. At some point in the future the financial sun will rise again.

A state of normalcy and predictability will again settle on the markets. Industries will begin to grow. That growth will create jobs and wealth.

The storm raging around us is beyond our control. Focusing on the storm raging around us will distract us from the items that need to be accomplished today.

We can control our actions to today. Besides “Each day has enough trouble of its own.”

Photo Credit: phatman

What was your favorite subject in school?

I have a natural proclivity towards math. I enjoyed algebra and solving a challenging problem was always fun. (I didn’t like calculus or trigonometry, too theoretical.)

Writing for me was always more difficult. Whether it was a research report or a story I always had a hard time getting to the minimum word limit. English was not my favorite subject. (Now I can’t shut up.)

It Comes Naturally

Talents and Skills

Each of us has natural talent that makes some tasks easier than others. Solving a complex finance problem is easier for me than for some. Some men are gifted with their hands and can build almost anything. Other men have the ability to design beautiful buildings. Some women are naturally creative and can sculpt or paint beautiful works of art. Other women have an attention to detail that makes them incredible administrators.

Our natural talents often lead us to industries where we will be maximally productive.

Personality Traits

Like natural talents, many of us have personality traits or characteristics that have been present from birth. One child is more gregarious, while the next is more reserved. Some people like their privacy and others will share almost anything with you.

Often time these personality traits determine how we act in our careers, how we relate to others, and our personal lives as well.

The woman with a driven personality may pursue her career at the expense of friends or family. The quiet teenager is less likely to take a sales role. The shy man is more likely to avoid speaking in public. The intellectual college student is more likely to pursue a career in academics.

Determined to Fail

Humans are naturally lazy (myself included). We like to follow the path of least resistance.

Frequently, our pre-determined character traits are the path of least resistance.  We follow them because they make us feel comfortable, we don’t have to change, and it is what we know.

Unfortunately, our determined character traits may cause us to avoid actions that may lead to greater success and a more fulfilling life. Have you ever heard:

“I can’t cold call, I’m not made that way.”

“I’ll never be able to do that. I was never good at …”

“I could never do that. It is beyond me.”

Self-Imposed Limits

These statements, and others like them, limit our inclination to change. We are limiting ourselves to what comes naturally and what is easy.

“No pain, no gain” is the colloquial saying. It is true. Without discomfort we will not change from our current status.

In essence we are saying that we are determined to fail because of our natural characteristics. We are admitting that our given character traits are too powerful for us to over come.

Breaking the Cycle of Failure

We can loose the chains of our natural tendencies and change how we act. We no longer have to be a slave to our predispositions.

It starts with a choice to act in a way that is consistent with what we want to achieve or to become, no matter how uncomfortable we feel. Over time the action will become more and more natural.

It is a bit like breaking in a new pair of shoes. The first time you wear them they may be uncomfortable for a bit, but as the leather stretches and becomes pliable they begin to form to your foot, and in two years’ time you may be sad to have to replace them.

In Your Personal Life

If you are shy, choose to talk to a stranger. If your natural tendency is to follow, find a role to be a leader. If you are timid, develop courage. Take a class to develop a skill or hobby. Read a book that stretches your mind and soul.

Your life won’t improve on accident. It takes discipline and dedication. But it can be done.

At Work

Choose to pick up the telephone and make those cold calls. Choose to give the presentation to the group of strangers, but potential clients. Choose to take a difficult course that will allow you to better serve your clients. Develop new habits that will bring value to your employer.

Choose to do what does not come naturally, but will be profitable for your work goals.

Today Is the Day

Make the choice today. Otherwise, you may be determined to fail.

Photo Credit: Akash K

According to the WSJ.com in Condo King Corus Weighs Its Options, Corus Bankshares, Inc.

is one of the few lenders to report that the Treasury Department intends to reject the bank’s application for funds from the Troubled Asset Relief Program, or TARP.

Ouch! The bank must be in trouble if they are admitting that they were rejected by the Treasury Department.

Corus has about $2 billion in unfunded construction commitments and that in the event of a federal takeover, regulators wouldn’t be obligated to fund these commitments.

This would be a major disaster. The article doesn’t specify how many projects this is spread over, but imagine if all of them were forced to stop mid-project.

Corus funded condo projects nationwide could come to a standstill. Depending on the FDIC’s decision, some of these projects could languish incomplete for a long time.

This is shaping up to be a huges mess.

I’m taking a few things home to read this weekend. Here they are if you want to print them out and read them too.

• Marcus & Millichap 2009 Real Estate Investment Outlook – Marcus & Millichap provides 12 pages of data for you to chew on.
  
• Everything You Wanted to Know about Credit Default Swaps–but Were Never Told – More than a 5 minute read from RGE Monitor – Home of “Dr. Doom” Nouriel Roubini.
• Putting Office Rent Declines into Historical Perspective – Torto Wheaton Research gives there thoughts on the direction of office rents are headed.

See you on Monday!

The CoStar Group is reporting that Centro Sells Power Center to Acadia for $78M; 40% Discount.

Acadia said the $78 million purchase price, which equates to $122 per square foot, represents a 40% discount to the center’s replacement cost. Acadia’s president and CEO, Kenneth Bernstein, said the REIT “may be acting ahead of the real estate market’s trough,” but added the company is confident in its purchase due to the center’s “great price,” remaining category-leading tenant mix and high barrier-to-entry location.

It seems like Acadia is getting a huge discount. Whether, it is a good deal remains to be seen. Currently the center is running at a 15% vacancy as two of the national tenants have gone dark.

Cap Rates Rising

Cap rates are rising.

Take for instance this shopping center in Fresno, California. Using the current income and deducting the pro forma expenses, I calculated that the cap rate is north of 9% based on current income for the listing price.

A reasonable cap rate and a discount, do not a deal make.

As the commercial loan market and commercial real estate market deleverage themselves expect prices to come down and better deals to be had.

UPDATE: Lucas Rotter has posted about Capitalization Rates – On The Move at his blog.