Rebel Traders – Analysis Without The Hype

Highlights of the most recent report from Reis Inc, Real Estate Research -

“There’s something of an illusion of profitability”, says Kenneth Rogoff, Harvard economist. At a gathering of the American Economic Association’s yearly meeting held in Atlanta. Economists from a wide range of backgrounds mulled over the prospects of growth in the United States for the next decade.

[...] experts from a range of political leanings were in surprising agreement when it came to the chances for a robust and sustained expansion:  They are slim.

Many predicted U.S. gross domestic product would expand less than 2 percent per year over the next 10 years. That stands in sharp contrast to the immediate aftermath of other steep economic downturns, which have usually elicited a growth surge in their wake.

“It will be difficult to have a robust recovery while housing and commercial real estate are depressed,” said Martin Feldstein, a Harvard University professor and former head of the National Bureau of Economic Research.

Housing was at the heart of the nation’s worst recession since the 1930s, with median home values falling over 30 percent from their 2005 peaks, and even more sharply in heavily affected states like California and Nevada.

The decline has sapped a principal source of wealth for U.S. consumers, whose spending is the key driver of the country’s growth pattern. The steep drop in home prices has also boosted their propensity to save.

“It’s very hard to see what will replace it,” said Joseph Stiglitz, Nobel laureate and professor of economics at Columbia University. “It’s going to take a number of years.”

One reason is that U.S. consumers remain heavily indebted. Consumer credit outstanding has fallen from its mid-2008 records, but still stands at some $2.5 trillion, or nearly one-fifth of total yearly spending in the U.S. economy.

Another is that many of the country’s largest banks are still largely dependent on funding from the U.S. Federal Reserve and the implicit backing of the Treasury Department.

Kenneth Rogoff, also of Harvard, argued that if the U.S. government ever “credibly” pulled away from its backing of the financial system, then a renewed collapse would likely ensue.

He cited government programs giving large financial institutions access to zero-cost borrowing as artificially padding their bottom lines.

“There’s something of an illusion of profitability,” he said. (Source: Reuters) H/T butch (emphasis mine)

The Bloomberg article says it all -

Dec. 21 (Bloomberg) — Commercial property values in the U.S. declined in October to the lowest level in more than seven years as unemployment reduced demand for apartments, offices and retail space. [...]

[...]Values are dropping as U.S. unemployment climbs and consumers cut spending. Office vacancies may approach 20 percent next year as employers hold off hiring, commercial property brokers Jones Lang LaSalle Inc. and Grubb & Ellis Co. said last month. [...]

[...]An estimated $1.4 trillion of commercial real estate debt is scheduled to mature over the next five years and Foresight estimates that 53 percent of it is “underwater,” meaning the value of the property is less than the mortgage, Anderson said.

[...]The delinquency rate for U.S. commercial mortgage-backed securities rose to 4.47 percent as of the end of November, Moody’s Investors Service said on Dec. 10. That’s almost six times the year-ago rate of 0.75 percent. (emphasis added)

Delinquencies for commercial real estate mortgages held by banks may rise to 5.6 percent in the fourth quarter and reach as much as 8 percent next year, Anderson said. [...]

Too much money in the hands of the wealthy lead them into the light of reality, the hard way.

ANGUILLA, British West Indies — Robert Sillerman amassed a billion-dollar fortune buying and selling media and entertainment companies. Among his most successful deals: the purchase of television franchise “American Idol.”

Mr. Sillerman’s winning streak ended on an alluring stretch of beach on this tiny Caribbean island.

His luxury hotel, condominium and golf resort here, Temenos, languishes half-built and out of money. “American Idol” creator Simon Fuller and novelist Dan Brown, among others, have put down deposits on million-dollar villas. It’s not clear when or if their vacation homes will be completed.[...]

[...]Some newly opened properties aren’t generating enough cash to cover operating expenses. Construction of others is being halted as lenders and investors pull out. During the first nine months of the year, developers postponed or canceled 43 luxury hotels totaling about 9,300 rooms in the U.S. and the Caribbean, according to research firm Lodging Econometrics.

While veteran hoteliers are accustomed to booms and busts, the newcomers are getting a sobering lesson in the risks of owning and developing high-end lodging, which has been hit hard by the real-estate bust.[...]

[...]An investment group headed by Dell Inc. founder Michael Dell teamed with Rockpoint Capital LLC to acquire the Four Seasons Hualalai in Hawaii in 2006. Since then, the 243-room hotel’s annual cash flow has fallen to $7.9 million, from $20.6 million, and its occupancy rate declined by 33 percentage points to 54%, loan documents indicate.[...]

[...]Ty Warner, the Beanie Baby mogul, might lose his slumping Four Seasons New York and three other luxury hotels to foreclosure unless he can land a one-year extension on the properties’ $345 million securitized mortgage, which comes due Jan. 9, according to credit-rating company Realpoint LLC.[...]

[...]Microsoft Corp. founder Bill Gates has run into several problems on the hotel front. In 2007, his personal investment company teamed with Saudi Prince Alwaleed bin Talal to acquire Four Seasons Hotels & Resorts, which manages 82 luxury properties, for $3.4 billion. Since then, revenue per available room at those properties is down 25%. In addition, his investment company is foreclosing on the 582-room Terranea Resort in Palos Verdes, Calif., which defaulted on a $110 million loan from Mr. Gates’s firm shortly after opening in June.[...]

[...]EBay Inc. founder Pierre Omidyar is a major investor in Montage Hotels & Resorts, which owns two luxury hotels in California and one about to open in Utah. At its new Beverly Hills boutique hotel, occupancy is running about 60%, and only four of its 20 residences have sold so far.[...] (Source: WSJ) H/T Butch

Oh how sad … NOT

Dubai, unable to make payments on its debt is being rattled yet again. This time it is the investment arm of Dubai World.

NEW YORK (AP) – Dubai World’s investment arm, Istithmar, lost ownership of the W Union Square New York hotel in a foreclosure auction Tuesday.One of the hotel’s interim lenders, a private equity firm called LEM Mezzanine, acquired the 270-room hotel for $2 million, according to Dow Jones. The sale was another financial blow to Istithmar, which acquired the hotel in October 2006 for $285 million, according to Real Capital Analytics, a data tracking firm.[...]

[...]At the beginning of December, owners of eight New York hotels worth a total of $985 million were in financial distress, including a Courtyard Marriott and The Time Hotel, according to Real Capital Analytics.

The W was not the only Dubai World hotel in trouble. The Fontainebleau in Miami Beach is also in financial straits. The property’s $660 million loan was due in August. Contractors also claim the owner of the historic hotel owes them $60 million.[...] (H/T butch)

A price reduction of 99.3%. And some say commercial real estate is just fine.

Submitted to us this morning by ‘Bob G”

Give them hell Chuck…

(CRE) Commercial real estate crash in pictures . I took a drive this evening from 5.30 pm – 7.30 pm and shot over 200 pictures of Florida real estate in crisis. What is really amazing if you notice the time and date on each picture . I was able to shoot a picture about every 45 seconds while all alone driving in traffic including stopping for traffic lights and gas and parking in a safe place each time for each shot . Everywhere you turn something is for lease or rent.
All these headlines in the media don’t seem to have any effect on people so here is one road in one town ( out of thousands ) in Fort Lauderdale Florida up to Pompano Beach ( about 8 miles ) I pretty much only shot the right side of the street because I did not want to do any u turns . Some pics I shot across the street . This does not even include office buildings .
There is something for lease or rent in almost every single plaza or strip mall without exception . I also missed a lot more because of traffic and buildings set back from the street. This does not even include offices , homes , condos etc, this is just stuff abandoned or had a sign in front of it and I missed a LOT of signs . This is not even all the empty lots that sit because the developer abandoned the project after buying up the whole neighborhood .
This is Fort Lauderdale Florida . The Gold Coast , The Venice of America the Yachting capital of the world folks.The pictures start at the Fort Lauderdale beach on Sunrise Blvd. and go west to federal Highway ( rte 1 ) north to Pompano Beach about 8 miles and finish in a random warehouse district off the main road . After that it got dark and I had to stop .
You will see Exotic car dealerships Burger King, Wendys , Fuddruckers , Hooters , Pier one , furniture stores , restaurants , clubs boat dealers, Business that have been there 20 + years , Supermarkets , Saks 5th avenue ( big white building in beginning ) Macks groves , Flaming Pit , the old 50’s diner . A Ford dealer and a Dodge dealer . A golf course in beginning of slideshow . All GONE in just one 8 mile strip . Folks this is the good side of town with the money I did not even go to the other side of the tracks or to other streets just one !!!
Please Note Ferrari is building a beautiful new dealership. I guess that is where Goldman Sachs employees will spend their money.

Watch the pics

[...]The $8.6 billion Las Vegas development owned by MGM Mirage and DubaiWorld, is preparing for a potential bankruptcy filing that could bring the massive project to a halt, according to people familiar with the situation.

MGM Mirage and investment partner Dubai World appear unlikely to make a $220 million payment due Friday on City Center — a massive resort and casino project under construction on 67 acres. City Center has hired Dewey & LeBoeuf to prepare itself for a possible bankruptcy filing, and the firm’s Martin Bienenstock, a noted bankruptcy attorney, is handling the work, according to people familiar with matter. The law firm of Weil, Gotshal & Manges LLP is working for MGM Mirage on a range of legal issues, according to these people.

MGM Mirage

A filing could come this weekend, depending on talks among MGM Mirage, its lenders and Dubai World, these people said. There is a possibility that any filing for court-protection could be averted if the talks lead to an agreement.

Dubai World, a conglomerate owned by the government of Dubai, has sued MGM Mirage for breach of contract and blamed it for cost overruns. It also signaled it won’t provide its half of Friday’s payment. MGM Mirage, meanwhile, is struggling to persuade its reluctant lenders to allow it to solely fund the project. While talks between MGM Mirage and Dubai World were ongoing Thursday night, there “may be no choice” but for City Center to file bankruptcy “if Dubai World doesn’t fund,” said a person close to MGM Mirage.

The casino company faces a cash crunch as it tries to meet obligations on more than $13 billion in debt. The company narrowly averted defaulting on loans last week and warned that it could default by mid-May.[...]

[...]Missing Friday’s payment would start the clock ticking on City Center’s future. Work could grind to a halt within days, idling 8,500 construction jobs, said a person familiar with the talks between MGM Mirage and Dubai World. A delayed opening would also risk the jobs of 12,000 workers who are to staff the complex.[...]

Source: WSJ

From the WSJ…

With a record amount of commercial real-estate debt coming due, some of the country’s biggest property developers have become the latest to go hat-in-hand to the government for assistance.

A recent report by Deutsche Bank shows a sharp drop in the number of loans paying off from October to November. They’re warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics LCC, $530 billion of commercial mortgages will be coming due for refinancing in the next three years — with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off.[...]

[...]A recent letter sent to Treasury Secretary Henry Paulson, and signed by a dozen real-estate trade groups, painted a bleak scenario: “Right now, we believe there is insufficient systemic capacity to refinance expiring, performing commercial real-estate loans,” said the letter. “For many borrowers, [credit] simply is not available,” the letter noted.[...]

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