RCA (Real Capital Analytics) June Capital Trends Reports were published today. I offer you a few choice morsels:

1. Apartments: Some encouraging signs include some larger deals now in contract, the emergence of new buyers and the return of some investors after a year or more on the sidelines.
2. Industrial: Drop in transactions is on par with other property types but defaults and foreclosures in the have been relatively mild so far compared to other property types.
3. Retail: Sales volume languish and the inventory of properties for sale swells and defaults and foreclosures proliferate.
4. Office: Some signs that investment trends are stabilizing. Although they are not improving on an absolute basis, the pace of decline is slowing.

Barron's reports: The US home-foreclosure rate fell in May for the first time since January. But with filings on 321,480 homes in May, it hardly suggests housing is out of the woods.

Indeed, multifamily properties have begun to feel the stress of the credit crisis, with apartment defaults spiking to 3% in recent months, versus an average monthly rate of less than a half-percent in the past eight years. And with unemployment up and rents and occupancy down since the start of the year, the numbers are poised to get worse. So says Mike Kelly, president and co-founder of Caldera Asset Management, a multifamily-real-estate consulting firm: "It's the single-family world, just two years later."

First-quarter multifamily apartment transaction volume fell more than 70%, according to Real Capital Analytics. Kelly says the situation in the $880 billion multifamily debt market is likely to get only worse, with $7 billion of such asset-backed securities coming due next year.

Meanwhile, the average capitalization rate for multifamily properties has risen by two percentage points since 2007, to about 7.5%. The capitalization rate, similar to the yield on a bond, is calculated by dividing annual net operating income by total debt and equity,

Although apartment cap rates have moved closer to those of other properties, their costs of borrowing (largely from government-sponsored entities) are typically up to 1.5 percentage points lower than for other commercial properties, Real Capital Analytics noted in its May report. Its conclusion: This is "a buying opportunity."

GLOBAL SALES HIT BOTTOM: No Rebound, but Little Room Left to Fall 
“Global transaction volume continues at a remarkably sluggish rate—and that is good news. Although Q2’09 sales are now estimated at $48.6 b worldwide, a 67 % year-over-year drop, the decline from Q1 volume could be as little as 5%, indicating a plateau has been reached, although there is no recovery in sight. Quarterly volume projected for the Americas is almost negligible at $8 b, a 6% consecutive drop but an 83 % fall yoy. EMEA is likely to take the most dramatic hit from the first quarter, down 24 % at $17.3 b and 71 % yoy. But with Australia, Japan and China beginning to stabilize, Asia Pacific sales are expected to be positive with an 18 % gain on the prior quarter at $23.3 b. That’s nearly half of estimated global volume and marks Asia Pacific’s first quarterly lead in sales worldwide—even as the Americas accounted for just one-sixth of that volume.”

When people, claiming to be economists and having missed calling the downturn, say we are nearing the “bottom” of the recession, I just smile.

 

In real estate, everything is driven by JOBS.  We now have a reported 9.4% unemployment rate. We have lost 6 million jobs and now over 14 million people are out of work.  However, if we counted the people who have become discouraged and left the job market, the rate would be over 16%.

 

I do not think it is good to take what is happening in the short term and make long-term judgments.  With the exception of a few, no one saw this coming and certainly not this bad. 

 

At the moment, we do not know the rules of the game.  We do not know how to price things and, therefore, we do not see many transactions.  Unless people absolutely need to sell, everyone will stand pat and wait.  Sam Zell said it best: "I think it was Confucius that said 'Banks don't recognize securities'."

 

Everyone will be looking to get in a position of liquidity.   At the moment, the only liquidity in the real estate market is found in REIT stocks.  People may not like the values, on either side, but it is the only place at the moment. 

 

If we examine what has happened in one of the hottest residential markets, we can see that there is very little liquidity today in property.   In West Los Angeles, one of the hottest residential markets in the country, in the last three years, the number of houses sold has dropped 80% and the prices have declined 40%.  

The Numbers Tell Us Things Are Bad in Real Estate

Some real estate stuff from Real Capital Analytics (RCA) April Capital Trends Reports (We’re not out of this thing yet!):

1. Retail: Q1 retail asset sales volume, at $1.9b, was down more than 90% from its market peak two years earlier and was off 74% from the same quarter a year ago.

2. Office: the $3.6b sales volume for office properties through the first quarter fell to just 6% of the $77.5b recorded two years ago at the market peak in Q1’07. Versus a year ago, volume was off 76% and compared to the previous quarter, volume was down 53%. Digging deep to find any positive news, sales did increase slightly in March over February.

3. Industrial: Two statistics illustrate the state of investment sales for the industrial marketplace in q1’09. Closed deal volume fell to its lowest level in at least eight years at $1.3b, and was 9.2% of peak quarterly volume. Adding insult to injury, offered volume, at $8.3b, outpaced closed volume by over 6:1.

4. Apartment: Sales of significant apartment properties fell to a mere $1.8b in q1, a drop of 86% from a year ago. The unimpressive volume last quarter equates to just 6.7% of quarterly volume recorded at the market peak. As shocking as these declines are, more recent comparisons indicate that the market is continuing to slow. q1’09 volume breakdown

I guess these statistics just underscore what it’s like out there. Almost each week we read about new private equity funds that have been pulled due to lack of interest (or other issues) but many people that I speak with say that there is money out there; it’s a matter of finding who’s got it and in some cases working out a draw-down schedule that suits the investor.

The Commercial Real Estate Market Will Be the Next Challeng

Policy makers believe it is critical to get credit flowing to the $6.5 trillion real-estate industry. Defaults likely would rise if borrowers were unable to refinance loans as they become due.

The $700 billion market for existing CMBS, which is as big as the markets for securitized auto loans, credit cards and student loans combined, has rallied in the past two weeks on hopes for TALF.

Real-estate owners and investors who have talked to the Fed predict the central bank will begin offering some five-year loans under the government's Term Asset-Backed Securities Loan Facility, or TALF. That is longer than the three-year loans being offered.

While it may be a small change, the length of loans is a critical matter to the Fed, which prefers to make short-term loans. Longer-dated loans could make it more difficult for the Fed to fight inflation, as the bank can't pull back the money injected into the economy.

Industry executives hope that the TALF effort will resurrect the CMBS market. In 2007, about $230 billion of securities were sold.

No one is buying the government program, because the term of the loans are too short and the regulations are ridiculous.

The first TALF-eligible deals, involving securitized car loans and credit-card cash flows, began in March, but investor response to the program has been anemic. Investors applied for just $1.71 billion in loans on Tuesday in the second round of TALF, according to the central bank. That follows applications for $4.71 billion last month.

The country’s 10 biggest banks have $327.6 billion in commercial mortgages, which face a wave of defaults as office vacancies grow and retailers and casinos go bankrupt. A projected tripling in the default rate would result in losses of about 7 percent of total unpaid balances, according to estimates from analysts at research firm Reis Inc.

Commercial property prices are down almost 20 percent in the past year, and with the global recession worsening, there’s “significant stress” in the market, said William Schwartz, a credit analyst at DBRS Inc. in New York. Moody’s Investors Service is reviewing the financial strength ratings of 23 regional lenders, as “these losses are likely to meaningfully weaken the capital position of many banks in 2009,” said Managing Director Robert Young in New York.

So the Fed responded, today. Instead of being realistic, they proposed that if a borrower required a five year loan the rate for the first three years would be 200 basis points over LIBOR and for the next two years the rate would be 300 basis points. They assume that the market will have improved and private financing would be at lower rates. Thus, they would get their money back. If the private market does not improve, the higher rates will be a huge penalty. They are so naive, but so arrogant.

This will have a tsunami affect on the capital markets. Strap in for a rough ride!!!!