Archive for category: DCRE Report

By the end of June, I will no longer occupy an office at Madison Circle, 3191 Coral Way.  The first of July, I will set up my new home office at Kings Creek South, near Dadeland.  This same contact information will be valid, since I will receive my mail at the office on Coral Way and the telephone, fax and e-mail address will not change.

What will change however, is that I will no longer be an office mate of Tom Dixon (17 years),  Andrew Dixon (6 years), Gary Sisler (8 years) and Roger Lopez (3 years).  I shall miss the fellowship, camaraderie and synergism of being together on a daily basis.

It is time to reflect past events and remember its lessons, as well as look to the future.  To reflect on my lifetime, I was born 18 months before the stock market crash of October 1929, that led to the Great Depression, grew up in the Northeast during this time.  My recollection of the Depression years is one of  a normal childhood, without financial concerns.  My father worked for a large Wall Street commercial bank, collecting a paycheck each week.  He even bought a new Pontiac for only $285.   I do remember when Pearl Harbor was bombed, (I was playing roller hockey at Victory Field in Queens N.Y.).  I spent the war years of WW II attending high school and attended college and law school at the University of Virginia.  Then served two years in the US Army in the Far East, in the counter intelligence agency (CIC) during the Korean War. With my new bride Dawn we moved to South Florida in September 1955.

My first encounter with a recession was in 1958-59 while working as a young traveling lawyer for a title company.  The recession was caused by the tight money controls imposed on an overheated real estate economy by the Federal Reserve.  The next downturn occurred during in 1966, when I was running the asset side of the balance sheet of the first mortgage real estate investment trust (REIT) in the US, First Mortgage Investors.  We were making construction and development loans in 18 states.  This downturn was moderate to severe, again caused by a restrictive monetary policy by the Federal Reserve to slow down the overbuilding in single family homes.  This caused many defaults and foreclosures in the housing industry.  Up to this point in the US economic history, inflation was not the factor it became in later downturns.

By the early 1970’s, the economy was booming again, with an over-supply of easy money from commercial banks and REIT’s formed by financial intermediaries with little experience in making construction and development loan to unqualified builder/developers in unfeasible locations.  This led to a severe downturn caused by tight money at high costs, inflation and the Watergate scandals of the Nixon administration.  Many REITS failed or were absorbed by their parent banks.  This led to a period of workouts and restructuring of both construction and development loans.

The 1980’s was a period of recovery and prosperity, led by the Savings and Loan Industry fed by jumbo Certificates of Deposit and excess funds to invest in real estate projects that were not feasible.  Also, real estate tax syndications created false values for investment real estate. The excess of this market, plus the Tax Reform Act of 1986, brought the house of cards crashing down in the early 1990’s.  This led to government intervention in the market place by the formation of the Resolution Trust Corporation (RTC), as a vehicle to work out these problems.  Scandals surfaced and several S&L executives went to jail.

By the late 1990’s and the dawn of the new century, things were booming again.  Only this time Wall Street got involved in the real estate finance area with exotic debt and equity vehicles such as Commercial Mortgage Backed Securities (CMBS) and subprime mortgages.     They created credit default swaps  to securitize and protect themselves from the inevitable defaults.  This arrangement not only did not protect the Wall Street house from default, it placed them all in the same boat.  When it sprung a leak by default, they all began to sink.

The event that ushered in the Great Recession was the bankruptcy filing of Lehman Brothers in the fall of 2007.  Other houses (Morgan Stanley, Goldman Sachs, Morgan Chase, Merrill Lynch and etc,  were rescued by mergers engineered by the US Treasury with more solvent commercial banks.  The US congress was convinced to provide stimulus monies to rescue the financial houses, General Motors and Chrysler Motors also received “bailout” loans to save those “too big to fail’.

At the present time we are still feeling the pain of financial excesses, fraud and lack of controls and experience in financial/loan management.  I once had a Texas banker (who we owed over 6 million dollars) say “remember too much ice cream will make you sick”.

Many pundits and forecasters predict it will be several more years until the housing and commercial markets correct themselves.  If that proves true, it will be 2015 or 2018 before a return to “normal” is evident.  Next time around let us hope we have more wisdom and experience at the financial controls of our recovery.

Belonging to that elite group of males know as Octogenarians , I celebrate the naming of Jack McKeon (age 80) as the new skipper of the Florida Marlins.  He will right the team and may instill the magic of the 2003 team which won the World Series.

Call me, I still function as a commercial real estate broker.

STEVE MAGENHEIMER – (305) 445-0916

In today’s office market in South Florida vacancy rates for most submarkets average 20% and over.  This is especially true in “C” Class Buildings or below.  Class “A” buildings are enjoying lower vacancies and less willingness by landlords to give excessive concessions to lure tenants.  Concessions can take several forms; free rent, free parking, generous tenant improvement allowances, moving allowances and the like.  Also there is less flexibility in the published rental rate and the actual effective rent finally agreed to by the landlord and tenant.

The classification of “B” buildings, plus or minus (B+ or B-) is often in the eyes of the beholder/owner/landlords/leasing agents.  Most landlords will want the newer buildings, less than ten years old, to remain in the “A” class category.  These landlords or lender/receivers want their properties to remain  Class “B” when they are by reason of financial condition, deferred maintenance, poor leasing and marketing efforts, are clearly about to fall into the dreaded “C” category.

The classification of “A”, “B” or “C” buildings should be determined by the age, location, leasing/marketing efforts by the leasing agent and maintenance of the property.  Because there is no industry wide criteria established, the classifications float, the “B” buildings tend to be the most flexible.  The plus (+) classification may include some buildings fallen from the “A” by reason of age and maintenance/condition.  The minus (-) classification in this category will include some properties that are clearly headed to become “C”.

In today’s recession period, several building have fallen into the “sour” category.  This is by reason of the negative factors set out above, they are about to fall into a lower category.  This is particularly true of “B” properties about to become “C” quality.  Many of these properties are “fractured” condominium offices which were good solid “B” building when they were leased.  After they were purchased at an inflated price by a condo converter, over financed by a unknowledgeable lender and failed after selling only a small fraction of the office units.  After foreclosure and judicial sale, tenants in these buildings are quick to recognize the changes in the maintenance, functioning of elevators/AC/ and poor marketing/leasing efforts by the owner.  Using the services of a tenant representative/broker, tenants can find out quickly what other properties in the submarket are offering.  They may discover they can improve their surroundings, lower their rent and gain the advantage of new quarters at an improved economic level.

“Sour” buildings tend to have this new designation spread faster through the market.  “Good” buildings and the office brokers representing tenants determine rapidly that new opportunities have presented themselves and they are quick to take advantage of the situation.  “Sour” buildings usually get worse before they get better, ultimately falling into the hands of a rogue buyer, who has purchased the building at a steep discount.  This buyer or his next in line can now afford to reposition the property and enter into a new leasing program which will ultimately create a healthy Net Operating Income (NOI) and a sale at a substantial gain the owner.

“Good” buildings usually get better and “Sour” buildings worse.  Office brokers know the territory.  If you are in a “Sour” building, hire a good office broker, he can negotiate good terms for you in a “Sweeter” building.  Remember the tenant representative is paid by the new landlord, so essentially you receive the services of this trusted, experienced and established professional at no cost to you or your company.

By:  Office Broker and Tenant Representative Steve Magenheimer -305-445-0916

 

For those of us involved in real estate for over 20 years, we have experienced cycles which seldom took more than 3-4 years to work out. This one is much different with few experts able to forecast a time to return to normalcy.  It has been much more personal than the past because all of us have heard of the economic impacts on members of our families, neighbors and close friends.  Those involved in real estate seem to be particularly hard hit. Architects, title insurance firms, engineers and developers have suffered mortal blows. It is understandable why the government administration grasps at green shoots in order to show improvement with our dire economy.  Let’s dissect some of the most influential elements:

Here in Florida we have historically depended upon increasing population to feed our growth and real estate activity. That in turn fuels our construction employment. This growth has not occurred for the past two years and this year will show more outflow than inflow. This is causing havoc with local government budgets.

With our housing bubble resulting in serious overbuilding for single family and condos, we are still wallowing around trying to figure out when residential housing will return to normalcy. No question that bargain basement prices are assisting the sale of houses. But, this is with unusual amounts of government support such as the $8,000 credit for new home buyers and the fact that 90% of the residential financing has government backing. What will happen without this government support?

The unemployment numbers are downright scary. The present average unemployment level and length of time unemployed is the greatest since 1948. Paul Krugman, economist and writer for New York Times, says US household’s net worth has declined by $14 trillion. A large segment of our population, fearful of our burgeoning debt and feeling the need to increase reserves, is saving more and curtailing their consumer spending. Of course, this adversely impacts real estate investments.

We have yet to feel the full sledge hammer impact of commercial foreclosures, the result of commercial real estate having a 35-40 % reduction in market value. Locally and in the rest of Florida, we have a large amount of our commercial loans coming due in 5-10 years posing a tremendous challenge to both borrowers and lenders.

No rational answers have been forthcoming for these challenging elements. Against the backdrop of these daunting challenges giving advice to active investors is difficult. There will be a large group of investors who have been active in the area for years, throwing up their hands and electing not to play the game. Offsetting this will be some new players, bringing to the market large chunks of cash, attracted to buying well below replacement costs.

The great investor, Warren Buffett has several observations to remember:

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”

And “In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”

By: Gary Sisler