Fiscal Cliff Hogwash

I don't claim to know it all, but when I read JLL reports projecting increased growth and the benefits of the fiscal cliff, I have to wonder if as an industry we only see the trees and not the forest. Which also happens to be on fire.

Core markets (D.C., Chicago, L.A., New York, Atlanta, San Fransisco, etc) that are seats of industry and goverment will almost always do well. And there are smaller markets, like Savannah, that have the real estate throttle wide open.

The problem is that articles glossing over the fiscal cliff, Patient Protection and Affordable Care act, Up-Eurs Zone volitility, etc. make a key error. They presume that decreased uncertainty will equal increased economic growth. Such is not the case.

In his acceptance speech Obama did reduce uncertainty and make some very specific tax proposals. In particular, he promised to:

• Raise the top marginal income tax rate to 39.6%.
• Raise the top short-term capital gains tax rate to 39.6%.
• Raise the top long-term capital gains tax rate from 15% to 20%.
• Raise the top tax on dividends from 15% to 39.6%. There will also be an additional 3.8% tax on dividends as of January 1.
• Replace the alternative minimum tax with the "Buffett Rule." That means the highest income-earners will pay a minimum 30% tax rate on wages, interest, dividends and capital gains.
• Raise the estate tax rate from 35% to 45%.

Every day bits of "Obamacare" are translated into Treasury code and released to the public. These new rules are not reported by media, but their effects are. Layoffs, decreased hours, diminished bonuses, hiring freezes are now daily reports.

In unrelated news, inflation has ticked up, jobless claims are up, poverty rates are spiking.

How can going over "the fiscal cliff" possibly help commercial real estate or the economy as a whole?

The authors gush "Continued low interest rates will prompt people to buy!" True, but lending standards are still tight because banks don't want to lend money if they can't make a decent profit. They'd rather keep the cash in excess reserves for the Fed to pay them interest on.

"Less uncertainty in healthcare means more real estate deals!" I've lost two medical office deals due to the new certainty of taxes and regulation in the last month.

Let's get real about the fiscal cliff: there won't be one. Obama owns this budget deficit now. He must act on it or his legacy will be mud. When has Congress ever had a problem compromising to let federal spending continue?

A. Joseph Marshall
Coldwell Banker Commercial
Commercial Real Estate Advisor
Savannah, Ga

In commercial real estate, the other shoe(s) are falling

Portland Business Journal by Rance Gregory, Morrison Street Capital

Date: Tuesday, September 4, 2012, 10:57am PDT - Last Modified: Tuesday, September 4, 2012

Yes, we've all been reading about colossal 1 ton shoes that will fall on the commercial real estate market. And yet it hasn't happened the way we've been expecting it. Rance Gregory explains why.

Summary and Key Quote.

Commercial real estate simply does not mark-to-market as quickly as do stocks and bonds, no matter how many derivatives the industry puts in place to make bets on the direction of the market or how badly some wish it would be so. In reality, commercial real estate has been a slow-motion train wreck for the past five years. There has been real damage and pain, but it has occurred largely out of view, in loan workouts, consensual foreclosures and complex recapitalizations, resulting in paper writedowns and real losses.

Why then hasn’t the crash been loud and sudden? Why do many have the feeling the industry is recovering or has recovered? It seems many industry veterans were expecting to fight the last war, remembering a saving and loan collapse and a consolidated government-sponsored (RTC) fire sale of troubled assets. Instead, the actual mechanisms involved provided banks with additional capital (TARP), or worked on healing the background credit markets (CMBS) through programs such as TALF, PPIP, etc, in the hopes of stabilizing the system and providing time for the industry to work through its problems in a more organized way.

The answer is that it wasn’t one giant shoe, rather many thousands of smaller shoes, dropping one loan at a time, scattering across a diverse commercial real estate landscape, leaving behind alternating spots of utter destruction and patches of renewal.

 You can read the full article at In commercial real estate, the other shoe(s) are falling

A. Joseph Marshall
Coldwell Banker Commercial
Commercial Real Estate Advisor
Savannah, Ga

Reports Say That Despite Supports, Commercial Real Estate is Recovering at Slow Pace

Posted by Alex Ferreras on August 27, 2012 in Real Estate

Summary: The headline announces slow CRE recovery across the board, but the text reveals that this is in specific markets. Slow job creation growth and lending restrictions has slowed commercial real estate growth in some areas. Otherwise, increasing demand and favorable lending supports CRE growth across the board.

Things are still positive with vacancy decreasing in varying degrees across industry segments (office, industrial, retail, etc). Multi-family is of course very positive with late coming investors jumping on that bandwagon. Multi-family lenders are flooded as a result.

What could slow things down? Drama in Up Eurs Zone, the "fiscal cliff" everyone is talking about, fall out from the November elections and decreased lending by community banks are making everyone cautious about the future.

Read the full article at Reports Say That Despite Supports, Commercial Real Estate is Recovering at Slow Pace

A. Joseph Marshall
Coldwell Banker Commercial
Commercial Real Estate Advisor
Savannah, Ga

U.S. Federal Reserve Beige Book: Atlanta District

By Editors: [bn:PRSN=3214650] Alex Tanzi on June 06, 2012 

The Federal Reserve Atlanta District last week released the April and May data that show moderate economic expansion.

Summary:

Reports from Sixth District business contacts indicated that economic activity continued to expand at a moderate pace in April and May. Reports were somewhat more positive than the previous report, and expectations remained generally optimistic across most sectors. However, uncertainties surrounding the potential impact of developments in Europe weighed on the outlook

Key Excerpts:

Real Estate and Construction. The majority of residential brokers said that home sales exceeded year-ago levels in April and May with many reporting that sales exceeded expectations. Strengthening sales, mostly from cash buyers and investors, were noted by most Florida contacts. Brokers observed that inventory levels across the District continued to decline. The majority of contacts reported that home prices were flat to slightly up on a year-over-year basis. The sales outlook among brokers remained positive with most anticipating year-over-year gains, albeit from very low levels of overall activity, over the next several months.

Banking and Finance. Lending standards remained largely unchanged since the last report, but banking contacts indicated that more applicants were qualifying for loans. Most District bankers commented that demand for refinancing mortgage loans continued to increase; more applicants had ample cash for down payments or enough equity in their homes to meet the loan requirements. Credit availability increased and competition among lenders for loans remained strong. Some bankers mentioned improvements in the general creditworthiness of borrowers and appraisal valuations.


Read the full article at U.S. Federal Reserve Beige Book: Atlanta District

A. Joseph Marshall
Coldwell Banker Commercial
Commercial Real Estate Advisor
Savannah, Ga

Mortgage do-over time

May 31, 2012 9:55 AM By NICOLE GELINAS Los Angeles Times

Here's a great opinion piece!

Key Quotes:

After the bubble burst, Americans couldn’t keep paying all of that debt and support the economy with retail spending and investments in businesses. They still can’t.

Yet no mainstream politician, Democrat or Republican, embraced the idea of forcing banks and investors to admit reality on their bad loans.

Why? Public opinion was rabidly against it. A commenter to a January 2009 New York Times blog summed up the zeitgeist in asserting that “people who (bought) more house than they can afford … ARE idiots.”
 
The moral-hazard argument against principal write-downs was always faulty. During the housing boom, the financial and real estate industries and popular culture — TV programs such as “Flip This House” — encouraged Americans to buy a home as a speculative investment.

But when you lose money on an investment, it’s perfectly rational -- and not immoral -- to cut your losses.

Lenders don’t reduce the amount of money they’re owed because they’re nice. They do it because it’s economical. They don’t want to be stuck managing an asset that’s lost value.

Moreover, the more pressing problem is not that mortgage interest rates may be too high someday but that they are too low right now. The government has intervened massively, reducing rates to below 4%. President Obama and Federal Reserve Chairman Ben Bernanke encourage low rates because they want people to flock back to the housing market -- creating artificial demand and keeping house prices from falling further.
That would create a new generation of borrowers who will find themselves underwater in coming years when the government stops propping up prices. That’s moral hazard -- using unwitting new people to bail out the old.

The best way to avoid that risk would be to allow housing prices to find their bottom now. Such an effort is helped by mortgage-principal reductions, as they reduce uncertainty over future foreclosures.

Read the full article at Mortgage do-over time.

A. Joseph Marshall
Coldwell Banker Commercial
Commercial Real Estate Advisor
Savannah, Ga

Insight: Falling home prices drag new buyers under water

By Tim Reid

Thu Apr 26, 2012 1:12pm EDT

Summary: Use caution when purchasing a home in today's economy: many who bought homes within the last two years see their home losing value. Study the local marketplace before signing on the dotted line!

Key Quotes:

"More than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth, and Federal Housing Administration loans that require only a tiny down payment are partly to blame."

"It is a sobering indication the U.S. housing market remains deeply troubled, with home values still falling in many parts of the country, and raises the question of whether low-down payment loans backed by the FHA are putting another generation of buyers at risk."

"The overwhelming majority of the U.S. is still seeing home prices decline," said CoreLogic senior economist Sam Khater. "Many borrowers continue to be quickly wiped out."

"CoreLogic predicts the overall U.S. housing market will finally bottom out this year."

Read the full article at: Insight: Falling home prices drag new buyers under water
  
A. Joseph Marshall
Coldwell Banker Commercial
Commercial Real Estate Advisor
Savannah, Ga

U.S. Federal Reserve Beige Book: Atlanta District

The following is the text of the Federal Reserve Board’s Sixth District-- Atlanta.

Real Estate and Construction

The majority of residential broker contacts reported that home sales exceeded the year earlier level in late February and March. More than two-thirds of the brokers indicated that sales met or exceeded their expectations. Florida contacts noted strengthening sales, particularly in South Florida markets. Many noted that inventory levels across the District continued to decline on a year-over-year basis and, in spite of this, home prices were flat to slightly down compared with a year ago. The outlook among brokers for sales growth remained positive, with most anticipating modest year-over-year gains over the next several months.

The majority of homebuilder contacts reported that new home sales and construction rose modestly during late February and March compared with a year earlier. Similar to brokers, builders also noted that home price declines abated somewhat and new home inventories continued to decline on a year-over-year basis. Contacts observed that multifamily construction remained robust across much of the District and new projects continued to be announced. Over the next several months, homebuilders anticipate sales and construction to be flat to slightly up compared with a year ago.

Most commercial real estate contacts indicated that conditions continued to improve slowly in the region. Contractors noted a slight improvement in demand, but the market remained very competitive and overall activity remained at low levels. Commercial real estate brokers continued to report modest improvements in demand, mostly for class A space in urban markets. Some reported that businesses have become more willing to move ahead with lease plans. Rent concessions continued to be noted with several brokers reporting that rates have begun to stabilize; however, longer leases were reported which included generous tenant improvements. The outlook among contacts was a bit more positive than previously reported, but most contractors and commercial real estate brokers continued to anticipate that activity would improve slowly this year.

To read the full report see U.S. Federal Reserve Beige Book: Atlanta District

A. Joseph Marshall
Coldwell Banker Commercial
Commercial Real Estate Advisor
Savannah, Ga