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Pundits and Predictions...contradiction abounds

Pink Magazine a business women's publication wrote in the May issue that investing in REITs (Real Estate Investment Trusts) is a great idea for women without the time to buy property and watch it themselves. Did the writer of that article read ANYTHING about REITs before writing that? Not to mention that a small commercial property is not time intensive. A trusted broker or manager will handle the leasing, trusted subcontractors, plumbers, construction, electricians will handle the repairs that are not the tenants' responsibility.

REITs can be a great investment but when a leading REIT like Prologis starts shedding assets, it's a different world. Part of the argument that Pink Magazine made for investing in a REIT is that it's a time saver, but it's still a stock, without an understanding of the REIT's holdings, the market trends for their property type and the economies and vacancy rates in the markets where the REITs have holdings, an investor is still flying blind. Now is not the time for a real estate novice to invest in a REIT, not without having solid knowledge of market trends and demand.

On the residential front, pundits believe that we are hovering near the bottom of the market. Fewer homes are on the market this spring selling season than there were last year. Less inventory is a traditional sign that the bottom is here. Nationally, homes have declined in value 14% and in some areas, such as Portland Oregon and New Orleans values have actually risen two to three percent.

In Connecticut, Gold Coast Towns like Greenwich, New Canaan and Darien as well as waterfront homes have seen larger declines in value than middle class suburban towns. Outside Hartford, Avon and Glastonbury have also seen declines in value around 15% compared to 11% in towns like Guilford, Madison and Branford.

Foreclosures remain the wild card in the housing market. Currently, banks own about 765,000 homes nationally. Some predict that the number will rise to more than a million over the next ten months. Bankers don't want to be in the real estate business so that number may cause another dip in home values but what will actually happen remains to be seen.

In the commercial markets throughout Connecticut, retail and office properties are still in the most volatile position while light industrial properties and leasing is brisk.

May 14, 2009

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Direct From the Yale Daily News....

It only took Forty Years to reverse a Bad Decision that seemed Avant Garde in the late 60's. I think of the people who hold an Oak Street Neighborhood Reunion every year. Imagine seeing your neighborhood returned after being plowed under for a highway. "They paved paradise, put in a highway connector." -kristin

Plans for Route 34 demolition are revealed
Rustin Fakheri

Staff Reporter
Published Wednesday, April 22, 2009
After 40 years of contention, New Haven will demolish part of the Route 34 East Connector to build a boulevard and shops.

At a press conference Monday, Mayor John DeStefano Jr. unveiled a city project that would reconnect streets and develop businesses along the route in the Oak Street area of the city. The plans include demolishing part of the connector, replacing it with a boulevard, and using the freed 10 acres of land from the project to house businesses. But the project?s expected cost, and its extended time frame, threaten to further strain the city?s budget at a time when the Elm City is struggling for funds.

According to New Haven city records, the state of Connecticut acquired 26 acres of land in the late 1960s to connect downtown New Haven to its valley communities through an extension of Route 34. The project displaced 600 families in the process. At the time, the project was billed as creating jobs and improving the city by destroying the Oak Street area ? a ?slum neighborhood,? as contemporary advertisements for the project called it ? in favor of ?high-income apartments and department stores.?

By razing the Oak Street area, the state claimed it would better connect downtown New Haven and the Yale-New Haven Medical Center, which were on opposite sides of the neighborhood.

DeStefano said he hopes that this time the new project will better connect downtown New Haven to Union Station and the medical school campus while creating more than 5,500 construction jobs and 2,000 permanent jobs. The plan allows the Yale medical school campus ? which includes both Yale-New Haven Hospital and the Yale School of Medicine ? to expand into the area south of the highway.

Developer Carter Winstanley will, as part of the Downtown Crossing project, erect a new building between North and South Frontage Roads. The building, which will feature office and laboratory space, will mark the beginning of DeStefano?s 15-year Downtown Crossing project, meant to rebuild more than 18 acres of land in the area, the mayor has said. The city has yet to turn the land for the building over to Winstanley, though city officials said they expect the deed to change hands before the end of the year.

At the press conference, DeStefano said Downtown Crossing, at a projected cost of $45 million for solely the medical school campus portion, would generate $100 million in sales, income and property taxes. The cost of the entire project, City Hall spokeswoman Jessica Mayorga said, is difficult to pin down in light of the long-term nature of the construction.

But city officials maintain that the project will, in fact, decrease the tax burden on residents by broadening the city?s tax base.

?By reconnecting the street grid, developing space for new businesses, labs, housing, restaurants, cultural attractions, parks and so much more,? DeStefano said in a statement, ?we will be growing our tax base, reducing the tax burden on our residents and most importantly, creating thousands of new permanent jobs at all skill levels.?

Ward 6 Alderwoman Dolores Colon said the project will be the first attempt made by the city to bring a community back to the ward it fractured in the ?60s.

?I think that whole area needs life after dark,? she said of the Oak Street area. ?After the hospital and Med School employees leave, it?s like a grave site.?

The city expects the Route 34 project to take 15 years to complete

April 22, 2009

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Counting on CNN and the rest of the media to be behind the curve on insight

CNN is reporting the widely known fact that $700 Billion in commercial real estate loans that will mature in the next two years. Surprise! With rising vacancy, dropping rental rates and stricter underwriting standards, their pundit Don Peebles thinks that a lot of properties will go into foreclosure.

What a soothsayer.

Commercial real estate cycles have followed residential cycles since Lords kept serfs to work their land. Crops died off, tenant farmers couldn't meet the price of their rented land plots, the overlord took their land back and home, they couldn't work so stopped buying meat and fish, grocers went out of business, pubs couldn't pay their rent and every one clung by their fingernails or fell until a better crop came in and harvests improved.

Suddenly, the media seems to be catching on.

Those of us in the industry knew that commercial real estate would suffer, the only questions were and remain, how long will the market be slow and how far will values drop? As ever, the answer is yet to be seen. If layoffs continue, businesses will shrink requiring less physical space, more space will come on the market with fewer companies growing or starting up (government bailout money is still elusive for business, CBIA loans are difficult to secure, taking longer than ever, banks are skittish about lending...funny when those businesses might employ more members of the families whose homes are in jeopardy if they could expand their product and service lines and grow through the recession), and landlords will see more vacancy in their buildings, making it harder to meet existing mortgage payments, or refinancing terms.

Now, according to CNN's pundit, this isn't a big deal for the economy because someone else will pick up the property and people won't lose jobs like they did in the financial industry. It'll just be one investor or group of investors trading property to another group, so only a small pocket of people will be hurt. **Nice Spin if you can Get It.**

Conveniently, CNN's real estate report left out an entire sector of commercial real estate owners. The business owners who own their business property or those who own properties larger than they need so that they can live in their workspace for free. As their debt management issues impact them and their business, it'll be a sign that our economy and corporate health is still in jeopardy. He also neatly side stepped the issues that underlie vacancy in commercial and industrial properties. Empty spaces where companies once employed, once paid taxes to the towns and cities in which they are sited, dark buildings not being maintained. Don't let CNN fool you. In painting commercial real estate owners as an army of Donald Trumps that deserve a little humility, they neglect to look at the issues that create and are created for and by a commercial real estate bust.

When buildings go dark it won't simply be because people bought investments that were upside down at the top of the market; their debt exceeding their income. It will also be because companies failed, mortgages came due. It will mean that not only are more people losing work, but town city and county tax based services will suffer. Non-profits will suffer - fewer businesses, fewer sponsorships, fewer profits.

A commercial real estate money collapse will be felt in every pocket of America to some degree. It looks as though the crash will not be stopped with $250 Billion in commercial loans coming due this year. As with every bust, some areas will be hit harder than others and this time, Connecticut's barriers to business, though keeping us out of the hunt for desirable corporate headquarters and regional satellite business centers for the past ten years, will help us through the recession. Since we haven't grown like the rest of the country for the past twenty years, there isn't far for us to fall. Unless of course, our state government chooses to enforce more regressive corporate and sales taxes, in which case we'll only have our legislators to blame. Then again we're already 49th best state in the union to do business, how much farther can we fall?

April 20, 2009

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Turbulant Commerial Real Estate Market Nationally, Locally

Since the start of the Commercial Real Estate crash of 2009, Connecticut Commercial Real Estate owners have been living in the eye of the real estate storm. Landlords in CT read the news as REIT stocks tumbled on the heels of hedge fund implosions. They worried as the end of 2008 and the credit crisis hit retail property owners with rising vacancies and rent renegotiations. But, they did not feel the earth shift under their feet the way REITs world wide and commercial property owners in Florida, Texas, Vegas and the Inland Empire east of Los Angeles hit by the subprime crash, over building, and the crash of our retail economy did.

Now the storm is gaining speed and no one is safe in the eye. The market in Connecticut is shifting, assets and equity are for sale.

In Plainville, Connecticut Commons, 556,000 square feet of retail space is on the block. It is part of a 52 property portfolio being sold by Macquarie DDR Trust throughout 20 states. The property had been valued by the ownership for $91 million. But that counts Linens and Things on the balance sheet. An open air big box center, one wonders what the vacancy rate will be in six months or two years. How many people will buy fishing rods at Dick's Sporting Goods for opening day of trout season this year?

A year from now, the sale of the John Hancock Tower will be hailed as the shot heard round the commercial real estate world. The building sold at auction in 60 seconds for $660.6 million.

In 2006, its sale price was $1.3 billion.

In 2009, a roomful of investors stood with their arms at their sides while a single bidder raised his hand. The Tarantino twist in the story? This was not a sixty second sale.

Normandy Real Estate Partners bought enough of the debt through second and third mortgage leans on the tower to force its troubled owners into foreclosure on the first mortgage. More twists: the roomful of prospects were only there to see what would happen and how low the price would go.

The unknown subplot realized after multiple calculations? Not only was the sale price a fifty percent discount off the purchase price of two years ago, Normandy bought the building for an even lower price in real dollars. They bought the Boston landmark at a cost of money far below that which is available to buyers with today's underwriting and increasing vacancy. The real cost of the tower is closer to $400 million.

Investors watched. Fire sales won't sweep the market traditionally, savvy investors are going to look for similar over leveraged properties. In fact they already are, in Colorado and Southeastern states where money ran like water for the past seven years.

In Connecticut those properties will be harder to find, vacancy rates being an underwriting issue since the early 90's when the state last sunk. But 1031 money flowed freely from New York City for several years, so there will be distressed properties to cherry pick.

Though Prologis, Kimco Realty and Simon Property have successfully sold equity, REITs are over leveraged and stocks are falling. Mergers and acquisitions are on the horizon. Of the 130 public REITs, 30% are trading at below $5 a share. REITs have stakes in CT. Through mergers and acquisitions, properties will continue to be dropped from portfolios and will be opportunities for CT investors who have been waiting for prices to fall.

While there isn't much land left in our state, existing properties will be prime for redevelopment, green development, transit oriented development and available at lower prices than we've seen in ten years if they are sold off as under-performing REIT assets.

Toxic, the catch phrase of self help books for a decade is the commercial real estate catch phrase of the next several quarters. Keep an eye out for toxic assets and opportunity.

April 14, 2009

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TALF Launched. Will Commercial Real Estate Investment Bounce Back?

The TALF (Term Asset-Backed Securities Loan Facility) funds rollout began on March 5th, will it spur commercial real estate investment as promised?

Commercial property values are falling nation wide. Construction and Development are at a dead stop around the country because no one can get financing.

In ailing Detroit, 8 of 13 approved developments are on hold.

In California, the tax rolls of many counties are negative. The national economic downturn and falling commercial real estate values throughout the state are at the heart of tax revenue loss. While homeowners are getting relief through government programs, most commercial real estate owners are not. The mortgage crisis hit people where they live but the ramifications of a devalued commercial real estate market are rippling across the state. County programs are being slashed. The Inland Empire, boom-towns east of Los Angeles for the last decade, is crashing.

Should Connecticut see Commercial Real Estate values fall in a similar manner, a city like New Haven, which has already begun laying off city employees would be devastated by negative tax income. 124,000 residents: more than 160 non-profit organizations.

Around Chicago, luxury condominium developments have stopped mid-construction as have mixed-use developments.

Nationally, heirs of Howard Hughes may soon own a mall portfolio by default. Mall giant General Growth Properties, bought Rouse in 2004 and inherited its commitment to pay half the appraised value of property related to The Hughes family's master planned community outside Las Vegas, Summerlin. The only problem? General Growth Properties stock has dropped 98%. To make the payment, GGP would effectively give all their stock to the Hughes heirs.

The government used the "Domino Effect" to justify entry into the Vietnam War, but leaders couldn't see that building an economy on consumerism wasn't going to splinter when people stopped spending?

Talk about a real domino effect. Buying ceases. Stores are shuttered, clerks are laid off, logisitics workers are laid off, no new mall construction, trades people are laid off, call center workers for catalogue workers are laid off, truckers move less product. It?s a Domino Effect that looks like one of those Guinness Book attempts dominos falling one after the other in circles, up and down stairs, on ramps, off ramps and ends in an explosion of falling real estate values.

Meanwhile in Connecticut and New England as a whole commercial values hold steady. New England Manufacturers will outpace the rest of the country in revenues. In a contrarian move, they project revenue.

Our Commercial Real Estate Market is not imploding. We've been here before, 1989-1992. It was a blip on national radar but devastating to Connecticut and the rest of the colonies. We learned. Exponential growth has not been the norm over the past ten years.

Still, nerves are on edge and the question remains:

Will TALF funds, which are available for three years while most commercial mortgages packaged into bonds run seven to ten years, really spur investment and lending?

The disconnect in the years between fund monies and traditional commercial mortgage terms of ten years has not gone unnoticed.

March 8, 2009

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Where is the Recession Going?

Are we in the middle of the Recession or Just the Beginning?

Economists are all over the time space continuum when they speak about the economic downturn and project a recovery. In November, and economist from Tulane was projecting a start of recovery at the end of this quarter. At the other end of the spectrum, there are those who don't see the economy turning around till the first quarter of 2010. Retail closings, banks continuing to perform badly and job losses lead me to believe that we are somewhere in the middle of the recession but we have three or four more months of loss before we reach the bottom. As stimulus dollars are slowly released to the banks, people will hold tightly on to the money waiting to see which way the wind blows before potential lending opens up. This will delay recovery and drive us deeper into the downtown.

Now, however, around Connecticut, the recession has come home to roost. Circuit City is working to close its big box stores. Each closing will leave large chunks of retail vacancies on the block. There won?t be other big box retailers moving in so those spaces will be ripe for re-use. But the question is, what type of space is in demand in this new era of downsizing?

Stamford?s office market is showing signs of economic fatigue. In 2001, after the World Trade Center fell, financial firms flocked to Fairfield County. Greenwhich became the hedge fund capital of the country and Stamford filled office space with financial service firms. Rents were climbing and the value of office buildings followed, doubling in two years.

It?s a different picture today after the fall of the financial titans. Currently the office market is seeing about 18% vacancy, much of it sublease space. 22% vacancy equal to the red days of 1991-92 is predicted by 2010.

Rising vacancy translates to lost jobs and discretionary income. Ripples run through every level of the economy, from the barber to the Landlord. As shops, restaurants, salons and other retailers that provide services of ?choice? rather than the necessities of daily living see their customers dropping off, sidelined by job loss or wage caps, or fear that they may be the next to be laid off, the retail Landlord will continue to see vacancy rise.

Rising vacancy rates will continue to drive down the value of buildings. The first wave of real estate owners to feel the burn of the economy are those that have loans coming due or those with low occupancy in their properties who may need a loan to keep the properties operating. Larger banks are not lending and those that are, such as citibank are looking hard at the credit-worthiness of the borrower. Local banks like Quinnipiac Bank and Trust or the Bank of Southern Connecticut and a regional bank like Liberty Bank are still lending, however they are not making huge loans as the banks were just last year.

Around the state, as around country the recession has come home to roost. Even traditionally recession proof industries like universities and hospitals are feeling the burn. Yale lost half its endowment in the market crash. Harvard lost a third. It?s projected that enrollment will drop as people struggle to pay for college. Medical institutions are being hit with people putting off procedures due to fears of being out of work, or waiting until ?Things turn around?. Municipalities are cutting payroll too. Mayor Bloomberg laid off 20,000 workers last week.

Some are projecting ten percent national unemployment by the end of the year. That unemployment will cut across all industries as world economies adjust to meet demands of defaulting economic systems. It will be a hard adjustment for americans who have spent the last twenty years growing, spending and consuming products. Cutting edge manufacturers and new technology creators are going to be the ones to lead us out of the economic slump. Stimulating the economy so that every one starts buying multi-colored ceramic jack o lanterns, neon valentine hearts and mechanical easter bunnies to put n front of their newly refinanced homes is not the long term answer.


February 1, 2009

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CRE values will see a bumpy road well into '09 yet Connecticut stays strong.

There's no call to toll the bell for CRE, as we discussed extensively at the Fall 2008 SIOR world conference in Minneapolis, there are dollars and financing available for smaller development projects (though not retail projects) and there is a market for green buildings. New buildings that meet LEED standards are in demand especially by universities and municipalities.

Real Share Westchester & Fairfield Counties echoed our conclusions. The retail sector is facing the biggest challenges in Commercial Real Estate. Large deals are also having trouble. Financing for smaller projects will remain the most available in the market. So the news is not all bleak, Peoples United Bank is reporting a stronger flow of deals in its pipeline and there are others in the market like Peoples that did not loosen underwriting standards. Those institutions still have money to lend and did not put themselves on the edge of ruin over the past ten years. So, the good news to take away is that while Retail suffers, smaller projects that make good business sense can be built.

Commercial Real Estate values in New Haven County have held up in this economic market that brings a new question every day. However, cracks are beginning to appear. Commercial Real Estate headlines that have been appearing around the country for the past three to six months are cropping up in Connecticut.

DDR, Developers Diversified Realty has put construction on their Guilford Retail project on hold. The retail development previously pitched as the ultimate destination for shoreline shopping, will halt construction as soon as site work is completed. The 155,000 square foot center was slated to open in 2009 with a mix of high end national tenants like J. Jill, Chico's, Panera Bread, Black House White Market and Barnes & Noble, as well as local and regional retail tenants.

According to DDR, the project has been put on hold because the local infill tenants have not signed leases.

In Bloomfield Michigan, DDR has put a $350 Million lifestyle retail project on hold. That project was more than five times the size of the Guilford project. It included 600,000 of retail space as well as 150,000sf of office space and about 100,000sf of residential condo units.

DDR was partnered with Coventry Real Estate Fund II in the project. DDR released a statement saying that the project was halted due to the partnership. According to DDR Coventry did not deliver on equity funding which had been projected to be 80% of the project cost.

While these may be the ultimate causes for the construction halts on both these projects, the overall economy and retail climate is a more likely culprit. As we all know, people are spending less. Consumerism is "out". Nationally retail sales have been dropping like a stone. In October, sales reached their lowest point since 1973.


November 9, 2008

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Investing in uncertain times: TIC perils

About a year ago, my company's founder was quoted in the press, talking about real estate and sex. Before I had a chance to read the paper, there were six messages on my voice mail. Customers and competitors laughing hysterically, asking how he had the guts to say something on the printed page. He left me mortified, wondering how a grown man and business leader could compare real estate to sex. But, compare it, he did. At the time, I thought he was acting the buffoon, looking to shock and amuse a bored readership, or, himself. The furthest thought from my mind was that he might have meant what he said. Jumping into real estate is like jumping into sex, nothing happens on the sidelines. Even further was the idea that he might have been right.

The reporter called to ask him about investing in TICs. In last year's economy, TICs still were safe bets as passive real estate investments. They promised a return like a REIT but instead of owning small pieces of stock representing snippets of a large real estate portfolio, TIC owners actually owned property. It might have been with 30 or 50 other people but TIC investors owned dirt.

Our founder claimed that real estate, like sex, is not a spectator sport. Interesting comparison, possibly compelling, but most likely stupefying to the casual reader or non-investor. However, the meaning behind his words have been born out in the past couple months.

Real Estate is a hands on project, whether your own or those of an accomplished, manager for both facilities and income stream. When the fortunes of economy change, a Landlord/owner/developer needs to see the change, anticipate an slackening of income and potential blow to the profit and loss statement. As a TIC owner, one generally has a limited amount of input into the management of a property. Decisions are made by a minority representing the majority. While the decision makers may keep you in the black through a recession, it isn't likely. It's not likely because they work with consultants who are paid employees, receiving a paycheck each week regardless of the property's performance.

Individual landlords or partnerships are more likely to be proactive in a changing market. They are paid when the bottom line balances on the plus side. Vacancy in recession is a Landlord's true enemy. Suddenly maintenance of the space, as well as advertising, marketing fees and operating expenses populate the negative side of the balance sheet. The bottom line does not love money flowing out. The wise Landlord mitigates vacancy.

Whether the owner of a large retail shopping center decides to suspend percentage rents for a period of time, or revises "go-dark" clauses in the leases to allow tenants to reduce employee costs is entirely up to the individual owner.

The list of proactive solutions to tenancy go on and on, for instance a Landlord in Illinois whose largest distribution tenant is Schneider Electric, the world's largest maker of circuit breakers, may negotiate a rental abatement, credit or brief reduction in rental payments. Headquartered in France, Schneider exports large quantities of product to the Emerging Market countries (BRIC - Brazil, Russia, India China). Emerging Markets have been taking a beating in the global credit crisis like everyone else. China which has expanded 10% every year for the past five years is slowing down. The Russian government has pledged $200 Billion to stop the bleeding in its worst banking crisis since 1998.

Ultimately, a landlord may be wise to renegotiate a lease with a leader in world manufacturing if the Landlord understands the world markets and the reality that Europe was increasingly exporting goods to Emerging Market Nations since 2000. Real Estate holders whose soul investment are in TIC's stand to lose in this market, not the same way that shareholders in REIT's with under performing portfolios will ache, but the inability to be proactive and think outside the box to maintain a positive income stream and return on equity will cause the average TIC holder sleepless nights and a knock to the wallet. As it turns out, Real Estate is not a spectator sport.


October 27, 2008

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Warnings: Deflation, Steel demand down, the Dow down, China down. Still the Economy can Rise.

Suddenly, predicting the country's financial future is as scientific as reading tea leaves.

We are in uncharted territory. Never before has the government owned so much of the "private" banking industry. World stock markets continue to fall. Each small gain is corrected by a loss two times as deep. What began as bad lending practices in the United States mortgage industry has become a world wide economic downtown.

The government is attempting to intervene and control the markets, the same thing it did before the Black Tuesday in 1929. Only back then, the Federal Reserve raised interest rates to discourage the booming stock market, only to drop them rates from 6% to 4% four months after the crash. Interest rates are again falling.

Is this really a parallel? A harbinger? It's certainly being argued that it is.

The only thing that can be known for certain is that since the turn of this new century, Americans have been living in a "Minimum Payment Economy. Living on credit, planning for a future when income will outstrip personal spending by virtue of imagined wage increases. Though predatory lending practices were certainly widespread throughout the mortgage market, particularly in the subprime arena but elsewhere also, these practices could not have flourished without a consumerist "gratify today, figure out how to pay for it next year" mentality and economy.

After the 1974 recession, the worst since the great depression, the personal savings rate was 5.1% alarming at the time. In the early 80's it rose to 5.8% but after 85 it plummeted to 3%. Think Oliver Stone's Wall Street, Gordon Gecko declaring "Greed is Good" and the "Me" generation.

1990-1991 saw another recession, a recession that crippled New England closing banks, driving our manufacturing south and sending unemployment into double digits. In Connecticut, the recession began in 1989. We didn't recover until 1992.

Our state history mirrors the nation's recent off-shoring of manufacturing jobs. India and China are the New South. Technical jobs and skilled labor continue to dwindle.

One wonders what the new century has wrought. Personal savings in 2005 was negative 1%. Currently it hovers under 3%, but it is on the rise and in fact is touted as soaring. Soaring because the savings rate in 2006 hovered around 1% and dropped closer to zero in all four quarters of 2007.

So, in 2008 personal savings of 3% is a breakthrough, in 1987 a disaster. Yet this time around Americans aren't greedy the McMansion buyers and credit card shoppers are duped and hoodwinked. Same net result, only repackaged: self indulgence and instant gratification in a non-judgemental world.

Worldwide, demand is down for commodities. OPEC laments falling oil prices. The steel industry is down, indirectly signalling a slow down in China's construction market. Two years ago, China consumed 40% of the world's steel.

Domestically, there are warnings about hedge fund sell offs. Other warnings are the rising unemployment rate. It's at 7%. The crippled domestic auto industry. The energy industry. What will the ripple effect be hedge funds sell off their stocks and flood the market, if they flood the market? Will grocery stores suddenly be unable to stock shelves because their stock will drop to the floor? Will the big three car makers disappear altogether?

REIT's, Real Estate Investment Trusts, which own large portfolios of real estate paying out dividends and returns to shareholders have artificially driven market prices up over the past five years, intensifying in the past three. But, now, there aren't any checks in the mail heading into REIT headquarters. Promised returns are not being achieved. What happens when they sell off assets and large tracts of property, hundreds of thousands of square feet of distribution, office and warehouse space? The short answer is that local entrepreneurial investors will be able to buy property for its true value, but will there be a demand? Is their cash well enough in reserve to keep commercial real estate values from tumbling?

Doomsday predictions are in Vogue, but is there an upside? Yes. Maybe this is the wake up call that we as a country needed.

Maybe the government and citizenry will realize that the United States can not succeed as an economy that simply consumes. Now is the time for venture capitalists, hedge funds and cash holders to invest in those niche products that only we can sell.

We gave our old economy away. Industrial, manufacturing, sewing, call center operations are gone, but there are new frontiers in medicine, stem cell research, fuel cell technology, nanotechnology, gene therapy to be explored. While our political system may prevent us from taking advantage of these breakthroughs we can and should sell them.

Once again, we can sell to the world instead of eating everything it produces. After the Great Depression, the war machine and the war economy were heralded for righting the Great American Ship.

In truth we were making and selling what the world needed and couldn't produce, so this time, instead of producing tanks, planes and bombs for the United States, and our old allies, it will be a reclamation of American ingenuity, technology, cutting edge software and medical techniques.

If only we heed the wake up call and trump doomsday.

October 21, 2008

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Borrowing from ourselves: reverse mortgages the next honey trap

There is already a new record. That record? Reverse Mortgage borrowing.

In 2008 the amount of reverse mortgages increased by 4.2% over last year. That may not sound like much but it's a good bet that there will be exponential growth in reverse mortgages next year.

Originally intended to give elderly homeowners without mortgages or with a lot of equity in their homes, a vehicle to liquidate some of that equity into cash for use in their twilight years, whether they use it for home health aides, hospice or dream trips.

In a reverse mortgage, 62 year old or older homeowners can tap into their home's equity by getting cash in a lump sum, or monthly income, a line of credit, or some form of all of the above, without having to sell or give up title to their houses. The money is tax free, and repayment is made only when the owner moves or dies.

Banks like them because they are front loaded with fees, meaning that they are profitable to write in the short term. The owner is charged points and closing costs upfront (this is on money that they've already paid interest on as they were paying down the original mortgage) which is profitable for the bank. Rather than dwell on the cost of each dollar that the homeowner is borrowing from themselves, there are more concrete cons to the reverse mortgage. The proceeds might actually prevent the homeowner from collecting medicaid since loan proceeds are counted as assets in certain states.

Also known as Home Equity Conversion Mortgages (HECMs), reverse mortgages are insured by the Federal Housing Administration, an arm of HUD.

In 2005 there were only 43,131 reverse mortgages completed in the US. Cut to the end of 2008 and 112,100 reverse mortgages. As part of the Homeownership and Economic Recovery Act of 2008, HUD approved a single national loan limit of $417,000 for federally insured HECM reverse mortgages that is expected to be effective around Nov. 1. Nearly 30 percent more seniors will be able to borrow through a reverse mortgage because of the higher loan limit.

Though there are pitfalls to the reverse mortgage, they are gaining in popularity and one can imagine that as the adult children of senior citizens suffer from credit spending, ARM backlash and bank bailout busts, borrowing from Mom, Dad and their home equity will be more than a little tempting. After all, you can't take it with you.

Another concern about reverse mortgages is scam artists. A bank won't have to hold a mortgage for a 77 year old for as many years, statistically speaking, as a 62 year old. But, who might influence the 77 year old to borrow in the first place? Unfortunately, there are plenty of people on the street looking to get paid for interacting with the lonely and fragile.

If that's not enough, make way for the next wave currently typified by Rex & Co. and their Rex Agreement. There aren't any points or interest as with the reverse mortgage, instead you are treated to a silent partner in your home ownership. The agreement lasts up to 50 years, depending on state of residence or until the home is sold. After paying cash for a portion of the home, Rex & Co. share in the profit, or loss at sale time. Rex & Co. are in it for the long haul. Even in a real estate slump, five, seven, ten years can cure price drops.

Watch the news, in eighteen, twenty four months, we will hear rumblings that Americans are again tottering on the edge of a borrowing precipice.


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October 15, 2008

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And the Dow jumps back

The Dow came back today: almost a thousand points in a day. 936 points. Last Thursday the stock market had its biggest loss and today, five days later, it's biggest gain.

The rally was fueled by confidence. Confidence in the government working to improve economic policy and implement bank safe guards, such as guaranteeing bank to bank loans, as well as European governments working to shore up their banks fueled the bounce. Unlike the United States, the British government pumped their bailout money into banks within five days which added to the positive vibes on Wall Street. Investors rallied on confidence and short sellers, who did their part to submarine the stock market by betting against the market and banking on stock losses had to buy as the day went on. Today, everyone was buying.

Is this a one time bounce or the beginning of the end of the bear market. Chances are, tomorrow the market may not continue this rally. Investors may sell, now that they've made some money or made money back.

Good news for the stock market is good news for everyone. But, a thousand point gain in a day is not going to instill long term confidence in the investment world. Slow steady growth without drops will allay fears, rebuild consumer and investor confidence.

While stock market investors, hedge fund managers, day traders and retirement account holders rejoice over the gains, real estate investors may not be jumping yet. Investing in real estate, traditionally is a long term hold proposition.

While home values doubled and tripled in record time, the manic market is not the arena of the commercial real estate investor buying office, industrial and retail properties looking for a steady return over 10 or 20 years. But, individual investors also keep their money in stocks and every time the Dow dropped over the past few weeks, investors' money became less valuable. So, there is a hesitancy in the real estate investment market.

Meanwhile, no matter what the politicians and pundits predict, americans need to keep working. Companies need to keep the lights on, call centers need to keep operators busy, hospitals, universities, research labs need to keep looking for ways to beat cancer and other disease. And governments need to keep serving the community. All these institutions need a place for their businesses to live.

That means that, despite the blips, despite the hurdles and the questions, real estate is still the place to put your equity.

The returns may not be as large as Wall Street when it's in a boom, but the losses aren't going to happen over night, or in a month either. Owning real estate is a safe bet, still a marketable entity and still the place where 7,8,9 and 10% returns on equity can be realized every day of the week. The savvy investor will watch the trends, consider what investment markets world wide are doing and take their cues from those markets, investing where they see gains for the next 10 years.

The United States will always be a consumer market, retail space though out of favor now, will be a bet for the future, especially ten years from now. Today, it's great to be a "flex" space Landlord. Whether an office moves from the central business district to the suburbs as a cost saving measure, or a distributor lands a new contract, the "Flex" landlord will have the space to lease. Office space needs will continue to evolve with technology and a backlash against executives, corner offices, perks and parachutes, but office landlords who can easily refit their space, flexible duct work, sprinkler systems and demising walls, will earn their best returns.

Mixed use property owners and residential property owners will continue to have tenants, though nerves are running high now as rent checks come in late. Still real estate, commercial, residential, industrial is a good bet. The investor with the right consultant and guidance will find plenty of returns as the stock market drops and rockets. -kristin

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October 13, 2008

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