The Housing Chronicles Blog: 5/1/10 - 6/1/10

Monday, May 24, 2010

"The Recovery: Is it Real?" San Diego Conference materials now online

The materials provided for Beacon Economics' "The Recovery: Is it Real?" annual conference in San Diego on May 21st are now available online.

As part of our ongoing association with Beacon Economics, MetroIntelligence Real Estate Advisors Principal Patrick Duffy wrote the sections on residential and commercial real estate.

If you want to read just the section on residential real estate, click here to download.

If you want to read just the section on commercial real estate, click here to download.

And if you want to download the entire conference book, click here to download.

Orange County housing market better than its neighbors?

According to a recent story by the Orange County Local News Network (OCLNN), the county's housing market was stronger during April 2010 than its surrounding counties. Nonetheless, as I told the reporter Mike Reicher, the real test of this strength will be when the market is forced to operate on its own:

A true test of the market may come in June when sales boosts from tax credits will have passed, said Patrick Duffy of MetroIntelligence Real Estate Advisors. “Hopefully the training wheels the federal government provided will help the housing market regain independence,” he said.

Click here to read entire story.

Saturday, May 22, 2010

Notes from the May 21st edition of The Kiplinger Letter

For some time now, I've been subscribing to The Kiplinger Letter, which is a weekly newsletter summarizing trends in politics and economics for managers and other decision-makers.

The May 21st edition was chock full of interesting remarks on housing and economics that I wanted to share here:

  • The red ink hemorrhage at Fannie Mae and Freddie Mac is far from finished.
The tally of losses since Uncle Sam took the two over will likely double
before all the bad loans made during the housing bubble years are washed out.

So far, the feds have funneled about $146 billion to the two mortgage giants,
and Obama has pledged to cover the duo’s losses, no matter how deep, through 2012.

There’s little chance Congress will undertake an overhaul this year,
and it probably won’t finish up next, either. Republicans want to tackle the issue now,
while there’s a sense of urgency, so they can wind down Fannie and Freddie’s role
over five years or so.

But Democrats won’t agree. They fear that would deal a blow
to the housing market. The two quasi-governmental agencies, along with the FHA,
the Federal Housing Admin., now make or buy nine out of 10 new mortgages.

Delay has an indirect upside. Odds are Fannie and Freddie will be cut back,
but not eliminated, when lawmakers finally hash out what to do with them.
In the interval…more time for banks to repair their balance sheets and beef up lending
and for a private secondary market to revive. Otherwise, lending would be constrained.

  • The slowdown in mortgage foreclosures isn’t necessarily good news.

Though the pace is decelerating, it isn’t because fewer homeowners are falling behind.
Lenders are simply taking longer to pull the trigger…12 months instead of about six.

Banks hope that by holding loans and letting delinquent borrowers stay put for now,
they’ll stave off a tidal wave of foreclosures and help to stabilize housing prices.
Short term, it’s good news for hard-hit areas such as Las Vegas and Miami.
But it will drag out the adjustment process. Now the number of foreclosures
isn’t likely to peak until sometime next year. One in eight mortgages is in distress...

  • Europe’s woes spell a break for mortgage seekers, purchasing or refinancing.

For the time being, investors are loading up on U.S. Treasuries, pushing yields down
to about 3.2%. That’s translating into a dip in the 30-year fixed rate for mortgages.

The effects won’t last much longer, though. If Greece, Portugal and Spain
get a better grip on their budgets, following through in the coming weeks on promises
to rein in spending, investors’ worries will shift to the mounting pile of U.S. debt
and resulting inflationary pressures. Look for Treasury yields to bounce back up...

To read the entire letter or subscribe, visit

Friday, May 21, 2010

San Diego housing recovery expected to slow

San Diego Union-Tribune reporter Roger Showley covered Beacon Economics' lastest economic conference in San Diego on Friday, May 21st. In addition to the recent conference in Los Angeles, I also wrote the sections on residential and commercial real estate for this conference book, one of which was cited in Showley's piece:

"Office vacancies, currently about 19.3 percent, will fall only to 13 percent over the next four years as employment growth remains sluggish. Industry norms consider a healthy office vacancy rate to be less than 10 percent.

“Looking ahead to the rest of 2010 through 2012, the health of the office market will be largely tied to the extent of increased government spending on biotech and technology,” said Patrick S. Duffy of MetroIntelligence Real Estate Advisors, who wrote the chapter on commercial real estate in the Beacon report.

High vacancies will mean bargains for investors in some office buildings, he said, but values will still end up 36 percent below their peak of 2006."

Click here to read entire story.

Monday, May 17, 2010

"What's Next L.A.?" Conference Materials Now Online

The materials provided for Beacon Economics' "What's Next L.A.?" annual conference in Los Angeles on May 5th are now available online.

As part of our ongoing association with Beacon Economics, MetroIntelligence Real Estate Advisors Principal Patrick Duffy wrote the sections on residential and commercial real estate.

If you want to read just the section on residential real estate, click here to download.

If you want to read just the section on commercial real estate, click here to download.

And if you want to download the entire conference book, click here to download.

The next Beacon Economics conference will be May 21st in San Diego. If you'd like to attend that conference, click here to register. For special discounts on registration, please contact us at MetroIntelligence at 818-584-1848.

Sunday, May 16, 2010

A Spring Thaw for Development Finance?

As the building industry continues to slowly recover from its most prolonged downturn since The Great Depression, the good news is that it appears a minor thaw may be finally beginning in the credit and equity markets. The bad news is that the rules of the game have changed so profoundly that not all players will be able to adjust accordingly.

In order to prepare for this new environment, MetroIntelligence is now partnering with George Smith Partners (GSP), a leading real estate investment bank which regularly taps its vast network of sources for customized equity and debt on residential and commercial properties throughout the U.S.

Whether the assignment is finding an equity partner to buy land or refinancing a stabilized apartment property, MetroIntelligence is now able to provide objective reviews of a sponsor’s assumptions in order to bring appropriate opportunities to GSP -- as well as to ensure that builders and developers are fully aware of their options.

According to GSP Vice President Jonathan Lee, who focuses largely on the residential sector, although the thaw in lending has unofficially begun, it won’t really matter until banks have re-set the land on their books to current values.

In the interim, Lee is seeing lenders reaching out to established builders as either fee builders or as JV partners to protect their investments by maintaining entitlements and building out what’s already been started. And yet the Catch-22 here is builders don’t want to JV unless land values are re-set to current value, but lenders aren’t strong enough yet to do so.

As for buying new land, assuming a private builder can out-bid a public company, the terms for leverage are going to be strict, with hard-money interest rates and 50% loan-to-value (LTV) ratios.

Not surprisingly, GSP’s Lee says that most of the projects getting financing today are infill projects closer to employment centers, stressing that broken developments in tertiary markets with high rates of foreclosures will take much longer to rebound.

For builders looking to dip their toes into construction financing for new projects, Lee says that as opposed to the one or two banks actively lending six months ago, today there are closer to four or five banks plus half a dozen hard-money lenders. Nonetheless, both of these types of lenders would want to chop up larger projects into phases to minimize their exposure.

But for builders looking to revive dormant projects, the view is cloudier, with a delicate dance involving a builder with deep enough pockets to buy back his note at a discount with new recourse money that ultimately protects the lender. Of course that assumes we’re talking about a single-family project, as financing for new condominiums is virtually nonexistent.

However, Lee does offer up an intriguing idea in which a multi-family project could conceivably be financed based on apartment underwriting standards but with the appropriate release clauses and a caveat that -- under the right conditions and assuming available mortgage financing – the units could eventually be sold as condos.

As for traditional apartments, with the worst of the downturn likely behind us, lenders are starting to wade back in with the right operators in the best markets but still with extremely conservative LTV ratios.

Certainly, any return to the days of easier credit will be long and arduous, especially given that total outstanding AD&C loans were reportedly down by 23% year-over-year in the fourth quarter of 2009.

Yet for those builders and developers who can adapt to the new environment and partner with the right sources for capital, a greater share of both the market and its future spoils await.

Want to see if the financing quotes you're getting for your projects are competitive? Interested in rolling over maturing debt for land, apartments or other commercial uses?

Contact MetroIntelligence at 818-584-1848 for more information!

May column for Builder & Developer magazine now online

My column for the May 2010 issue of Builder & Developer magazine is now online. In this issue, entitled "Green Building Grows from Infant to Toddler,"I review the pros and cons that builders have so far encountered by building green homes as well as future growth prospects. An excerpt:

Now that green building is leaving its infancy and becoming a full-fledged (and often cranky) toddler, although its support among both the public and the industry remains high, some solid pros and cons are beginning to emerge.

According to the 4
th Annual Green Building Survey by the law firm Allen Matkins, Construction Technologies Group (CTG) and Green Building Insider, support among over 1,600 design and construction professionals for green building remains extremely high at 92%.

Not surprisingly, the growth of the global green building sector is on a tear, totaling over $500 billion in 2009 and expected to continue growing at a compound annual growth rate of nearly 110% between now and 2015.

And yet as these same professionals now have a few projects completed, they’ve come to realize that accompanying the greater complexity of green building is the perception of more construction risk.

To counteract that risk, some important strategies have emerged, including retaining specialized consultants (including those certified by groups such as the U.S. Green Building Counsel’s Leadership in Energy and Environmental Design, or LEED), measuring and re-commissioning existing systems to maximize energy savings, regular testing and, to tie it all together, shifting the risks through insurance contracts.

You can read the entire column by clicking here.

What's next for L.A. commercial real estate?

Want to get an idea of how MetroIntelligence Real Estate Advisors sees the past and future of L.A. commercial real estate? As part of our ongoing association with Beacon Economics, we've been writing the real estate sections for their conference books. Here are the bullet points summarizing our thoughts for the coming year and beyond:

  • As employers resist hiring new workers and opt to cut expenses further by opting for sub-lease space, the office market in Los Angeles County will remain under pressure through the first part of 2012. Look for rents to fall by another 9% by the end of 2010 as vacancies remain just above 18%.
  • Although the retail market in Los Angeles has borne the brunt of The Great Recession, the region's population density has helped it plod along much better than many other markets in the U.S. Look for asking rents to continue falling by another 5% by the end of 2010 as vacancies remain elevated before gradually trending down by early 2011.
  • While not immune from larger economic forces, the combination of the ports and one of the largest manufacturing sectors in the country will help the industrial sector rebound to healthy levels by mid 2012. For now, look for rents to fall by another 4% by the end of 2010 as vacancies remain stuck at about 8%.

What's next for L.A. residential real estate?

Want to get an idea of how MetroIntelligence Real Estate advisors sees the past and future of L.A. residential real estate? As part of our ongoing association with Beacon Economics, we've been writing the real estate sections for their conference books. Here are the bullet points summarizing our thoughts for the coming year and beyond:

  • Falling home prices in Los Angeles County have made them exponentially more affordable, with 37% of households able to buy the median-priced home at current interest rates, up from just 2% to 3% during the last half of 2005 through all of 2007.
  • Although the S&P/Case-Shiller Index has shown small increases of home prices in recent quarters, those rises could be short-lived as interest rates rise and support by the federal government in the form of tax credits expire.
  • A combination of state tax credits favoring new homes as well as cost cutting by home builders has helped new home sales rebound by 66% since the trough in the first quarter of 2009; yet since prices took longer to crest during the boom, they're still falling slightly even after declining by 24% since peaking at nearly $525,000 in mid 2007.
  • Due to price declines of 36% over the past two years year, sales of existing homes - of which about 35% are foreclosures - rose by 75% during the same time period; between the third and fourth quarters of 2009, both sales and prices managed to rise by just over 6%.
  • Due to price declines of 24% over the past two years, sales of existing condominiums rose by 110% during the same time period; between the third and fourth quarters of 2009, condo sales continued to rise by 19% even as prices began to rebound by a small yet positive 1.4%.
  • Due to larger economic issues, apartments remain under considerable pressure, with vacancy rates rising by 50% over the past two years to 7.5% and forcing rents down by 8% during the same time period to $1,614 per month, which are projected to fall by another 6.7% by the end of 2010.
  • Although the pace of new foreclosures did temporarily dipped due to various moratoria throughout most of 2009, they did began to rise again by nearly 7% between the third and fourth quarters of 2009, and more recent indications show rises in loan defaults between February and March of 2010.
To read the entire section, click here to download in a .pdf format.

Friday, May 14, 2010

New-home buyers re-emerging in Southern California

According to a story in the L.A. Times, buyers are increasingly responding to the efforts by builders such as KBHome and Shea Homes to re-configure how they build homes -- as well as the lower price tags:

Buyers purchased 3,447 new homes in Southern California during the first three months of the year, a 17% increase from the same period last year, according to the San Diego research firm MDA DataQuick.

That's a fraction of what sales were during the peak of the region's housing boom; in the first quarter of 2006, builders sold 17,324 new homes in Southern California. Gone too are the days when developers built on spec, confident that buyers armed with easy credit would line up to purchase the finished product.

Still, there are signs of a rebound. Nationwide, sales of new homes jumped 27% in March from the month before and 24% compared with March 2009. A key index of homebuilder stocks is up 16% this year, compared with a rise of 3.4% in the Dow index. One major builder, Lennar Corp., has seen its shares rocket 47%.

Experts say new-home sales have been helped by state and federal tax credits, as well as by new tactics by builders adjusting to the no-frills post-bubble environment...

Shea Homes, a privately held builder based in Walnut, has also introduced a line of smaller homes with modern design, scaled-down master bathrooms and interior spaces that can be reconfigured, said Patrick Duffy, principal for research firm MetroIntelligence Real Estate Advisors.

"They have gone back and they have reengineered their entire production process," Duffy said. "Where can we find economies of scale, where can we cut price, where can we simplify?"...

Click here for entire story.