RealEstateFlux

The owners of Starrett City are currently examining four final offers for the 46 building, 5,881 unit complex in Brooklyn, New York. Yet the owners already sold the property last year to Clipper Equity LLC for $1.3 billion - but Clipper’s winning bid would have required them to bring many more apartments to market rate rents than acceptable to affordable housing advocates.

Starrett City has become Exhibit A in a simmering conflict between tenant’s right advocates and investors including private equity funds and developers. In recent years a popular investment strategy has been to acquire and actively manage affordable multifamily units so as to bring them to market rate rents. However increasing scrutiny and political pressure may make these strategies more difficult, time consuming and expensive to execute.

The new agreement at Starret City between the owners and city, state, and federal housing authorities stipulates that a larger percentage of units will remain affordable. While this will reduce Starrett’s sale price by $300 million or more, it will also guarantee subsidies of approximately $70 million a year provided by the government. These guaranteed subsidies are risk free cash flows, while returns from apartment conversions and expected rent increases are much more uncertain.

A new component of active management strategies for affordable housing projects will need to be greater public private partnership and concessions so as to ensure their success.

Look no further than Equity Residential’s second quarter financial results to get the gist of their new $550 million loan closing this week: dry powder for the war chest. In the second quarter, NOI grew 4.9% due to increasing rents, eight smaller properties were sold at a 5.6% cap, and four larger properties were purchased at a 6.0% cap. In terms of liquidity, the company already has in place a $1.4 billion unsecured revolving credit facility and approximately $145 million of unrestricted cash.

So what might Equity Residential be doing locking in a new loan at a 6%, interest only rate? The answer is positioning itself for opportunities amidst the ashes of over leveraged, burned out competitors. The target of choice for Equity Residential is 200+ unit properties built ≥1990, without existing debt in the following locales:

* Boston MSA
* New York including the Route 95 corridor in Connecticut and New Jersey
* Washington D.C. MSA
* Southern Florida including Palm Beach, Broward and Dade counties
* Chicago MSA
* Seattle MSA
* San Francisco Bay MSA
* Los Angeles MSA
* Orange County
* San Diego County

Notice that Austin does not appear on this list? Earlier this week Equity Residential sold a nine asset, 3000 unit portfolio in the Texas capital this week - The buyer, Northland Investment Corp., will obtain a significant foothold in Austin. Apparently EQR is not bullish on Texas, yet they are looking to invest in almost every California MSA.

Globe St.com | Amy Wolff Sorter | August 25, 2008

“AUSTIN, TX-Ending months of speculation, Northland Investment Corp.’s Northland Fund III has been revealed as the buyer of Equity Residential Properties Trust’s 2,985-unit apartment portfolio. The Newton, MA-based buyer has paid $270 million for the nine-asset portfolio.”

It is remarkable that while Westfield Group and Simon Property Group are sizing up a tremendous growth opportunity in Europe, Centro Properties Group, with their vastly different capital structure, is selling large chunks of their portfolio at wholesale prices in a race to survive.

In answer to Simon Property Group’s disclosure last week of a 3.5% stake in UK retail REIT Liberty International, Westfield Group has announced their own 2.96% position in the firm. With Liberty coming into play and appearing more and more likely as a takeover target, Simon quickly answered on Tuesday by raising their stake in Liberty to 4.22%.

The real question is whether Simon and Westfield will work together in their bid for this choice UK retail portfolio, or if a bidding war will break out. The stakes are an irreplaceable foothold in the world of British retailing. Some of the highlights of the Liberty portfolio include London’s Covent Garden Estate, a prime tourist destination.

The Real Estate Flux market started with a 35% chance that Simon would be the eventual owner of Liberty’s holdings.

Analysts have noted that the acquisition of Liberty could only be a long term strategic maneuver rather than an attempt to capitalize on any share price discount to Liberty’s Net Asset Value (NAV). Prior to these recent disclosures, Liberty was trading below the NAV of its holdings, yet the stock has soared since the announcements, closing up 5.3% in Tuesday’s trading. Furthermore, the Financial Times reports that “A potential price for Liberty of about £12 a share was being talked about in the London market, a premium to the last stated net asset value of £10.95 per share.”

FT.com | Daniel Thomas | August 27, 2008

“Westfield bought 10.7m shares in June and July at an average price of 835p. The company said that the stake was being held for “investment purposes” and declined to comment further. Simon, likewise, has refused to comment on its intentions, although it is unusual for the company to build indirect stakes in rival developers. This is also its first investment in the British property market.”

Bloomberg | Simon Packard | August 26, 2008

“There’s a track record of takeover collaboration between the two companies,” said John Perry, an analyst at Deutsche Bank AG with a “sell” rating on Liberty. “This looks like positioning for something down the line.”

The Wall Street Journal |William Boston | August 27, 2008

“Both groups have now clearly pulled up a seat at the table,” said Merrill Lynch property analysts in a note to clients. “They could be either working together and looking to divide up the assets, or the move by Westfield could be a defensive move to try and keep new entrants out of this market.” Westfield is currently building the U.K.’s two largest malls. Its Westfield London project is scheduled to open in October and Westfield Stratford City on the grounds of London’s 2012 Olympic Games complex is targeted for a 2011 opening. Simon, based in Indianapolis, operates 323 U.S. properties and 51 in France, Italy and Poland but none in the U.K.”

After a history of delay and neighborhood opposition, Essex Property Trust is in lease up of Phase 1 of the 275 unit Los Angeles Belmont Station project. The key to victory for Essex was the research and renewal of the site’s historic characteristics in and their incorporation into the final design of the project.

Los Angeles Downtown News | Ryan Vaillancourt | August 18, 2008

“The recognition of the site’s role in Los Angeles history is not lost on Essex, said Don Kinney, the company’s regional portfolio manager. “We welcomed that with open arms, the history,” Kinney said. “Obviously, it was a challenge because when we first saw it, it was all graffitied. But watching it progress, we decided we were going to take this theme and run with it.” The company tapped the archives at the city’s Office of Historic Resources for photographs of the site in its heyday and other images related to the Pacific Electric Red Cars. The photos, some in black and white, others in color, adorn the newly finished lobby at Belmont Station. Apartment doors are also painted red on the outside.”

Multifamily lending has been a bright spot in the otherwise dismal days of Fannie Mae and Freddie Mac. One significant debt placement included the Lehman Brothers and Tishman Speyer acquisition of the Archstone portfolio. Fannie and Freddie provided $8.9 billion of senior debt to facilitate the $22 biillion purchase. In spite of the 25% mark to market discount that Lehman is said to have made on Archstone since the purchase, Fannie and Freddie are still in a super senior position.

The New York Times | Terry Pristin | August 12, 2008

“But though financing for multifamily housing, including Archstone, as the national apartment company is now known, represents only a small portion of [Fannie Mae and Freddie Mac's] multitrillion-dollar business, “it has been a rare bright spot for both of them,” said Richard C. Anderson, a senior real estate investment trust analyst at the financial services company BMO Capital Markets. As a result, both Fannie Mae and Freddie Mac, though often associated exclusively with single-family housing, are rapidly increasing their multifamily portfolios.”

In a stinging reversal of fortune, Lehman Brothers is now looking to liquidate its commercial real estate holdings. At the height of the market, Lehman teamed with Tishman Speyer to acquire Archstone, a multifamily REIT. According to The Financial Times, Lehman may now need to accept a 25% discount to offload Archstone and raise cash.

Bloomberg | Jonathan Keehner and Sree Vidya Bhaktavatsalam | August 13, 2008

“Lehman Brothers Holdings Inc., seeking to restore investor confidence after a $2.8 billion second-quarter loss, is negotiating to sell commercial real estate assets to a group including BlackRock Inc., said three people briefed on the discussions. Lehman is seeking to sell about $14 billion of its $40 billion in commercial property and related securities by the end of the year, according to two potential buyers approached by the New York- based firm.”

Third quarter activity has already been lively for Meruelo Maddux. Earlier this week the Los Angeles Unified School district agreed to settle a long simmering eminent domain dispute with the developer / owner. Late last week Canyon Capital announced they had committed an $84 million construction loan to the Los Angeles based developer for their 717 W. Ninth St. multifamily project. The financing represents a significant vote of confidence in the downtown L.A. multifamily market. For decades it has been an open question if the downtown area could support a residential market (it is traditionally concentrated with office product) and whether that residential market would survive a recession. Apparently Canyon Capital is a believer in downtown and forecasts rents to rise up against growing vacancy.

Real Estate Flux forecasts the current trend in downtown L.A. rent growth here.

CPN | Barbra Murray | August 5, 2008

With a bevy of new projects delivering, the vacancy rate in the downtown area has risen a tad, but it is still not expected to exceed a relatively low 5.2 percent this year, according to a report by real estate investment services firm Marcus & Millichap. Furthermore, swelling asking rents, which are expected to increase 4 percent this year, will continue to offset minor growth in the average vacancy rate. “The demand for upscale apartments downtown is very strong,” the spokesperson said. “Downtown is really evolving into an area that can accommodate residential. It’s been tried before, the idea of having downtown residential development, but at the end of the day downtown essentially closed down. But now there’s a rebirth. There are restaurants, nightlife and ancillary services people are accustomed to having.”

PRNewswire-FirstCall | August 5, 2008

“We had an extremely successful quarter enhancing our liquidity position,” said Richard Meruelo, Chairman and Chief Executive Officer of Meruelo Maddux Properties. “Securing the $84.0 million construction loan and extending land loans out a year have been especially difficult to accomplish in today’s credit markets. These positive liquidity events will allow us to re-focus our efforts on completing our development activities such as at 717 W. Ninth St. and to continue to improve our operating results on our stabilized projects.”

Los Angeles Downtown News | Ryan Vaillancourt | August 11, 2008

“School District Settles Land Dispute for $50 Million”

CPN | Barbra Murray | July 25, 2008

Plans for the development of University Gateway, an upscale mixed-use student housing development across from the University of Southern California in Los Angeles, move forward with the closing of financing for the 421-unit project. With the assistance of commercial real estate capital intermediary Holliday Fenoglio Fowler L.P., developers Urban Partner L.L.C., Real Estate Capital Partners and Blackstone Real Estate Advisors attained funding totaling $167.5 million in the form of a construction loan and joint venture equity.

Globe St. | Bob Howard | July 25, 2008

HFF senior managing director Paul Brindley calls University Gateway “one of the most highly anticipated projects to be under way in the USC area in years,” in part due to the nearly 7,000-bed shortage the university is facing for student housing. The 421 units at University Gateway will provide 1,600 beds, Brindley notes.

Source: PRNewswire

Los Angeles Mayor Antonio Villaraigosa and Doris Koo, president and CEO of Enterprise Community Partners, today announced the first multimillion dollar financing tool for the creation and preservation of affordable housing in Los Angeles. The New Generation Fund is a $100 million predevelopment and acquisition fund created through a partnership of the City of Los Angeles and a consortium of banks, financial institutions.

The Fund is designed to combat homelessness and reduce the housing burden on poor and working families by offering affordable housing developers early-stage financing for properties intended for low- and moderate- income residents.

Citi, Wachovia, Enterprise Community Loan Fund, Merrill Lynch, MetLife and HSBC have contributed a combined total of $100 million to the Fund, which is expected to grow up to $150 million by next summer.

In order to apply for a loan, potential borrowers approach one of five underwriting lenders: Enterprise Community Loan Fund, Low Income Investment Fund, Local Initiatives Support Corporation, Century Housing, or Corporation for Supportive Housing. Each organization is dedicated to community development and focuses on one or more of the program areas covered by the Fund: preservation, affordable homeownership, mixed-income, low-income rental housing, and supportive housing.

To promote the creation of healthy and energy-efficient homes for low-income residents in Los Angeles, Enterprise will also provide borrowers of the New Generation Fund access to green development consulting at no additional cost.

Source: CPN

Many developers are already stepping up to the plate to augment the affordable housing supply in Los Angeles. According to a first quarter report by real estate investment services firm Marcus & Millichap, approximately 2,300 units affordable housing units are scheduled for delivery by the close of this year. Meta Housing Corp. broke ground less than two weeks ago on a mixed-use project in South Los Angeles with 80 apartments atop retail space. In February, Golden Boy Partners broke ground on a 107-unit urban infill project designed for working families in South Gate in Los Angeles County.

According to Pensions & Investments, a privatization or nationalization of the two quasi-governmental agencies could alter the course of multifamily markets. The dynamic would be such that the two agencies would come under increasing pressure to support single family home markets and shift portfolio resources in their direction. This would devalue multifamily investments by decreasing the supply of available capital. The probability of lawmakers caving to this pressure should not be too great. Richard K. Green, director of the Lusk Center for Real Estate at the University of Southern California, explains succinctly:

Source: Pensions & Investments

“But whatever Fannie and Freddie might look like, their whole role is to make sure there is a lender in the market, and I don’t see any reason why that would change,” Mr. Green added.

The agencies’ multifamily loans are still performing well and as of March, the most current public information available, default rates on apartment loans were still low, Mr. Green said.