Virtual War Games: Brick & Mortar Retailers Battle Online ... - CoStar

MARK HESCHMEYER, EDITOR

NOVEMBER 10, 2011

WWW.COSTAR.COM

A WEEKLY NEWSLETTER FOCUSING ON CHANGING MARKET CONDITIONS, COMMERCIAL REAL ESTATE, MORTGAGES AND CORPORATIONS PUBLISHED BY COSTAR NEWS

IN THIS WEEK'S ISSUE: Virtual War Games: Brick & Mortar Retailers Battle Online Retailing ................................................................................................ 1 Developer-Ordered Auction ............................................................................................................................................................... 3 Will Mobile Wallets Kill Bank Branches? ........................................................................................................................................... 4 Auction of 150 Bank-Owned Properties ............................................................................................................................................ 5 Retail Demand Continues Steady Recovery, But Pockets of Pain Persist ........................................................................................ 6 Defending mREITs: Industry Heavies Weigh in on Regulatory Changes .......................................................................................... 8 Audubon Commerce Center Office Complex Auction ....................................................................................................................... 9 Given a Chance To Be Lone Guns, Most Workers Still Choose the Posse ..................................................................................... 10 More Tenants Satisfied with Staying Put ......................................................................................................................................... 10 Pace of Bank Failures Picks Up Again ............................................................................................................................................ 11 CMBS Delinquencies Hit Second Highest Level, Could Go Higher ................................................................................................. 12 Life Insurers Lead 10% Boost in CRE Loan Originations ................................................................................................................ 13 No Let Up in Tight CRE Lending Standards .................................................................................................................................... 13 New Billion-Dollar CMBS Offering from Freddie Mac ...................................................................................................................... 14 Real Money: Kimco, Vornado, American Cap Each Pull in $1 Bil. or More ..................................................................................... 14 Upcoming Corporate Closures & Downsizings ................................................................................................................................ 16 Loans and Properties Under Surveillance ....................................................................................................................................... 17 Watch List: Delinquent 2011 Small Balance Loans ......................................................................................................................... 18

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Virtual War Games: Brick & Mortar Retailers Battle Online Retailing Shrinking, Reformatting Excess Square Footage, Beefing Own Online Presence Among Tactics Traditional brick-and-mortar retailers are waging a multi-front war on the rapid advances in online retailing to compete for the growing legion of shoppers armed with the latest in mobile technologies. Retailers are battling outdated tax laws that give virtual stores an advantage, while also battling these retailers for market share, and they are also ruthlessly evaluating sales performance across their portfolios to trim excess square footage that is not meeting expectations. In the latest salvo fired by store operators against their online counterparts, Simon Property Group Inc., the country's largest owner, developer and manager of retail real estate, filed a complaint this past week against the State of Indiana asking the courts to force the state to collect sales tax on goods sold by Amazon.com. According to the suit, Amazon.com is required by Indiana law to collect sales and use taxes to the state for sales made over the Internet, but has consistently refused to do so. In a statement, Simon said, "We have a responsibility to ensure the laws are equally applied to everyone. Main Street retailers are being harmed by this unequal playing field in Indiana, and their existence is being jeopardized and threatens the employment of hundreds of thousands of retail employees in our state." Industry representatives at the International Council of Shopping Centers (ICSC) are also weighing in. Speaking at an ICSC confab in Texas last month, Brad Greenblum, president of Greenblum Investment Partners in Austin, TX, said Texas lost $850 million of revenue last year to online retailers. The trade group is pushing for legislation called the Main Street Fairness Act. The legislation would allow states to collect taxes from out-of-state sellers – helping to even the playing field for brick-and-mortar locations.

THE WATCH LIST NEWSLETTER

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FEATURED NOTES: 5 Retail Property Portfolio Troy, MI Starting Bid:.... $1,750,000 Current Balance: ......$5,803,729 Size:........................150,928 SF Type:.....................................Retail Loan Status:....... Non-Performing

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Metaldyne Precision Forming Hobart Warehouse Four Gas Station Assets Hartford, MI Fraser, MI Hobart, IN Starting Bid:....... $800,000 Starting Bid:....... $350,000 Starting Bid:....... $425,000 Current Balance: ......$1,631,506 Size: ...........................186,443 SF Size: .............................18,366 SF Size:..........................10,819 SF Type:.............................. Industrial Type:.................Retail Warehouse Loan Status:....... Non-Performing CLICK HERE to view full list of 150 assets!

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SHIFT IN MARKETING DOLLARS On another front, nearly six in 10 middle market retail executives reported their companies are shifting marketing dollars away from old media toward new media, such as social media campaigns, according to the third annual Retail Finance Outlook study released by CIT Group Inc. As part of that shift, 68% of respondents report increases in marketing and deals through social media channels, including Facebook and Twitter. In addition, 63% report that their web sales are growing (28%) or growing faster than other channels (35%). In a sign that this trend will continue, some 58% of retail executives said they believe they need to improve their new media marketing strategies, while a further 7% characterize their companies as "late starters" in the new media game. Jeffery J. McNaught, a partner specializing in real estate with the law firm of Lindquist Vennum in Minneapolis, told CoStar that even this approach is double-edged sword. "It's easier, less work and more efficient to buy [some] items online. Smartly, such retailers like Best Buy have their own online stores, and have worked with the 'one stop' retailers like Newegg, Amazon to get their products on screens everywhere. But that is a sale lost for a brick/mortar franchisee or retailer on the ground." As more retailers drive more sales to their Internet channels that is also creating changes in retail space utilization. Suzanne Mulvee, real estate strategist, for CoStar Group, addressed that trend at CoStar's quarterly State of Retail Market webinar last week. "I think the retailers are trying to make the bricks complements the clicks," Mulvee said. "I was at the ULI (Urban Land Institute) fall meeting and had the opportunity to speak with some retailers and found there are some that are already successful. Staples, for example, is very successful in deriving the bulk of its sales from the Internet." But, Mulvee added, "Staples and all retailers are thinking very strategically about what they want and need on their floor. What they’re finding is, they don’t need as deep an inventory as they have previously. That takes space out of the back room of the store, but it doesn’t necessarily take the space out of the front end." "That said, as far as the technological changes that are happening in what you can purchase on the Internet, Best Buy is a great example," she added. "When Best Buy first saw its explosive growth and was opening its stores en masse, they were filled with CDs and DVDs predominately. [However] you don’t buy CDs and DVDs in stores any more, or very seldom. You’re looking to purchase those online." Mulvee agreed that it's very challenging for retailers to determine which will be the next product category that will become digitized see sales diminish in physical stores. "Where retailers are looking to combat this is by adding more service and necessity goods," she continued. "The defenses that retailers have lined up, I don’t know if they’re going to be sufficient for all [retailers] to weather the impact of the Internet," Mulvee said, adding that, "so I think you’ve got to be very selective about who you have in your center." Paul W. Adler, vice president of Rand Commercial Services in New York, told CoStar that, "Smart retailers are morphing their physical plants to deal with these changes in the market. The dinosaurs will disappear. Mobile tech and online buying centers, distribution outlets and distribution portals will be a new emerging market." Harvard Business School professors Rajiv Lal and José B. Alvarez, addressed the topic last month in a paper entitled: "Retailing Revolution: Category Killers on the Brink." Lal and Alvarez contend that mass-market retailers, particularly big-box "category killers," are under critical pressure from online competitors. For retailers that can react quickly enough, this upheaval is survivable. But those slow to see the tsunami wave on the horizon stand to be swept away.


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The two define "category killers" as those highly focused retailers that specialize in a specific category of goods, including Barnes & Noble, Best Buy, and Staples. Their wide assortment, aggressive pricing, large stores and extensive store network, served proved a massive competitive advantage. But now, online competitors are threatening to make such large chains of retail stores, many of which spent much of the last decade adding floor space, less productive. And the impact of emerging technologies, expanding price and assortment transparency, and the increasing amount of excess retail space has created new challenges. The two believe that ultimately the war will be won on a new front: product and branding. "Clearly, this is a new world for store retailers," the two conclude. "To compete with online competitors, retailers will need to be agile both in eliminating or downsizing categories that do not benefit from their stores' assets, and in introducing new categories that cannot be bought without the help of the core assets of their stores." "With this constant evolution of product categories, retailers will also need to be much more cognizant of how they develop and interpret their brands as they become more flexible in their offerings. Can you be an office supply store if you do not sell paper? What does it mean to be an electronics shop if the focus is on mobile devices and you don't sell televisions?" "Store productivity will come only if a store becomes known for offering a shopping experience that is consistent with the needs of the category," the Harvard professors said. "An ever-evolving retailer that understands how key store-level assets can be deployed in a category to create a compelling shopping experience will separate the winners from the bankrupt over the next decade."

Developer-Ordered Auction


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Will Mobile Wallets Kill Bank Branches? The convenience of the "mobile wallet" for making payments and accessing bank accounts from anywhere, at any time, could change the definition of "banking hours" -- and the need for bank branches. In a recent Deloitte LLC video presentation, Brian Johnston, principal, Deloitte Consulting LLP, said that, "Out of the top 25 banks, I am not sure that there is one out there that doesn't have some type of focus or initiative in place right now on the mobile channel." In terms of sizing it up, Johnston said mobile technology is currently an $86 billion market in terms of mobile payments, having grown 300% over the last three to four years. "We see significant growth over the next three to four years," he said. "By 2015, there are forecasts out there that say it will be a $400 billion market." Right now, banks are trying to figure out how to create and set up the mobile channel, he said. "For instance, certain transactions that occur within a branch are 50 times cheaper if it occurs through a mobile application or mobile channel," Johnston said. "So, how do you shift customer behavior from a branch into that mobile environment?" The Great Recession has already taken the steam out of new bank branching activity. In the last two years, there have been more bank branches closed than opened. New branch openings per year have been cut by more than half the annual activity in 2006 and 2007; whereas annual branch closings have increased by about 50%, according to FDIC statistics. Nov. 2005 Oct. 2006

Nov. 2006 Oct. 2007

Branch Openings

3,520

Branch Closings Branch Office Relocations

1,570

Purchase & Assumption of Branches

Nov. 2007 Oct. 2008

Nov. 2008 Oct. 2009

Nov. 2009 Oct. 2010

Nov. 2010 Oct. 2011

4,708

3,109

2,955

1,664

1,756

1,776

1,972

2,385

2,261

2,115

1,012

1,955

1,885

1,934

1,938

1,397

111

138

124

69

92

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Now there is also a threat out there on the banking side from mobile technology: disintermediation, Johnston said. "We are seeing certain applications pop-up recently that really aggregate financial accounts and aggregate bill pay providers and that application is really linking it," said Johnson. "So, it is really taking the bank out of the loop. The barrier to entry is probably low, so we are not quite sure how that is going to play out, but at any time you have some type of aggregation device which can really bring financial accounts together, I think there is some type of reason for concern." With the growth of mobile wallets, customers will want to bank any time, everywhere, Johnston said. "So banks really need to be able to cater to those needs and understand that it is a much different sort of behavior than what we have seen in the past with other generations, and if they don't focus on that type of behavior, I believe it could be a lost generation," he said. "When I look out five to 10 years and see how the banking industry is going to evolve, I wouldn't be surprised if we see a pure mobile bank, (one with) no branches, no call center," Johnston said. "All of the legacy channels won't be there. It will just be purely a mobile-channel bank, and we will see how things evolve, but I think the technology exists and the customer behavior in terms of the younger generation is there that we may see that evolve over the coming years." Keep up with Watch List News Tweets here.


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Auction of 150 Bank-Owned Properties


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Retail Demand Continues Steady Recovery, But Pockets of Pain Persist By: Randyl Drummer With the holiday shopping season getting under way in earnest this month, recession-weary American consumers are setting aside their worries about stagnant U.S. employment, a soft housing picture and the debt crisis in Europe to go shopping. That's providing fuel for the slow-but-steady improvement in retail property fundamentals that has emerged in recent quarters. Consumers rode out a slow-but-not-stalled economic expansion during the spring, and annualized GDP growth edged up in the third quarter, with lower interest rates beginning to have their intended effect -- encouraging purchases of durable goods like autos and stronger spending by consumers on home improvements, food and beverage and electronics, furniture and appliances, according to data presented at CoStar Group’s Third-Quarter 2011 Retail Review and Outlook. "Retail spending started out with ‘needs’-based items like health care and general merchandise at Target and Wal-Mart, and it's now widened to include more of the ‘wants’ by consumers," said Senior Real Estate Strategist Suzanne Mulvee, who co-presented the quarterly review with Real Estate Economist Ryan McCullough. Even as shopping centers and malls logged their ninth consecutive quarter of positive absorption nationally at 17 million square feet, the pace of increase in the third quarter remained muted compared with absorption during the market peak back in 2007. Cautious retailers are leasing space at a much slower rate than they did at the height of the housing boom, and many have weeded-out underperforming stores. "We’re seeing very light absorption given this period of the recovery, especially considering the retail sales volume," said McCullough. But those retailers that survived the downturn are performing well, reporting higher sales per square foot, he added. Other chains, such as Best Buy, are shrinking their footprints at existing properties, Mulvee noted. "They’re looking at demographics and trends like online shopping and wondering how they’re going to grow their top line, and they haven’t quite figured it out yet. Until they do, I don’t think we’ll see a major ratcheting up in demand for physical space," Mulvee said. CoStar sent questions to retail webinar respondents prior to the event last week to sample their views on the economic forces shaping their local markets, along with which types of product are hot and which are not. Predictably, participants representing core markets were fairly bullish, while many of those doing business in secondary and tertiary locations continued to be discouraged by the retail real estate environment. "Gyrations in sales volume appears to be driven primarily from discounting and bargains offered by retailers and are not a reflection of any true improvement," with confidence-lacking consumers still buying what they need and not their desires, said Michael Berube of Berube Company in San Mateo, CA, a view expressed by several other respondents. Some retailers such as Wal-Mart are rolling out smaller format stores in urban centers to reach out to new customers. As suburban housing expansion has come to a standstill and urban core centers enjoy a rebirth, especially among renters in their 20s and 30s, retailers are finding a tapped market in undersupplied areas. Restaurant growth is reported as especially strong, with residents eating fewer meals at home, a trend reflected in Census figures that show declining sales of food consumed at home. Sit-down and fast-food restaurants are taking an increasing role on large retail leases, and not just in urban locations, McCullough said. Wal-Mart and other retailers are adding food to their offerings to take advantage of these shoppers, a trend noted by several e-mail respondents. "Food has become more prominent at a variety of chains as it brings shoppers in more frequently, driving sales gains. For example, Target at The Pavilions at Talking Stick added fresh foods," said Linda Whitlow, director of public relations, De Rito Partners, Inc. in Phoenix. Whitlow added that unemployment in the area is still high and consumers have fewer discretionary dollars to spend, and are looking for more value for those dollars spent.


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"My experience as of late is that retail leasing is very slow, with two distinct exceptions. Restaurant activity has been and continues to be very strong. Also, leasing activity for general retail is very active for large, over 10,000square-foot, very well situated spaces that have all the other important attributes such as parking and visibility," added Norman Lotstein, vice president, Pyramid Real Estate Group, a retail specialist working primarily in southern Fairfield County, CT. "Target just added grocery and expanded their stores in this region while Wal-Mart seems to be opening a new SuperCenter every 3-6 months," said David Doerr of Realty USA Commercial Division in Buffalo, NY. Strip centers and neighborhood centers have been the slowest to see absorption gains, while power centers have performed strongly, with competition and tightening vacancies in some core markets for larger floor plates, CoStar's McCullough said. Respondents reported that many of the abandoned Circuit City and Borders stores are being replaced by such tenants as fitness centers, seasonal Halloween and Christmas stores and in one case in the San Francisco area, a 10year lease of a Circuit City store to the Peninsula Ballet Theatre and Conservatory. However, "I have yet to see any abandoned big box stores replaced by like-kind credit worthy tenants, which was perceived of Borders, Circuit City, etc.," said Jeff Rigg, assistant vice president, Wells Fargo Bank - RETECHS, in Columbus, OH. "A number are temporary season tenants ... but very few national retailers have filled these spaces, most likely due to market overlap." Denver, a metro at the intersection of technology and energy employment, has seen especially strong gains in absorption, leading the country with 1.3% of total retail inventory, with other strong markets including Seattle/Puget Sound, Boston, Washington, D.C., Houston and


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South Florida, the CoStar economists said. In contrast, several metros plagued by large amounts of vacant "zombie" retail space such as Phoenix and Atlanta are plodding along with 25-35% vacancies. While the national vacancy rate has ticked down slightly in recent quarters from its peak in early 2010, the availability rate -- space being marketed by landlords in anticipation of a tenant’s departure -- is improving at a slower pace, which is not encouraging given that some national chains are still announcing they will close more stores, Mulvee said. Power centers are the only retail category where vacancies are continuing to edge down, with strip centers, neighborhood center and even community centers, many populated by mom-and-pop businesses, grappling with stubbornly higher vacancy rates. That said, while the vacancy improvements are modest, they’re also broad-based. About two-thirds of the thousands of submarkets that CoStar tracks saw declining vacancies in the third quarter. In one interesting exception to the lack of strength in non-core markets, Doerr said the strength of the Canadian dollar and loonie-toting tourists is providing an extraordinary boost to tourism and malls in his area, which includes Niagara Falls. "In the Buffalo and Western New York retail market, we are uniquely positioned at the Canadian border and have approximately 6 million people within a 90-minute drive which includes the greater Toronto area," Doerr said. "We closely watch the value of the Canadian dollar against ours." "I think retailers tend to only look at demographics and fail to know how strong our retail sector actually is beyond straight demos," he said. In fact, in one of the largest investment sales of the third quarter, AWE Talisman sold Fashion Outlets of Niagara Falls to The Macerich Co. for $200 million, or $377 per square foot. The 530,000-square-foot center right on the border is 95% leased, taking advantage of the strong cross-border trade.

Defending mREITs: Industry Heavies Weigh in on Regulatory Changes The mortgage REIT industry came to its own defense this week as the deadline arrived for public comments to the U.S. Securities & Exchange Commission as it considers changes to how such REITs are regulated. The SEC is contemplating whether mortgage REITs should be allowed to continue to claim exemptions enacted as part of the Investment Company Act of 1940 -- long before such REITs were even created. In addition, it is weighing whether they should be subjected to tighter new regulations as part of greater oversight of the mortgage industry proposed in light of the extensive abuses uncovered in wake of the Great Recession and their role in the mortgage market collapse. In its concept release last August considering the changes, the SEC expressed concerns that companies not regulated by the act may deliberately 'mis-value' their assets, use excessive amounts of leverage, and operate in a manner that favors company insiders and not shareholders. The reactions in the stock markets were immediate. Mortgage REIT share prices plunged on the announcement. Mortgage REITs still haven't recovered to the stock price values they posted in July. That prompted a multitude of retired investors to write in defending mortgage REITs and their value as a dividend income generation tool. The industry heavyweights waited until the Nov. 7 deadline to file their comments. "Mortgage REITs have flourished as operating companies and are an established, accepted and desirable investment asset class for a wide range of individual and institutional investors," said Michael A.J. Farrell,


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chairman, CEO and president of Annaly Capital Management Inc. "Mortgage REITs have also become a critically important source of capital formation in the residential and commercial real estate markets." Michael Hough, chairman and CEO of Hatteras Financial Corp. commented, "We are proud of the important role we play as a specialist in acquiring and holding mortgage securities, and we believe that our participation, and the participation of our public residential mortgage REIT peers, helps reduce the cost of home ownership to the substantial majority of Americans that borrow to acquire their family homes. We are confident Congress intended that companies like Hatteras would be exempt from the Investment Company Act and hope the SEC's review can be resolved quickly to reduce any uncertainty in the market." Commenting on its public comment submission, Andrew F. Jacobs, president and CEO of Capstead Mortgage Corp., said, "We strongly endorse the findings and comments made in the National Association of Real Estate Investment Trusts' residential mortgage real estate investment trust (mortgage REIT) comment letter and the Securities Industry and Financial Markets Association's comment letter regarding the well regulated environment in which mortgage REITs currently operate that fosters a culture within which investors are well-protected, and the significant current and future role of mortgage REITs in supporting our nation's housing markets through capital formation." The Mortgage Bankers Association also filed a comment letter. In its letter, the MBA argues that changes to the current regulatory structure could have a negative impact on real estate finance activity and the provision of liquidity to the mortgage market. Keep up with Watch List News Tweets here.

Audubon Commerce Center Office Complex Auction


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Given a Chance To Be Lone Guns, Most Workers Still Choose the Posse As technology and alternative work strategies free people to work anywhere, the majority of employees are still choosing to work in the office, according to a new study by Steelcase in partnership with CoreNet Global. And employers are optimizing space to accommodate them. The study found that 86% of companies now offer alternative work strategies such as home offices, hoteling, (shared workspaces that can be reserved), and mobile work, (consistently using multiple places to work virtually). This number is up from 50% in 2009. An additional 16% of respondents said they plan to implement an alternative work strategy this year. Organizations reported using alternative work strategies to help employees improve work-life balance, (49%), and to save on real estate costs (31%). But despite the trend toward increasing mobility, nearly 50% of all organizations reported they have 10% or fewer of their employees regularly working remotely. Just 3% have half or more of their employees utilizing alternative workplace strategies. Even with a range of options, what's attracting workers to the office when they can choose to work anywhere? The answer is: People and technology. 72% of respondents said the office is the best place to interact with colleagues, and 40% said the office provides access to much needed tools and technology. "The world is more interconnected and interdependent than ever which makes work more complex and fastpaced. Businesses are addressing competitive pressures by using new technologies and mobility strategies to support diverse ways of working. Yet, workers are coming to the workplace because they need spaces that enhance collaboration with teammates, who are often distributed around the world. They also need to be supported physically, and cognitively, and to feel a sense of belonging and connection to the organization's culture," said Jim Keane, president of Steelcase. As one survey participant reported, "I need to maintain strong links with my staff and the best way to do that is to see them face-to-face. It's in our culture to work collaboratively." REAL ESTATE OPTIMIZATION Organizations continue to rethink their real estate strategies to gain efficiencies and improve effectiveness. For most organizations, net usable space per employee now ranges from 150 to 225 square-feet and nearly 55% of respondents plan to cut their current real estate portfolio by up to 10% this year alone. That number is up from 47% in 2009. Businesses aren't just shrinking -- they're repurposing. 57% of respondents reported using their real estate savings to reconfigure team spaces and 41% reported accommodating alternative work settings such as cafes that provide the access to people and technology that workers want. "Everyone wants to do more with less space, and at the same time employers are realizing the benefits of giving employees more choice and control over where they work. They want a range of spaces, depending on what kind of work they need to do. By revitalizing existing spaces or investing in new spaces, it's possible to achieve more real estate efficiency and create a variety of spaces that allow workers to be their most effective throughout the day." Melissa Securda, director of knowledge and research, CoreNet Global.

More Tenants Satisfied with Staying Put More than 61% of tenants in U.S. office buildings intend to renew their leases, according to Kingsley Associates' Q3 2011 Office Industry Trends. During the four quarters ending September 30, 2011, 61.3% of tenants indicated that they "definitely" or "probably" would renew, the highest level of loyalty since 61.9% in the fourth quarter of 2008. Furthermore, 64.8% of tenants reported either "good" or "excellent" value for the amount paid, up from 63.9% last quarter.


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Other signs hint at a strengthening office market. Nearly 15% (14.9) of tenants anticipate the need for more space, an increase of 2.8 percentage points since the fourth quarter of 2009, the recent low. Furthermore, 37.8% of tenants expect to add headcount at their location. "Office users have taken advantage of favorable rates and are generally happy with their space," comments Jim Woidat, principal, Kingsley Associates' San Francisco office. "Now that the economy has stabilized somewhat, there are indications they are ready to start hiring again." Boston is a leader among major U.S. markets in both future space needs (15.8% of tenants indicating the need for more space) and anticipated headcount growth (41.7% of tenants expecting to add headcount). Boston is also one of the few markets where more tenants are placing value on green buildings practices. Nationally, the proportion of tenants indicating that green practices are "very" or "somewhat" important to them fell below 59% (58.6) for the first time in three years. But in Boston, it rose to 62.2%, up from 60.3% last quarter. These and other findings are available in Kingsley Associates' Q3 2011 Office Trends. Keep up with Watch List News Tweets here.

Pace of Bank Failures Picks Up Again Eleven banks failed in October, up sharply from six in September and seven in August (see chart on page 3). The count through October is now 85 failures year‐to‐date, putting the annualized pace just over 100 for the full year 2011, according to Trepp LLC. The pace of closures in October was above the year‐to‐date average of 8.5 per month. "We maintain our estimate of a total failure count of approximately 100 for 2011, as there does seem to be some seasonality with the pace of closures picking up in quarterly reporting months (like July and October), then falling in the next two months," Trepp reported. "We expect closures to extend into 2012 and possibly beyond. This will depend largely on the strength of the economy in general, and real estate market conditions in particular." Commercial real estate exposure was the main driver behind problem loans for the banks that failed in October. Commercial real estate (CRE) loans comprised $401 million (65.1%) of the total $617 million in nonperforming loans at the failed banks. Construction and land loans made up $254 million (41.2%) of the total, while commercial mortgages comprised $147 million (23.9%) of the total nonperforming pool. The residential real estate loan category was a secondary source of distress, with $136 million in nonperforming loans, or 22.0% of the total nonperforming balance. The failures mainly occurred in the Southeast and Midwest. In the Southeast, there were three failures in Georgia and one each in Florida and North Carolina. Georgia and Florida rank first and second for failures, both in 2011 year‐to‐date and in the current cycle of failures that started in late‐2007. In the Midwest, there were two failures in Illinois and one each in Missouri and Minnesota. Illinois ranks third in the nation for failures, both in 2011 and in the current cycle. Minnesota ranks fifth (tied with Washington) for failures in the current cycle, but the pace of failures has dropped, with only two failures in 2011. One failure occurred in the Northeast—First State Bank in New Jersey. Failures have been less prevalent in the Northeast, as the region avoided the worst excesses of the housing boom. The largest failure occurred in the West—Community Banks of Colorado—and accounted for nearly 40% of total failed bank assets in October.


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In addition, two more banks failed in the first week of November: SunFirst Bank in St. George, UT. and Mid City Bank Inc. in Omaha, NE. SUNFIRST BANK The FDIC entered into a purchase and assumption agreement with Cache Valley Bank in Logan, UT, to assume most of the deposits of SunFirst Bank. The FDIC will retain $15 million in deposits that may be subject to external litigation involving SunFirst Bank. The affected accounts were frozen prior to the failure of the bank. All other accounts were transferred to Cache Valley Bank. As of Sept. 30, SunFirst Bank had $198.1 million in total assets. Cache Valley Bank agreed to purchase $177.3 million of the failed bank's assets. The FDIC is retaining the balance of the assets for later disposition. The FDIC and Cache Valley Bank entered into a loss-share transaction on $128.9 million of SunFirst Bank's assets. The FDIC estimates that the cost to its DIF will be $49.7 million. MID CITY BANK The FDIC entered into a purchase and assumption agreement with Purdum State Bank in Purdum, NE, to assume all of the deposits of Mid City Bank Inc. As of Sept. 30, 2011, Mid City Bank had $106.1 million in total assets. In addition to assuming all of the deposits of the failed bank, Purdum State Bank agreed to purchase essentially all of the assets. The FDIC estimates that the cost to its Deposit Insurance Fund (DIF) will be $12.7 million. Keep up with Watch List News Tweets here.

CMBS Delinquencies Hit Second Highest Level, Could Go Higher The CMBS delinquency rate moved significantly higher in October as investors continued to ask whether the glass was three quarters empty or one quarter full. In October, the delinquency rate for U.S. commercial real estate loans in CMBS moved up 21 basis points to 9.77%. The CMBS delinquency rate is now at its second highest level ever. Only the 9.88% reading in July 2011 was higher, according to Trepp LLC After experiencing a big dip in the delinquency rate in August, the rate has now increased for two straight months. "We noted last month that the tone in the CMBS market had been extremely negative since the beginning of the summer," Trepp reported. "CMBS investors watched as spreads rose sharply and lenders retrenched from making new loans. Many CMBS investors began to whisper that the impressive rally in CMBS from mid-2010 through May 2011 had taken the market too far, too fast. At the same time, commercial real estate professionals made similar comments about the lofty pricing of trophy properties in the U.S. earlier this year." "This negative sentiment continued for the better part of October. Word of layoffs at origination and trading shops on Wall Street jolted the market further," Trepp added. "Spreads continued to race upward-- ultimately hitting their highest levels since mid-2010. Researchers at some investment banks offered very bearish predictions for the levels of CMBS issuance in 2012." Morningstar’s structured credit research and ratings subsidiary RealPoint, also reported that there are future delinquency concerns on the horizon. Morningstar reported that there are a number of loans on CMBS servicers watch lists that have never met proforma underwritten expectations or loans that have experienced significant performance declines. This includes


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a large number of loans on the master servicer watch lists that remain current in payment but which may ultimately default based upon a denial of requests for loan modifications or debt restructuring or a decision by borrowers to surrender the collateral. By property type, the greatest future risk exposure by unpaid balance is found in office collateral, while retail collateral is by far the largest by loan count, Morningstar reported. Keep up with Watch List News Tweets here.

Life Insurers Lead 10% Boost in CRE Loan Originations Third quarter 2011 commercial and multifamily mortgage loan originations were 98% higher than during the same period last year and 10% higher than the second quarter of 2011, according to the Mortgage Bankers Association's (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations. "Lending on commercial and multifamily properties continues," said Jamie Woodwell, MBA's Vice President of Commercial Real Estate Research. "Mortgage originations by life company portfolios hit another new record in the third quarter, and lending by bank portfolios and Fannie Mae and Freddie Mac also picked-up. Mortgage originations for the CMBS market, which was caught up in the global economic uncertainty of recent months, declined from last quarter, but were higher than last year's Q3 level." The 98% overall increase in commercial/multifamily lending activity during the third quarter of 2011 was driven by increases in originations in most property types. When compared to the third quarter of 2010, the increase included a 406% increase in loans for hotel properties, a 164% increase in loans for retail properties, a 103% increase in loans for office properties, a 39% increase in loans for multifamily properties, a 3% decrease in industrial property loans and an 8% decrease in health care property loans. Among investor types, loans for commercial bank portfolios increased by 433% compared to last year's third quarter. There was also a 169% increase in loans for conduits for CMBS, a 61% increase in loans for life insurance companies and a 47% increase in loans for Government Sponsored Enterprises (or GSEs – Fannie Mae and Freddie Mac). Third quarter 2011 commercial and multifamily mortgage originations were 10% higher than originations in the second quarter of 2011. Compared to the second quarter, third quarter originations for retail properties saw a 37% increase. There was an 8% increase for office properties, a 4% increase for hotel properties, a 2% decrease for multifamily properties, a 14% decrease for industrial properties and a 30% decrease for health care properties. Among investor types, between the second and third quarters of 2011, loans for commercial bank portfolios saw an increase in loan volume of 55%, loans for GSEs saw an increase in loan volume of 32%, originations for life insurance companies increased 3% and loans for conduits for CMBS decreased by 48%. Keep up with Watch List News Tweets here.

No Let Up in Tight CRE Lending Standards U.S. bank lending standards for commercial and residential real estate loans changed little over the past three months, according to the Federal Reserve's October 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices However, a large fraction of foreign respondents reported having tightened standards on commercial real estate loans, in a substantial shift from the net easing reported by those institutions in the prior two surveys. At the same time, U.S. banks indicated that they had tightened standards on loans to European banks and their affiliates or subsidiaries.


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A modest fractions of domestic and foreign banks reported a strengthening of demand for CRE loans, on net, although these reports were a bit less widespread than in the two previous surveys. Keep up with Watch List News Tweets here.

New Billion-Dollar CMBS Offering from Freddie Mac Freddie Mac is going to market with its fourth offering of Structured Pass-Through Certificates (K-704 Certificates) backed exclusively by multifamily mortgages with a 7-year term. The company expects to offer approximately $1 billion in certificates, which were expected to price this week. The K-704 Certificates are backed by 65 recently originated multifamily mortgages and are guaranteed by Freddie Mac. The loans were originated by: loan was originated by one of Berkadia Commercial Mortgage, CBRE Capital Market, CWCapital, Deutsche Bank Berkshire Mortgage, Grandbridge Real Estate Capital, Holliday Fenoglio Fowler, Jones Lang LaSalle, KeyCorp Real Estate Capital Markets, NorthMarq Capital, PNC Bank, Walker & Dunlop and Wells Fargo Bank. Wells Fargo Bank will be acting as master and special servicer. The three largest loans in the pool are as follows. $73.55 million on Rosslyn Heights, a 366-unit complex in Arlington, VA; $41.48 million on Farms At Cool Springs, a 474-unit complex in Franklin, TN; and $41.38 million on Highlands of West Village, a 292-unit complex in Smyrna, GA. Loans on properties controlled by Equity Residential in Chicago make up 14.3% of the pools with six loans totaling $170.58 million. Keep up with Watch List News Tweets here.

Real Money: Kimco, Vornado, American Cap Each Pull in $1 Bil. or More Kimco Realty Corp. in New Hyde Park, NY, closed on a $1.75 billion unsecured revolving credit facility replacing both the company's $1.5 billion unsecured U.S. credit facility and a $250 million Canadian credit facility. The new facility, which can be increased to $2.25 billion through an accordion feature, is scheduled to mature on Oct. 27, 2015, with a provision to extend for an additional year. Interest accrues at an annual rate of LIBOR plus 105 basis points on drawn funds. In addition, the facility includes a $500 million sub-limit which provides the company the opportunity to borrow in alternative currencies including Canadian Dollars, Pounds Sterling, Japanese Yen or Euros. J.P. Morgan Securities LLC, Wells Fargo Securities LLC and RBC Capital Markets served as joint bookrunners, Vornado Realty Trust in Paramus, NJ, renewed the second of its unsecured revolving credit facilities for $1.25 billion. This renewed facility matures in four years, has a one-year extension option and bears interest at LIBOR plus 125 basis points, based on Vornado’s current credit rating. In June 2011, Vornado renewed its other revolving credit facility for a four-year term with a one-year extension option for $1.25 billion. Vornado’s total revolving credit facilities are now $2.5 billion. The lead arrangers and bookrunners for the facility are J.P. Morgan Securities and Merrill Lynch; Pierce, Fenner & Smith. American Capital Agency Corp. in Bethesda, MD, raised gross proceeds of $1 billion in a public offering of 37 million shares. The company AGNC expects to use the net proceeds to acquire additional federal agency securities. UDR Inc. in Denver entered into a $900 million unsecured revolving credit facility, replacing its prior, $600 million facility. The new facility has an initial term of four years and includes a one-year extension option, and contains an accordion feature that allows the company to increase the facility to $1.35 billion. Based on the company's


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current credit ratings, the credit facility carries an interest rate equal to LIBOR plus a spread of 122.5 basis points and a facility fee of 22.5 basis points. Wells Fargo Bank and JPMorgan Chase Bank served as joint lead arrangers and joint bookrunners. Boston Properties Inc. agreed to sell $850 million of 3.7% senior unsecured notes due 2018. The net proceeds are to be used to repay, redeem or repurchase outstanding debt. Health Care REIT Inc. in Toledo went to the public markets for the fourth time this year, this time selling more common stock and raising $635 million. The company intends to use the net proceeds to invest in health care and seniors housing properties and repay debt. The REIT has now raised more than $4 billion this year. CommonWealth REIT in Newton, MA, amended and increased its existing $400 million unsecured term loan to $557 million. Prior to this amendment, CWH's term loan had a maturity date of Dec. 15, 2015, and interest paid on borrowings was LIBOR plus 200 basis points. The maturity date of the amended term loan is extended one year and interest paid on borrowings is reduced to LIBOR plus 150 basis points. In addition, the maximum borrowing may be increased up to $1 billion in certain circumstances. CWH expects to use the increased proceeds of the term loan to repay debt. Behringer Harvard REIT I Inc. in Dallas closed on a $340 million secured credit facility. The facility includes a $200 million term loan and a $140 million revolving credit facility, each with a 3-year term and two 1-year extension options. KeyBanc Capital Markets and J.P. Morgan Securities LLC were co-lead arrangers. H&R REIT borrowed $250 million for its acquisition of Two Gotham Center, a 670,000-square-foot, 22-story office building in Long Island City, NY. The loan, arranged by CBRE Capital Markets, includes a 10-year term and a 4.25% interest rate. CubeSmart in Wayne, PA, closed its public offering of 23 million common shares raising $211.6 million and closed a public offering of preferred shares raising another $70 million. The company intends to use the net proceeds to fund a portion of the purchase price for its recently announced acquisition of 22 self-storage facilities from Storage Deluxe. FelCor Lodging Trust modified its $178 million CMBS mortgage loan scheduled to mature this month and extended the maturity date for up to two years. The loan now bears interest at LIBOR plus 2.20% and is prepayable at any time. It repaid $20 million of the principal with cash on hand reducing the outstanding balance to $158 million. The loan is secured by nine hotels. Sabal Financial Group in Newport Beach, CA, purchased a $142.2 million loan portfolio from Bank of the Cascades in Bend, OR. The portfolio includes a total of 171 both performing and non-performing loans, and is primarily secured by retail, office and industrial properties, and land based assets in Oregon and Idaho. RLJ Lodging Trust in Bethesda, MD, refinanced its $140 million term loan, which was scheduled to mature in November 2011, with Wells Fargo Bank. The company structured five independent first mortgage loans totaling $142 million. The base term for each mortgage is interest only and bears a floating rate of LIBOR plus 360 basis points. In addition to lowering the interest rate spread from 425 basis points to 360 basis points, the company also eliminated a 1% LIBOR floor. The base term for each loan is three years with two, one-year extension options. Including extensions, this tranche of debt will now mature in 2016. Education Realty Trust Inc. in Memphis, TN, raised $124.4 million in a public stock offering. The money is expected to be used to repay debt and fund its development pipeline. Agree Realty Corp. in Farmington Hills, MI, closed an $85 million unsecured revolving credit facility. The new and expanded arrangement replaces the company's former $55 million credit facility. The new 3-year facility matures Oct. 26, 2014, with two 1-year options to extend. Borrowings are priced at LIBOR plus 175 to 260 basis points. Based upon the company's current leverage ratio, it anticipates the margin will be 185 over LIBOR. The facility also includes a $50 million accordion feature to increase capacity to $135 million to accommodate the company's acquisition and development platforms. Bank of America will act as Administrative Agent.


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Stag Industrial Inc. in Boston raised $69 million through the sale of preferred stock. The money will be used for acquisitions. Summit Hotel Properties Inc. in Sioux Falls, SD, raised $57.5 million in a public offering of 2 million shares of its 9.25% Series A cumulative redeemable preferred stock. The company expects to use the net proceeds to repay the debt outstanding on its revolving credit facility. SilverLeaf Financial in Salt Lake City acquired a $57 million non-performing loan secured by 58 unsold luxury condominium units within the 86-unit Trailhead Lodge Development in Steamboat Springs, CO. The loan originated in 2007 for the amount of $57.4 million and was later extended in 2009. Currently the loan is in maturity default with an unpaid principal balance of $48 million. Thee lodge consists of one 5-story building over a 2-story underground garage, and features a total of 86 residential units. Acadia Realty Trust in White Plains, NY, raised $45.23 million through the sale of common stock, with the money earmarked for debt repayment. Gladstone Capital Corp. in McLean, VA, raised $35 million in a preferred stock offering. The company intends to use the net proceeds to repay debt. Lewis Operating Corp. secured a $34 million refinancing for Carmel Apartments, a 306-unit, Class A multihousing community in Rancho Cucamonga, CA. HFF placed the 12-year, 5.01%, fixed-rate loan with Northwestern Mutual. Loan proceeds refinanced a maturing loan. American Realty Capital Properties Inc. in New York raised $15.75 million through the sale of common stock. The company intends to use the net proceeds from the offering to make additional property acquisitions, pay related fees and expenses, and for general working capital purposes. It also received $15.1 million in net proceeds from a common stock offering. The company intends to use the net proceeds to make additional property acquisitions. Lightstone Group in New York closed on the senior mortgage acquisition secured by the 151-room Marriott Courtyard hotel in Parsippany, NJ. The purchase price was $9.3 million or $62,000 per room.

Upcoming Corporate Closures & Downsizings Company Inter-County Motor Coach General DynamicsElectric Boat Lowe's Home Center's CBA Insert Distribution System, Inc Voila Bakeries Time Warner Cable New Process Gear, Inc. (Division of Magna Powertrain) Zurn Industries Legal Sea Foods Metropolitan Suburban Bus Authority

Address 16 George St.; 243 Deer Park Ave., Babylon, NY 350 Atomic Project Road, Ballston Spa, NY 4180 Veteran's Memorial Drive, Batavia, NY 4811 First Ave., Brooklyn, NY 65 Porter Ave., Brooklyn, NY 10-15 14th Ave., College Point, NY 6600 New Venture Gear Drive, East Syracuse, NY 2640 South Work St., Falconer, NY 630 Old Country Road, No. 1161 A, Garden City, NY 700 Commercial Ave., Garden City, NY


Closure or Layoff Potential Closure

Owned or Leased

Bldg. RBA

No. Impacted

Owned

6,596

88

1/14/2012

Closure

Owned

15,000

165

12/30/2011

Closure

Leased

138,778

90

11/16/2011

33,000

312 76

1/8/2012 12/31/2011

Closure Closure

Impact Date

Closure

Leased

148,650

52

1/12/2012

Closure

Owned

1,703,516

139

11/30/2011

Closure

Leased

341,570

51

1/10/2012

Closure

Leased

2,951,995

67

1/22/2012

Closure

Owned

279,346

981

12/31/2011

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Company

Finch Paper Four Paws/ Central Garden & Pet Gateway Energy Services Corp. Walmart - NYC Apparel Office LF USA Bank of America All Voice Communications Dolce International/Palisades SkillSoft Corp./Element K Corp. VWR Education Hyosung USA Aureon Biosciences

Address Northeastern Industrial Park, Building 5, Guilderland Center, NY 50 Wireless Blvd., Hauppauge, NY 400 Rella Blvd., Suite 300, Montebello, NY 1372 Broadway, 2nd Floor, New York, NY 1450 Broadway, 9th & 10th Floors, New York, NY 2 & 4 World Financial Center, New York, NY 363 7th Ave., 9th Floor, New York, NY 334 Route 9W, Palisades, NY 500 Canal View Blvd., Rochester, NY 777 E. Park Drive, Tonawanda, NY 2214 Whitesboro St., Utica, NY 28 Wells Ave., 4th Floor, Yonkers, NY

Closure or Layoff

Owned or Leased

Bldg. RBA

No. Impacted

Closure

Leased

181,620

25

12/28/2011

Layoff

Owned

58,900

34

1/31/2012

Layoff

Leased

180,000

71

11/18/2011

Closure

Leased

534,000

278

2/1/2012

Layoff

Leased

160

12/31/2011

Layoff

Leased

382,269 2,591,244; 1,903,800

33

11/30/2011

Closure

Leased

2,424

34

1/9/2012

Potential

Leased

406,000

110

2/1/2012

Layoff

Leased

94,800

115

1/27/2012

Closure

Owned

121,600

113

1/19/2012

Closure

Owned

298,128

9

12/31/2011

Closure

Leased

145,000

95

10/4/2011

Impact Date

Loans and Properties Under Surveillance


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Watch List: Delinquent 2011 Small Balance Loans Property

4311 10th Ave.

107-04 Jamaica Ave. Venture Commerce Center

City

Brooklyn

Richmond Hill

San Jose

State

NY

NY

CA

Property Type

Servicer Comment

Retail, multifamily

The loan transferred to the special servicer in May 2011 after the borrower was unresponsive to the master servicer's correspondence regarding delinquent payments. The property received an updated appraised value in June 2011 that indicated a property value of $520,000, which is less than the current outstanding balance on the loan. The asset manager is beginning the foreclosure process while continuing to pursue a note sale.

Retail, multifamily

The loan transferred to the special servicer in April 2011 because the borrower stated that a default was imminent. The special servicer is in the process of appointing a receiver. The $605,000 appraised value from May 2011 is in excess of the current outstanding balance.

Office

The borrower has submitted partial payments that were previously in arrears and has expressed an intension to bring the loan fully current.

26 - 30 S. Broad St.

Woodbury

NJ

Retail

According to the Sept. 2011 remittance report, the loan is more than 90 days delinquent and the special servicer is in the process of pursuing enforcement.

952 Main Ave.

Passaic

NJ

Retail, multifamily

Transferred to the special servicer in June 2011 because of delinquent payments.

CA

Retail, multifamily

According to the Aug. 2011 remittance report, the loan is 60-days delinquent and the special servicer is currently reviewing the borrower's loan modification proposal.

8121 - 8125 S. Broadway

Los Angeles

716 Nickerbocker Ave.

Brooklyn

NY

Retail, multifamily

As of the Sept. 2011 remittance report, the loan was 30days delinquent. According to the servicer, the borrower has not submitted coverage for building insurance; therefore, force-placed insurance has been in place.

4062-4072 White Plains Road

The Bronx

NY

Retail, multifamily

As of the Sept. 2011 remittance report, the loan was 30 days delinquent.

1825 N. Canal Ave.

Long Beach

CA

Multifamily

According to the Sept. 2011 remittance report, the loan was 30 days delinquent.

Long Island The borrower was issued a force-placed insurance letter in 34-51 Vernon Blvd. City NY Flex August 2011. CMBS: Waterfall Victoria Mortgage Trust Series 2011-SBC2; Special Servicer: KeyCorp Real Estate Capital Market

Keep up with Watch List News Tweets here.


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