According to a recent Bloomberg article, the renowned investor George Soros feels that commercial real estate has an additional 30% decline left in its pricing.  If he is correct, that would mean an upcoming strain on the US banking system on an unbelievable scale.  Commercial prices have already fallen +/- 30% from their 2007 highs.  An additional 30% would be devastating.  Soros also commented on the current Administrations monetary policy, fearing that we are setting ourselves up for a period of significant inflation.

It all puts the real estate investor in a tough predicament.  The impending inflation would drive you towards buying now and locking in your capital costs.  However, with the specter of additional pricing declines on the horizon, investors are reluctant to buy now for fear of overpaying.  So, again, the real estate market remains locked in indecision. 

Here in Richmond, the situation is very similar.  Richmond BizSense ran an article this week talking about the lack of sales activity in this market.  In addition to quoting some fantastic market experts (including your truly), the article does a very good job of laying out the situation that faces both buyers and sellers in today’s market.  No doubt, it’s a tough one.  The companies that can be flexible and creative will do much better than those that can’t.

On Wednesday afternoon, the MSC Catania gracefully slid up to its berth at Jacksonville’s Blount Island Terminal.  The 983-foot, 4,900 TEU vessel represents the largest ship to ever call upon the port.  The large vessel did have to come in “light” due to the restrictive depth of the channel.  She will also not be part of a regular rotation at the port, as she was filling in for another vessel that ran aground.  Jacksonville hopes to be able to allocate a portion of the Stimulus funds to further deepen the channel to 40-feet.  The arrival of such a large ship is a momentous day for Jacksonville as they work towards becoming a major est coast player.

“You’re getting a snapshot of what Jacksonville can be,” said Rick Ferrin, the Jacksonville Port Authority’s executive director.

As large as the MSC Catania is, she is still medium size by today’s standards.  The MSC Catania is 300 meters long and 37.8 meters wide, drawing 14 meters.  As a comparison, the Emma Maersk, one of the largest container vessels in the world, is 397 meters long and 56 meters wide and draws 15.5 meters.  Even today, larger ships are being built.  Even with the additional dredging, Jacksonville has a long way to go before the Emma Maersk graces their terminals.

The Obama Administration and Treasury officials will today announce details of  another plan to help rescue the US banking system.  The Toxic Asset Repurchase Program aims to help finance the purchase of $1 Trillion of toxic assets from banks.  The new program, under a new Public-Private Investment Program government organization,  has three key components:

1. Federal Deposit Insurance Corp.: The agency that insures deposits at the nation’s banks would operate auctions of troubled mortgage loans and then provide financing to the winning bidders. The FDIC would also share the risks if the mortgages fell further in value.
2. Term Asset-Backed Securities Loan Facility: A Federal Reserve-operated loan facility will receive $200 billion from the government’s $700 billion bailout program. That money will enable the Fed to support as much as $1 trillion in loans to investors who want to buy securities backed by various types of consumer loans in an effort to make auto loans, credit card debt and student loans more available. The TALF will be expanded to allow the Fed to provide loans to investors buying securities backed by residential and commercial mortgages.
3. Public-Private Investment Funds: The Treasury would launch these partnerships between the government and the private sector, with the government matching dollar-for-dollar money put up by private investors to buy toxic assets.

Unfortunately, it is unclear that this plan has any hope of success.  Specifically, the “Public-Private Investment Funds” (PPIF) concept that is intended to remove toxic asset from banks balance sheets seem fraught with problems.

PRICING - Let’s take a look at this specific component of the plan from a real estate practitioners perspective.  To begin with I, and most other real estate professionals, are bombarded daily with a  barrage of emails announcing new “distressed asset” funds that have been created.  I wish I had been keeping track since 2007, but I know that the total is well into the billions of dollars that have been raised.  These funds are specifically targeting the very same distressed assets that the PPIF program is targeting.  What is noticeably absent, however, are the emails that announce that any deals have actually been completed.

From my own experience trying to buy troubled assets, and those of the fund managers I have spoken with, I can tell you that capital is not the problem.  The problem, I have found, is that the banks are not willing to let the assets go at a price that makes the risk worthwhile to an investor.  Most of these assets are REO for a reason, and that reason has to be addressed before the asset will be successful.  If these were such great and performing assets the bank wouldn’t own them – they would still be in investors hands.  So, the PPIF has to address what price these assets will be purchased for.  

Today, without the government plan, if banks were willing to sell for a “market” price, which adequately prices the risk involved, there is a ready and willing pool of investors.  Tomorrow, with the government plan, the banks will still need to be willing to sell at a market price, even if the investors are getting a loan from the government.  That market value will most likely be less than where the bank has the asset on the books.  Until they actually sell, they can keep the assets on their books at a higher value (although still written down significantly).  Once the asset is actually sold, the market value is the market value and the “pain” is realized.  I know on all of the projects I have looked at, the value I underwrote to was +/- 70% of the “written down” bank book value.  This discrepancy could mean much more future pain for the banking system.

Low Leverage Amounts - As I read the announcement, the PPIF program will basically amount to 50% leverage.  It is unclear whether the government piece will be a loan, in which case any additional debt would be classified as a second mortgage.  If it is a loan, will the government subordinate their position to a traditional lender?  The other option would be that the government piece would be equity and the public-private partnership could then go put additional debt on the assets.  That would obviously be the better scenario.  Even in today’s difficult market, experienced real estate operators can get much better than 50% financing.  However, they wouldn’t be able to even come close to the low interest rate the government would (most likely) offer.  Does that low rate offset the low leverage ratio?  I doubt it.  Equity is always the most expensive piece of the capital stack.  Add more equity to a deal and the required rate of return goes up dramatically.

I recently had the opportunity to hear the Honorable John E. Sununu (Member of the Troubled Asset Relief Program Oversight Board) speak on the TARP program.  He indicated that the Public-Private program was going to take the form of a 90% government loan, matched with 10% investor equity.  Somewhere between last weeks speech and today’s roll-out, the plan changed.  However, given that the previous discussions had centered around a “loan” program, my guess is that today’s PPIF program will be a loan as well.

Lack of Trust - The lack of trust in the government is a big issue, and is one that John E. Sununu brought up as a reason for a lack of participation in TARP.  Our government has already shown a willingness and ability to re-trade the terms of the agreement under which banks accepted Stimulus Funds.  Under TARP they went back and placed tighter restrictions on executive compensation, dividend policies, acquisition programs, and share repurchase programs.  More recently, Congress voted to tax bonuses at a 90% level for those companies that accepted bailout funds.  All of these meaningfully influence the way the private sector operates their businesses.  And, they were all implemented after the initial agreement.  Anyone in real estate knows that the key to any partnership arrangement is trust.  If you don’t trust your partner, you are in for a miserable journey.  The fear is that the government isn’t a trustworthy partner.  The fear is that the government will, after the fact, impose significant limitations on how we operate our businesses.

Overall, I think this program has some very significant flaws.  Maybe it buys the administration a few points on the Dow today, but I doubt even that.  I think that the real estate professional has other, less restrictive, sources of capital available to them.  And that is assuming you can get a bank to agree to a market price.  In this economy, I’m not sure they are there yet and I don’t see anything in this program that will help incentivize them to sell at market.  

The banks are like the neighbor who wants to sell their house for $X when the market keeps telling them it’s worth $Y.  Yet, they just won’t sell.  As long as grandma keeps bailing them out and paying their mortgage, there’s no real incentive for them to let it go at a market price.  Until there is an incentive, all of the other neighbors point to that one house and say, “he’s selling his for $X, mine must be worth $X too”.  The buyers just roll their eyes and go find another neighborhood.

Mexico today announced that it would enact retaliatory tariffs on nearly 90 US industrial and agricultural products after the US abruptly cancelled a program that allowed some Mexican trucks to operate across the US border.  Mexico contends that in addition to just being unfair and unnecessary, the nullification of the program violated a section of the North American Free Trade Agreement that was supposed to have opened cross-border trucking years ago.  Gerardo Ruiz Mateos, Mexico’s economy minister, said ”We consider that this action of the United States is mistaken, protectionist and clearly in violation of the (NAFTA) treaty.”

“I deeply regret the action taken by the Mexican government and the harm it may cause to American businesses,” Senator John McCain said in a statement. “Unfortunately, this is a predictable reaction by the Mexican government to a policy that now puts the United States in clear violation of the North American Free Trade Agreement and was inappropriately inserted into the Omnibus appropriations bill. We must take steps to prevent escalation of further protectionist measures — actions that only serve to harm American business during these tough economic times.”

Hopefully, the US can find a way to work this out.  The program itself wasn’t even that widely used.  However, it was gaining popularity.  NAFTA remains one of the great assets to our country and its importance is only growing.  I’m not sure most lawmakers understand just what a vital program this is to US trade.

The Port of Charleston announced a new breakbulk/container service that will provide connectivity to several ports in the Middle East and India.  The “North America” service of the National Shipping Company of Saudi Arabia (NSCSA) will have a rotation that includes the ports of Jeddah, Jubail and Dammam in Saudi Arabia; Jebel Ali, United Arab Emirates; Mumbai, India; Port Qasim, Pakistan and Livorno, Italy.  

No indication was given as to the anticipated volume of the new service.  However, any win in this economy is a great win.  Keep up the good work Charleston!

For those that don’t think that sailboat racing qualifies as an “extreme” sport, check out the boys of the Volvo Ocean Race rounding Cape Horn in the link below.

http://www.volvooceanrace.tv/page/NewsDetail/0,,12573~1591823,00.html

Good stuff.

The dailypress.com website is reporting that an offer may be forthcoming this week from CenterPoint properties to privatize the Port of Virginia.  Their sources indicate that an offer may be delivered to Virginia Transportation Secretary Pierce Homer this Friday.  Although the Port was not actively soliciting bids, privatizing their operations is something they have been examining after Del. Harry “Bob” Purkey, R-Virginia Beach organized a special committee to vet the option.  It could mean a significant upfront payment from CenterPoint which could help to plug the budget gap and fund other necessary transportation improvements.  

However, privatization comes with several big question marks.  As it stand right now, Virginia International Terminals operates the Virginia terminals.  They are a state owned organization and are currently focused on increasing the amount of cargo that flows through Virginia.  If CenterPoint were to operate the terminals, that focus may change to protecting their financial bottom line.  However, the two are more closely aligned than you might expect.  Port rankings are typically done by TEU volume (VIT’s goal), and shippers follow activity (more customers for them to work with, choose from and steal) and that flows through to CenterPoint’s bottom line.  So, the higher Virginia ranks the more business it will do and (presumably) the more profit it generates for CenterPoint.  Everyone wins.  If Virginia does agree to do this, I would suggest they structure significant rent penalties for CenterPoint if TEU volume targets are not met.

CenterPoint is not new to the Virginia market as the Chicago based developer recently won approval last month for its $350 million industrial park in Suffolk.  Although they are majority owned by CalPERS, I am not familiar with their terminal operating capabilities.  They may be exceptionally qualified to operate a port terminal, I’ve just always known them as an industrial real estate developer.  

If the proposal does arrive as expected, I am sure it will spawn a lively debate.  It will be interesting to see both sides present their arguments in the coming months.  I’ll keep you posted…

Last week the Oakland Board of Port Commissioners approved a new partnership agreement for its Outer Harbor berths 20-24.  Under the first of its kind agreement, the Port of Oakland will partner with Ports America Oakland (itself a partnership between Ports America and Terminal Investments Limited) to develop and operate the berths.  Ports America will invest approximately $2.5 billion in the build-out of the terminal in exchange for the exclusive right to operate the terminal for a 50 year period.  

This is public-private partnerships at its best and truly is a win-win situation for both parties.  The partnership is expected to generate over 6,000 jobs providing over $100 million in direct personal income.  In addition, the Port of Oakland received a one-time, upfront fee of $60 million and will receive annual rent of approximately $19.5 million.  This will allow them to retire some existing bonds, saving almost $3 million a year of debt service.  Ports America gets access to some very scare waterfront land, in an established port location and will enjoy the full marketing efforts of the Port of Oakland.

Finally, in addition to the innovative financial structure, the new terminal will be one of the most modern and environmentally responsible in the world.  Ports America has indicated that they will utilize several of the environmental and operational best practices to reduce per TEU carbon emissions by as much as 90%.  Some of their strategies include using electric stacking cranes, ship-to-shore power, and scheduled pick-up and delivery times.  All of these will help to contribute to a terminal that is not only financial successful, but also a good neighbor to its community.

Let’s hope we see more of these partnerships in the future.

Well it looks like Unicorp, the developer of West Broad Village, has reached an agreement with Henrico County on how their tap fees are to be calculated.  Under the agreement, Unicorp will pay Henrico County $983,000 for the three connections that are already in place.  They will then take the balance of the payment due (+/- $2.517 million) and amortize it out over 36 years at an interest rate of Prime + 1%.  Seems like this might be a win-win for everyone.  Henrico County gets the tap fees that they are rightfully due and Unicorp gets to spread out their payments.

This week defense supplier Sparta Composite Products announced that they will be building a $13.2 million plant in Suffolk, Virginia.  In association with this new facility, Sparta will be creating approximately 200 new jobs over the next 5 years.  The new plant will be 67,000 SF and will be located in the Northgate Commerce Park.  The Company also has plans to build an additional 87,000 facility in 5 years.  Prologis will construct the building for Sparta on the land it recently purchased in Northgate.  Prologis had intended to develop speculative product at Northgate, but with its recent financial issues had decided to halt all new development nationwide.