New Risk Analysis Technology Factors in Basel II Capital Adequacy Requirements

Risk Integrated, a consulting and technology firm specializing in risk measurement for commercial real estate and project finance lenders, today announced the availability of its Profitability Analysis Program for commercial real estate. The service will allow banks or lenders to evaluate the risk in their portfolios and the effectiveness of risk decisions made using their present assessment methodologies. Through the service, Risk Integrated’s Specialized Finance System (SFS) will also help financial institutions assess whether they are prepared to meet Advanced Basel II capital adequacy requirements, due to be introduced by US regulators in January 2009.

By using Advanced Basel II compliant credit risk analytics, the Profitability Analysis Program will allow lenders to evaluate a block of ten commercial real estate investment deals, both as a portfolio and as individual deals. A number of large European banks have already successfully deployed Risk Integrated’s technology to satisfy regional regulators that they stand up to the stringent demands of this level of compliance.

Risk Integrated will offer the Profitability Analysis Program as a low cost, low risk stand alone service, without the need for implementation of the system. The results are generated as a report which provides an in-depth analysis of all commercial property deals including suggestions on how to improve their risk-adjusted profitability. The reports quantify the source of risk in the portfolio and the extent to which it is caused by lease structures, interest rates, tenant creditworthiness or exit risk.

The complete 60 page report includes the full detailed results for stress tests and risk statistics such as the probability of default, loss given default, Basel II capital and risk-adjusted profitability. Risk Integrated work with the bank’s analysts to load the necessary deal data and the entire analysis can be conducted within a few working days.

Dr. Chris Marrison, CEO of Risk Integrated, states: “This is an easy way for banks to gain a fast and effective insight into the nature of the risks in their portfolio and how those risks can be mitigated through careful deal restructuring. Following our success in Europe showing banks the way to gain Advanced Basel II compliance, we have extended our services so that other banks can also benefit from Risk Integrated’s expertise and technology. Regulatory issues aside, it has never been more important for lenders to have a deep insight into the overall risk of a basket of deals in order to see how market stresses can affect not just one deal, but the whole portfolio.”

Risk Integrated’s CTO, Dr. Yusuf Jafry, considers Profitability Analysis Program to be a natural evolution of the SFS product set: “For four years we have had SFS installed on clients’ banking systems and recently have also given access to the system via ASP. By adding this service we are widening our reach to offer invaluable stress testing and cashflow simulation technology to all commercial real estate lenders. With Basel II and the current flux in the real estate markets, the service is a quick and easy way to test the adequacy of existing risk measurement systems and to understand how to make their portfolios more profitable.”

American Financial Realty Trust bought out by Gramercy Capital

The wall street journal reported today,

"

Real-estate financier Gramercy Capital Corp. agreed to buy American Financial Realty Trust, a real-estate investment trust that specializes in properties leased by financial institutions, for about $1.1 billion in cash and stock.

The deal calls for American Financial holders to get $5.50 a share in cash and 0.12096 Gramercy share for every share of American Financial. That values each share of American Financial at $8.43 a share, a 31% premium over Friday's closing price.

Gramercy will assume about $2.3 billion in American Financial debt.

"

Office Market Show Signs of Slowing

By Jennifer S. Forsyth
From The Wall Street Journal Online

The amount of sublease office space available to tenants increased nationally for the first time in five years, an indication that commercial leasing is slowing in many markets across the U.S.

The increase demonstrates that many businesses related to home-mortgage lending have returned space to the market. It also shows that many industries are nervous in light of the credit-market turmoil and want to keep costs down as much as possible until they see whether the economy will slump further in coming months.

Sublease space, in which tenants lease their rented space to other tenants, usually at below-market prices, increased to 77 million square feet in the third quarter from 73 million square feet nationwide in the second quarter, according to data provided by Grubb & Ellis Co., a real-estate services firm based in Chicago. That marked the first national increase since the third quarter of 2002, when the economy was in recession after the dot-com bust and the terrorist attacks of 2001. In the third quarter last year, available space was 76.5 million square feet.

The amount of sublease space in a market can affect the extent to which landlords can push up rents, because their "direct" space is competing with short-term sublease space that is often much cheaper, and tenants have more bargaining power.

A total of 77 million square feet is only about half the amount that was available in the so-called shadow market at the bottom of the cycle in the first quarter of 2002 and shouldn't be reason for office landlords to despair. Yet, the increase in sublease space, combined with a national vacancy rate that remained flat or barely budged downward over the quarter (depending whose data are used), indicates the market could be softening, says Bob Bach, senior vice president of research for Grubb & Ellis.

Even so, rents continue to climb. Average effective rents -- the amount tenants pay after concessions -- increased 2.4% nationwide over the third quarter, according to Reis Inc., a real-estate research firm.

Yet, soaring rents over the past few quarters could be one reason that sublease space is on the rise. As costs increase, businesses may look to downsize or even move out of a market to save money even as they must still pay on their previous lease. "Some of it is part and parcel of a market when rents have been rising rapidly, and suddenly there's more uncertainty and caution," Mr. Bach says.

Such uncertainty is related to the continuing fallout from the home-mortgage industry. Many troubled lenders are closing branch offices, and home builders have scaled back their operations. Indeed, Countrywide Financial Corp., the nation's biggest home-mortgage lender, is putting as much as 200,000 square feet of office space in the Dallas suburb of Richardson, Texas, on the shadow market and another 5,000 square feet in nearby Arlington, according to Tim Terrell of Stream Realty Partners LP, who represents Countrywide.

Sublease space increased over the third quarter in 29 of the 47 markets that Grubb & Ellis monitors. While shadow space continued to drop in the strongest office markets, such as New York, Boston and San Francisco, Mr. Bach predicts that even those markets will start to see an increase in coming quarters.

In South Florida, one of the areas hardest hit by the housing crisis, sublease space in Miami-Dade County increased 28% over the past four quarters and increased 36% in Fort Lauderdale-Broward County over that time. Moreover, rising rents in Florida have been compounded by escalating insurance premiums for storm coverage and higher real-estate taxes because of the run-up in property valuations, forcing some tenants to look for cheaper space.

San Diego, where sublease space has increased 43% over the past four quarters, also has been hit hard by the housing crisis as well as an increase in office supply. Developers have added four million square feet of office space in the past few years. Thus, in some case, tenants are getting good deals on new space and subletting their older offices. "For the most part in San Diego County, there are a fair amount of opportunities in the marketplace today to leverage a transaction," says Brian Ffrench, a San Diego-based senior executive with Studley Inc., a tenant-representation firm.

Studley represented one law firm, Mintz Levin Cohn Ferris Glovsky & Popeo PC, in taking more than a floor of sublease space in the northern part of the county that was vacated by an investment firm that decided against maintaining so large an office in San Diego. That allowed Mintz Levin to get palatial offices at 20% below market rate.

In Orange County, Calif., where many of the mortgage brokers are based, the amount of sublease space on the market hasn't changed since this time last year, about 2.4 million square feet. That is because many of those lenders "threw in the keys," Mr. Bach says, and filed for bankruptcy. So the space is being marketed by landlords as direct space instead of sublease. The vacancy rate there ticked up 0.7 percentage point over the past quarter, Reis found.

Charlotte Market Roundup

From Coldwell Banker Commercial Market Intelligence :

Must Read for Real Estate Developers

Center for Community and Economic Development released a comprehensive report on their website helping Real Estate Developers, and entrepreneurs identify opportunities in small cities, and communities.

The report can be found here and explains in simple terms how to understand local demographics and consumer behaviors, as well as tracking real estate opportunities in revitalizing downtowns, and central business districts.

This report is a must read for any real estate developer looking to maximize on local tax abatements and benefits as well as ensuring you don't miss out on opportunities.

Charlotte leads in lowest office vacancies

Condo Conversions Switch Gears to Go Commercial

The strength of Manhattan’s commercial property market is causing developers to rethink plans to convert aging office buildings into residential condominiums, and some are deciding to sell buildings outright to developers that specialize in commercial projects.

The International Toy Center, a well-known building on Madison Square Park, is the latest example of a reverse in the residential conversion trend. In a deal announced Monday, the building is being sold for about $500 million to the L&L Holding Company, which will reposition it as Class A office space.

The site, used by designers and manufacturers in the toy industry, was purchased more than two years ago for $350 million by the Chetrit Group, a development company. But Chetrit had trouble getting all of the tenants out and had to deal with several lawsuits. Now, it has decided against converting the 800,000-square-foot building into condos.

The seemingly insatiable appetite for luxury condos over the last few years enticed developers to buy old Class B office buildings and spend hundreds of millions of dollars on conversions. Others have been building new condo towers in areas of Manhattan that had long been considered inhospitable to high-end residential uses. But with the commercial market tightening and construction costs rising, a handful of developers have changed course in the last six months.

“It’s the perfect situation for us,” said Robert T. Lapidus, president and chief investment officer of L&L, a privately owned real estate investment firm that specializes in commercial property. “Big blocks of office space are rare in Manhattan, so we looked at this solely as an office property.” When asked about tenants still in the building, Mr. Lapidus said that the seller was obligated to deliver the property vacant.

He added that the deal is expected to close this month and that asking rents will be in the middle $70s to low $80s a square foot.

The Toy Center will undergo major renovations, Mr. Lapidus said. The planned upgrades to the 1912 building include turning the interior courtyard into a series of hanging gardens, and possibly installing a sky lobby on the top floor, with elevators that would take tenants to a roof garden.

Chetrit also owns an adjacent building, 1107 Broadway, which is connected by a sky bridge but was not part of the sale. Mr. Lapidus said he believed that 1107 Broadway would be sold as well, although L&L was not interested, believing it was not well suited to offices. Mr. Lapidus speculated that it would better serve as hotel property.

David Levine, vice president of Chetrit, said that the company had sold the Toy Center to L&L because it was a “unique opportunity,” but that his company was going forward with residential plans at 1107 Broadway “for now.”

Another large block of space that had been earmarked for conversion to condos but will remain commercial is at 636 11th Avenue. Cushman & Wakefield, the commercial real estate company, recently began marketing the 530,000-square-foot building, owned by the Hakimian Organization, as office space for about $50 a square foot.

Formerly the headquarters of Global Crossing, a high-speed communications company that went bankrupt, the building has been empty for two years. Hakimian announced in the fall of 2005 that it would create 450 apartments, but decided against a residential conversion about six months ago.

The 11-story building overlooks the Hudson River and the home of the Intrepid aircraft carrier and museum; the carrier is docked in Bayonne, N.J., for repairs. The building occupies the entire block on 11th Avenue from 46th to 47th Streets. The large floor spaces, covering as much as 72,000 square feet on a single floor, would have made for a complicated condo conversion, but they are attractive to office tenants. The lobby will undergo a major renovation, and 70,000 square feet will be developed for retail tenants.

That is not to say that Hakimian has given up entirely on residential conversions, however. In a joint venture with Peykar Brothers Realty, Hakimian bought 75 Wall Street for $185 million in December 2005. The former headquarters for JPMorgan Chase, the property is a 36-story, 660,000-square-foot building that will become a hotel with 250 rooms and 350 condos on floors 20 to 36. “Structurally these buildings are very different,” Rex Hakimian said. “Eleventh Avenue is shorter and wider; 75 Wall is taller and thinner. It was a tough decision on 11th, but the commercial market is so strong, the numbers made more sense to go commercial. But 75 Wall is an exceptional building. The smaller floor plate and high ceilings — it’s as if it was built to be converted.”

Macklowe Properties also recently decided against converting 510 Madison Avenue at 53rd Street into condos. The site had been entirely demolished and a condo tower was going to be built. Instead, it will become a 30-story, 350,000-square-foot office building. It is expected to be ready for tenants by the third quarter of 2008.

A parcel of land owned by Robert Gladstone of Madison Equities on Eighth Avenue from 54th to 55th Streets had been slated to become a mixed-use residential development. Instead, Mr. Gladstone partnered with Boston Properties and acquired an adjacent property and some air rights, and all of it will become an 850,000-square-foot office building with retail businesses on a 50,000-square-foot parcel of land.

Because of the high costs of building luxury condominiums, a developer needs to sell the apartments for high prices, said Brian Ezratty, vice president of Eastern Consolidated, who helped broker the deal. But Eighth Avenue may not attract wealthy buyers, he said.

The area has recently experienced a sharp rise in office rents, however, and putting up an office building carries much less risk for the developer, Mr. Ezratty said.

Diesel USA, the Italian clothing company, bought a 100,000-square-foot building at 220-230 West 19th Street last fall; the site had been undergoing a condo conversion by its owner, Robert Gans. But he received an attractive offer from Diesel, which paid $53 million to turn the 12-story building into its headquarters and showroom.

“It was easier this way,” said Marcia Rose Yawitz, another broker with Eastern Consolidated. “He owned the property for a long time, and it needed to be totally renovated. This was a fast and easy deal.”

Newmark Knight Frank has also decided against turning the top floors of 40 Worth Street, from Church to West Broadway, into condos. The 700,000-square-foot property will be renovated for offices when city agencies move out this spring. Newmark Knight Frank’s construction division, founded 10 years ago, has converted 26 commercial properties totaling more than seven million square feet, creating approximately 5,400 residential units, mostly in Lower Manhattan.

The commercial market “has a shortage of large blocks of space, and this is a large block of space,” said Barry M. Gosin, chief executive of Newmark. “Part of the problem with condos is, you sell it and pay taxes and you don’t have the building any more. If the economics are close, we’d rather own the building.”

http://www.nytimes.com