Commercial Real Estate Blog

In what is one of the most fantastic days in modern financial history, Lehman looks to be headed into bankruptcy as potential suitors Barclays and Bank of America have walked away. Meanwhile, Bank of America has reached an agreement to acquire Merrill Lynch.

These two moves likely won’t be the last as attention will likely next turn to Washington Mutual in the coming next week or two. Attracted to Washington Mutual’s strong and well-located branch network, it’s likely a suitor will be found to take over. My money is on JP Morgan Chase to do that deal.

Westfield Valley Fair, the 1.5 million square feet mall on the border of Santa Clara and San Jose will break ground on a 500,000 square foot expansion in January. At $809 per square foot excluding anchors, the mall is one of the best performing shopping centers in the United States ringing up sales almost twice as high as the national average. The project, which was acquired in the late nineties by Westfield is looking to make the following improvements over the next few years:

• New Safeway and Long’s Drugs (replacing the current older structures) at Winchester and Stevens Creek
• New Washington Mutual and Bank of America (replacing existing structures) at Winchester and Stevens Creek
• Existing parking on Stevens Creek Blvd. will be demolished and make room for new anchors, shop space, and an additional 3,000 spaces (some of hwich will be on Monroe Street).

The Mercury News is reporting rumours that Bloomingdale’s and Neiman Marcus will be new anchors to the center. I’m not sure about Neiman Marcus, but about two years ago I heard that Bloomingdale’s was not interested in renewing its lease at Stanford Shopping Center, giving credence to the rumour. Neiman Marcus just signed a lease for a 100,000 square foot store at Broadway Plaza in Walnut Creek.

In commercial real estate, the best buildings tend to maintain the highest levels of occupancy, even in a downturn. As the market softens, tenants try to take advantage by moving into better buildings.

I suspect what we’re seeing right now in banking will be similar to what happens in commercial real estate. As the media continues to put a spotlight on troubled financial institutions, depositors in those banks are very likely to withdraw their funds and seek a safe-haven. That safe haven is likely to be this country’s largest banks, such as Bank of America, Chase, Citibank, and Wells Fargo. Bank of America alone, for instance, holds about 8-10% of this nation’s deposits.

Most of Silicon Valley has been unscathed by the sub-prime mess with bank-owned homes being a fairly uncommon site (with the exception of East San Jose). Lately however we have been finding more and more bank owned properties in more exclusive neighborhoods. For the past several years finding a bank-owned property in Los Gatos, Saratoga, Palo Alto, or San Francisco would have been very rare. While the number of properties coming on the market that are REO in these markets still remains low, we have noticed a few cracks begin to show in these high end markets.

What we have also noticed is that there is a fair number of NoD (notice of defaults) occurring in some of these higher end markets as well. The numbers are still insignificant in these particular markets to have any material impact as the market remains hot enough to allow people in trouble to get out safely, it is something to keep a close eye on as some good opportunities might be arising very soon.

Some of the sites for the lenders which they list their REO properties on include:

Bank of America REO

Countrywide REO

Wells Fargo REO

Bank of America, Citigroup, and JP Morgan are expected to announce as early as today the establishing of an $80 Billion Commercial Paper fund. The fund is aimed at helping unlocking the asset-backed paper market from its current condition.

The fund might also help avoid units setup to provide subprime debt from selling off their assets at “fire-sale” prices. The several months subprime lending has become essentially not available with lending for things such as vacant buildings extremely difficult to place.

My guess is the $80 Billion funds initial goal will be to inject confidnece into the marketplace so that prices of commercial paper stabilize and provide reasonable exist for the investment vehicles that originally issued or purchased the debt.