Archive for February, 2011
Sam Chandan PhD, Global Chief Economist of Real Capital Analytics
Against the backdrop of a tentative recovery in the domestic economy, continued inertia in the nation’s employment trends, and an element of dysfunction in the nation’s capital, headline measures of activity in the commercial real estate investment marketplace have improved markedly over the course of 2010. Through November, sales of significant commercial properties had handily surpassed $90 billion dollars, on pace to double by year-end the cyclical low of $54 billion in activity measured in 2009. Looking forward into 2011, improving price discovery amongst buyers and sellers in leading markets, coupled with stabilizing property fundamentals and a significant improvement in the terms of credit, portend further gains in the most visible metrics of market health. Barring ineffective management of the downside risks to the economy’s modest baseline trend, the sector’s equity and debt markets are on much stronger footing than a year ago.
An Uneven Recovery
Notwithstanding very welcome indications of stabilization, the industry’s headline statistics belie a striking and persistent unevenness of the recovery in investment and credit trends. In a flight to quality, investors over the last year have focused their efforts on acquiring assets in the nation’s most visible and most liquid markets. This focus has resulted in a concentration of capital in a small subset of markets, New York City, Washington, DC, and San Francisco foremost amongst them. It is in these markets that competition for assets has been most intense, supported by a diversity of domestic and foreign investors, the former frustrated by the absence of opportunities in distress and the latter less dependent on mortgage financing.
The national increase in transaction volume and positive momentum in pricing are overwhelmingly reflective of outcomes in the few markets where the uncertain national economic outlook has fomented large liquidity premiums. Elsewhere, price discovery remains severely hampered by a paucity of investor demand for properties and continuing and sometimes severe constraints on the availability of credit to finance new transactions or refinance maturing debt. A key question for the new year will be whether economic and labor market conditions improve to a degree that investors will take up investments in smaller markets or if exaggerated spreads will be required to induce capital inflows.
Credit Markets Ease
Underpinning gains in major markets and for the highest quality properties, the availability of credit in support of significant property sales, as well as for the refinancing of maturing debt, has improved sharply in recent quarters. Buoyed by the aforementioned pricing trends and nascent recovery in property fundamentals in major markets and some property sectors, a broader range of lenders – including CMBS conduit originators, foreign banks and life companies – has reengaged with commercial real estate investors in the latter half of the year, albeit on terms that remain conservative by historic standards and even as smaller banks have curtailed their lending. This improvement in mortgage availability has been amongst the necessary conditions for a broader move towards normalization in the sector’s capital markets.
Coinciding with the improving position of many lenders, the dominant role of agency financing in the apartment sector has moderated as other institutions have begun to compete more aggressively for lending opportunities. In major markets, in particular, institutional and securitized lenders’ readiness to provide new acquisition financing on performing assets has supported the shift in investor activity away from the agency and private buyers that dominated activity in 2009 and early 2010, and towards sales of larger core properties in the nation’s leading markets. The improvement has pushed new acquisition financing to 35% of loan originations in 2010, up from 32% in 2009 when the balance weighed further in favor of refinancing activity. This trend will continue into 2011, albeit unevenly.
A Plateau in Distress
An important facilitator of this healthier new acquisition financing environment —additions to distress nationally fell to their lowest levels in two years in the third quarter of 2010, reflecting a slower pace of deterioration in legacy mortgage pools and the positive impact of more stable economic and credit market conditions. The default rate for commercial real estate mortgages held by the nation’s depository institutions—including mortgages at least 90 days delinquent and mortgages in non-accrual status—increased to 4.36 percent in the third quarter of 2010, up from 4.27 at midyear. While the default rate continues to trend higher, the most recent increase is the second smallest in three years.
Including $4.3 billion of new trouble in September, third quarter additions of $13.7 billion were down by 60% from the second quarter and by 61% from the same quarter one year ago. For the first time this cycle, workouts of distress – including resolutions and restructurings of troubled loans – almost fully offset additions over an entire quarter, even though workout activity declined modestly. As a result, the third quarter’s net increase to outstanding distress was just $2.4 billion, the smallest rise since 2007. The pool of lender real estate owned (REO) property increased by $1.2 billion over the same period, measuring its smallest increase since Q2’08. The current trend – if not disrupted by inadvertent policy or economic shocks – suggests that distress may be nearing its inflexion point, with workouts poised to overtake new additions even as larger numbers of CMBS loans reach maturity and face challenges in refinancing.
Risks from the Overhang of Unresolved Distress
Of course, slower inflows to distress and the absence of distress investment opportunities do not mean that deteriorating mortgage performance is not a feature of the market landscape. Rather, distress has been heavily intermediated, left unresolved or residing on bank balance sheets. As of late 2010, there is almost $200 billion in unresolved and unattended distress in US commercial real estate. The question of how we manage to draw down these balances when some of the most aggressively underwritten loans will only reach problematic maturity dates in 2011 and later should be a key source of concern. While a sudden outpouring of distress will inevitably provide opportunities for distress investors, it will do so by undermining the price stability that has been crucial in driving improvements in sales and credit.
Dr. Sam Chandan is Global Chief Economist of Real Capital Analytics and an adjunct professor at the Wharton School of the University of Pennsylvania. Chandan holds a PhD in applied economics from Wharton and was a doctoral scholar at Princeton University. His complete biography is available at www.chandan.com.
Michigan Small Business and Technology Development Centers land $1.6 million federal grant to drive job growth
$1.6 million in federal money will enable Michigan’s Small Business and Technology Development Centers to boost their ability to aid small businesses.
The two-year grant will go to hire nine financial and strategy consultants to work with SBTDC clients around the state to sharpen their financial management and strategic planning.
Consultants will work with small businesses that are in a growth mode and want to diversify, and need some assistance identifying the future and how to get there, said Teresa Sickles, a manufacturing and financing tools specialists with the Michigan SBTDC.
“They’ve evolved to a second-stage business to where they are taking it to the next level and where they are saying, ‘We really want to grow that business,’” Sickles said.
The grant was available through $50 million allocated in the Small Business Jobs Act of 2010. The Michigan SBTDCs are among the first in the U.S. to receive the federal funding.
Read more at mlive.com.
By Mark Sanchez, Business Review West Michigan.
Tuesday, January 18, 2011
Michael Shore, MEDC
MEGA board action projected to generate $89.4 million in new private investment
The Michigan Economic Growth Authority (MEGA) today approved tax incentives for nine companies choosing to expand or locate in Michigan. According to the companies’ estimates, the approved projects are expected to generate up to $89.4 million in new private investment, and create and retain a projected 1,222 direct jobs in communities across the state.
“As we work to foster business opportunities across a wide spectrum of sectors, we’re using every tool in our economic-development arsenal to leverage the kinds of public-private partnerships — like the ones announced today — that attract investment and create jobs for Michigan workers,” said Michael Finney, President and CEO of the Michigan Economic Development Corporation (MEDC).
The MEGA board approved incentives to win the following projects for Michigan over competing states and countries:
- Avon Protection Systems Inc. — The wholly owned subsidiary of Avon Rubber and the manufacturer of gas masks plans to invest $600,000 to expand production of gas masks for first responders, as well as specialized filters for the military, in Cadillac. The company expects the project to create up to 143 direct new jobs. Based on the MEDC’s recommendation, the MEGA board today approved a state tax credit valued at $596,354 over six years to convince the company to expand in Michigan over a competing site in Maryland. The City of Cadillac is considering an abatement in support of the project. http://www.avon-protection.com/
- Changan US Research and Development Center Inc. – The new-to-Michigan auto company is fully owned by Changan Automobile Co. Ltd., one of the largest automakers in China. The company plans to invest $7 million and lease a facility in Plymouth Twp. to conduct analysis, testing, simulation and verification activities for the auto industry. The company expects the project to create up to 161 direct new jobs. Based on the MEDC’s recommendation, the MEGA board today approved a state tax credit valued at $1.7 million over seven years to convince the company to locate in Michigan over competing sites in Ohio, California and China. The Charter Township of Plymouth is considering an abatement in support of the project. http://www.globalchana.com/
- Chemetall US Inc. – The developer, manufacturer and supplier of state-of-the-art specialty chemicals plans to invest $20.7 million to build a new manufacturing facility in Jackson. The company expects the new plant to retain up to 74 existing jobs. The plant will be the largest plant in the company’s history, occupying 200,000 square feet with room for expansion on 40 acres. Based on the MEDC’s recommendation, the MEGA board today approved a state tax credit valued at $810,511 over five years to support Chemetall’s decision to base its operations in Michigan over competing sites in Indiana and Kentucky. Blackman Charter Township is considering an abatement to further support of project. www.chemetallamericas.com
- Crain Communications Inc. – One of the largest privately owned business publishers plans to invest over $3.6 million in facilities and website development over the next several years at its Detroit location in a major expansion of its AutoWeek.com website. The company expects the project to create up to 50 direct new jobs during this time. Based on the MEDC’s recommendation, the MEGA board today approved a state tax credit valued at $443,229 over five years to convince the company to expand in Michigan over a competing site in Illinois. The city of Detroit is in support of the project. http://www.autoweek.com/ and http://www.crain.com/
- The MACOMB GROUP – A premier distributor of pipes, valves, fittings, and related products plans to invest $6.5 million to consolidate its four metro Detroit facilities into one significantly larger Sterling Heights location to eliminate redundancies, increase its fabrication capabilities, and improve operational efficiencies. The company expects the project to retain 107 existing jobs with an eye toward continued future growth. Based upon the MEDC’s recommendation, the MEGA board today approved a state tax credit valued at $1 million over six years to help convince the company to expand in Michigan over a competing site in Ohio. The city of Sterling Heights is considering an abatement in support of the project situated within their SmartZone. http:/www.macombgroup.com/
- Macprofessionals Inc. – The company with the largest staff of Apple-certified technicians in the United States plans to invest $2.2 million to expand in Novi to support significant growth in its operations. The company expects the project to create up to 119 direct new jobs. Based on the MEDC’s recommendation, the MEGA board today approved a state tax credit valued at $568,578 over five years to encourage the company to expand in Michigan over a competing site in Texas. The city of Novi is supportive of the project. http://www.macprofessionals.com/
- Martinrea Jonesville LLC – The tier one automotive supplier of underbody components plans to invest $15.9 million in a 50,000 square-foot expansion at its current facility in Jonesville. The company expects the project to create up to 168 direct new jobs. Based on the MEDC’s recommendation, the MEGA board today approved a state tax credit valued at $989,769 over five years to encourage the company to expand in Michigan over a competing site in Mexico. The village of Jonesville is considering an abatement in support of the project. http://www.martinrea.com/Public/Home.aspx
- MTU Detroit Diesel Inc. – The manufacturer and servicer of diesel engines and propulsion systems for off-highway applications such as marine, rail, defense vehicles and power-generation systems plans to invest up to $32 million to retain its headquarters and to establish a logistics center as well as a potential future training center. The logistics center would locate in the Charter Township of Brownstown. The company, which is owned by Tognum AG, Germany, expects the project to create up to 115 direct new jobs and retain 245 existing jobs. Based on the MEDC’s recommendation, the MEGA board today approved a state tax credit valued at up to $7.5 million over eight years to encourage the company to expand in Michigan over a competing site. http://www.mtu-online.com/mtu-northamerica/mtu/mtu-in-north-america/
- NU-VU Food Service Systems – The manufacturer of commercial food service equipment plans to invest $950,000 to expand its operations in Menominee by purchasing the assets of another company. The company expects the project to create up to 40 direct new jobs. Based on the MEDC’s recommendation, the MEGA board today approved a state tax credit valued at $90,201 over three years to encourage the company to expand in Michigan over competing sites in Vermont and Illinois. The city of Menominee is considering an abatement in support of the project. http://www.nu-vu.com/
The Michigan Economic Growth Authority (MEGA), the state’s response to interstate competition for company expansions and relocations, may provide a refundable tax credit against the Michigan Business Tax (MBT) to companies expanding or relocating their operations in Michigan. Tax credit agreements, awarded on the basis of the company’s strength of project, program guidelines and MEGA board approval, are earned over time by a company’s performance in meeting specified investment and hiring requirements.
Companies eligible for a MEGA Employment Tax Credit against the MBT are those engaged in manufacturing, mining, research and development, high technology, wholesale and trade, film and digital media, office operations, and tourism projects as defined by state law. Generally, retail facilities are not eligible. A company may receive a MEGA agreement specific to its circumstance, as defined in statute as High Tech, High Wage, Retention, Standard or Rural MEGAs.
The MEGA board is also empowered under statute to award Brownfield Redevelopment tax credits to support new business expansion projects on property that is contaminated, blighted or functionally obsolete.
Further details on the MEGA MBT tax credits are available online:
The Michigan Economic Development Corporation, a partnership between the state and local communities, promotes smart economic growth by developing strategies and providing services to create and retain good jobs and a high quality of life. For more information on the MEDC’s initiatives and programs, visit the website at www.MichiganAdvantage.org.