I was invited to speak to the 6th grade class at Mountain Brook Elementary to discuss our redevelopment  of the former PT’s/Mexico Lindo property aka ‘the Hollywood’ and to conduct a survey of the type of tenants they’d like to see in the project.

The kids were prepared with great, insightful questions.  They each took home a survey prepared by Ms. Millhouse for the kids and their parents to vote for a restaurant catagory they’d like to see in our center.  A week later, they presented me with the results.

You can see their report by clicking here:

*****the Hollywood MB Class results*****

Thanks to all the kids, parents and their teachers for your input.  Keep watching this blog and we’ll keep you updated on our progress!

Thanks to the Birmingham News for the article:

Development planned at vacant site on 280

By Dawn Kent — The Birmingham News

September 18, 2009, 5:30AM

Development plans are in the works for a high-profile slice of property along U.S. 280 between Homewood and Mountain Brook, the former site of three popular restaurants.

Shannon-Waltchack Investment Real Estate has a contract to purchase the empty retail strip at 400 Hollywood Blvd. that used to hold PT’s Sports Grill, Mexico Lindo and the Coffee Shoppe. The businesses vacated the area about three years ago to make way for a luxury condo project, Montelena, that never materialized.

Len Shannon, left, and Derek Waltchack of Shannon-Waltchack Investment Real Estate, plan to redevelop a vacant retail site on Hollywood Boulevard, near U.S. 280, Homewood and Mountain Brook. (The Birmingham News / Frank Couch)

 

Firm principals Derek Waltchack and Len Shannon are exploring interest among retailers to shape their plans for the property.

The buildings on the site could be razed to make way for a stand-alone retail use, such as a drugstore a restaurant, or for a four- to five-story office building with retail on the ground level.

The firm also may opt to rehab the existing buildings and bring in new tenants.

Either way, the site offers great potential for whoever ends up on it, Waltchack said.

View the map as a PDF.

The 1½ acres is in the Birmingham city limits but surrounded by the high-end enclaves of Homewood and Mountain Brook. At the same time, it’s visible from busy U.S. 280, which carries about 85,000 vehicles a day.

“It’s the gateway to Mountain Brook and Homewood, smack dab in the middle of those two cities,” Waltchack said. “It’s a once-in-a-generation kind of opportunity.”

Development at the site also will remove an eyesore from the highly-traveled corridor. The buildings that housed the restaurants are still standing, but they have been vandalized and attacked by the elements.

Despite the sluggish economy and a general reticence among retailers to expand, Shannon-Waltchack’s plans are generating a lot of interest.

The firm’s signs have been up on the property for about two weeks, prompting a flood of calls, including those from former tenants, Waltchack said. He also has traveled to Nashville to meet with retail prospects for the site.

Shannon-Waltchack is buying the site from its owners, the Mazer family, and plans to close in three to four months, Waltchack said.

Inkana Development had planned a seven-story, $50 million condo development at the site but pulled the plug on the project in early 2007 amid a slump in the market. The firm, which was partnering with the Mazers to develop the condo building, marketed the units in part by using a 100-foot crane to raise a platform and give prospective owners a 360-degree look at their view if they bought a condo.

Inkana said it didn’t get enough pre-construction contracts to proceed.

Join the conversation below or e-mail Kent at dkent@bhamnews.com.

Much has been made in the media about the coming collapse of Commercial Real Estate via problems with CMBS loans. Protective Life reported an excellent quarter today and I though it was interesting to see how their $1.1 Billion CMBS portfolio was performing.  To date, no real spike in problems.  Maybe they haven’t hit yet? Maybe PL is a good lender who hasn’t made many bad loans?  Maybe its overblown?  Time will tell….

A couple months ago a local broker emailed this document to me: Trammell Crow-Lessons Learned (click here to download) He said it was a must read, very applicable to our current state of the market.   After digesting the 90 pages, I felt like someone from the past had just sent me a ‘How to Survive in a Real Estate Slow Down Manual’ with the subtitle of ‘learn from my mistakes’.  For CRE nerds like me the info contained is pure gold and amazingly prescient.

The Background: during the late 80’s Commercial Real Estate in Texas and the Southwest went though a complete melt-down.  I won’t go into the history of that event, but right in the middle of it all was Trammell Crow.  They had offices in all the major cities with an inventory of hundreds of properties suffering.  In 1989 the head honcho at TC sent a memo around to all operating partners in the Southwest requesting a brain dump of all the things they did right and wrong during the slowdown.  Essentially a list of lessons learned. 

After reading this I was struck by how quickly our industry forgets things (20 yrs) and how history always repeats. I encourage all of you who are owners, brokers, bankers or investors in CRE to read this document and benefit from those that have already walked down the path we are now on.

For those of you who don’t have the time or would like the ‘Cliffs Notes’ version, here are my top take aways (quotes from the many memos):

• Pride kept us from cutting projects, debt, rents, and overhead in a timely manner (psychologists have proven that human psyche will take enormous risks before it will admit to a loss – “press the bet on the last hole” – “hidden odds for the house in Vegas” – etc.).
• Certainly, a good market tends to hide ones mistakes while a bad market overly dramatizes them.
• Doing or buying marginal deals because the money was available.
• Keep a conservative strategy as to bad times.  Generally, we did not know we were in a bad market until it was very bad.  Remember, it doesn’t pay to say “it can’t get worse or last much longer”.
• Make every deal at the best rate you can.  The deals we made in the early months of the downturn now look like great deals in retrospect.  At the time we did not feel good about most of them, but today they are our best deals.
• Lease, lease, lease – keep your building lease.  Occupancy helps cover taxes, insurance and other costs that we pay during vacancy.
• Don’t believe that just because rents have gone up at 5% per year for five years that they can’t or won’t drop 25% in one year.
• Don’t put too much faith in a single lender.  Despite the myth, large banks do fail and the new guys are not necessarily fair to you just because you are their customer.
• Don’t buy too soon when things are going down.  For example, we offered a contract for $22 per square foot in 1987 that we’ll probably get for $17.50 per square foot this year.
• First markdown is the smallest.
• Do not lag a market decline in rental rates for signing leases.  If rents are falling, address it quickly.  The longer you wait, the more expensive it gets.
• Work renewals hard and early.
• Do not do a project just to do something – maintain careful underwriting standards.
• Take more aggressive position with banks and other lenders sooner as opposed to later
• Be willing to make the tough decisions on projects and personnel.  The first markdown is the least expensive.
• One bad project can make up for five good ones.
• When the office, retail and industrial absorption softens and rental rates decline, the land values decline at an even greater rate.
• Do fewer deals and do them better.
• One way to stay financially healthy is to “sell too soon”.
• We made a bet that the market would come back in 3 years and tried to bottom fish.  When you don’t have staying power and the market stays bad, you turn into the fish.
• We made a bet that there is a reasonable sale market at all times in any market.  We have found that just when you most need to sell there is no market.

And I love this one……

• Without question our perceived need to keep busy (working, deals, leases, etc.) caused us to spend and commit unnecessarily.  We would have been far better off to have played golf on some days rather than doing a deal.

Below is a letter I sent to the Birmingham Business Journal to accompany their Annual Commercial Real Estate Deal of the Year Award:

“My nomination for the Commercial Real Estate deal of the year? The one that didn’t happen. This year has reconfirmed that old axiom that occasionally the best deal you did is the one you didn’t do.

I can think of a number of announcements I read nine months ago for new class A office buildings, retail centers, and industrial projects that were to break ground this year, only to be shelved for now. These projects may not have happened due to lackluster lease-up, difficulty in arranging financing, higher than expected construction costs, or just a negative “gut feel” by the developer. How smart do they look now? I can assure you that those developers and their lenders are thanking their lucky stars that they didn’t break ground.

Taking it a step further, the owners of the existing supply of buildings here in Birmingham are also thankful there isn’t more competition coming online. And that’s one of the great things about Birmingham, we’re not a boom/bust town like our larger sister cities. Our developments have been built by mostly home-grown folks who have a good feel for what our market will bear. We don’t seem to attract as many out of town developers and therefore have less volatility.

You’ll read a bunch over the next year about the coming Commercial Real Estate bust that will follow the residential melt down. While I can see how many of the Commercial Mortgage Backed Security Loans were aggressively underwritten over the past few of years, I don’t think we have an excess supply problem. To put it another way, in past CRE downturns, developers sewed the seeds of their own demise by overbuilding. This time is different as supply and demand were in equilibrium for the most part when we entered the recession. It will be interesting to see how this plays out.

It is my belief that if you were a smart shopper during the past 5 years, you didn’t overpay based on rosy rental assumptions and you didn’t over-borrow, you should be fine. Conversely, if you bought a deal that only works if rents grow, you are going to feel some pain when your loan renews. It all goes back to being conservative, planning for the worst and hoping for the best.

So congratulations to all the winners listed in this edition and an honorable mention to those of you who had deals that you didn’t do!

Derek Waltchack is a principal at Shannon l Waltchack Investment Real Estate, a local company that aquires, develops and manages commercial real estate. He can be reached at dw@shanwalt.com.”

Sovereign Wealth Funds (SWFs) are expected to become one of the most significant investors in the world’s commercial property markets, potentially investing as much as $725 billion during the next seven years, according to a new global report from CB Richard Ellis Group Inc.

Although more than half of the SWFs are believed to already hold direct commercial real estate investments, allocations to the sector are expected to rise substantially. The potential impact on the global real estate market is significant.

“With nearly $4 trillion of total assets currently under SWF control, a 7% allocation would mean worldwide commercial real estate investments totaling $280 billion,” said Ray Torto, chief global economist at CB Richard Ellis. “To put this number in context, the entire U.S. institutional-grade property portfolio owned or managed by investment managers and plan sponsors is valued at approximately $330 billion today.”

“Looking to the longer term, the SWFs’ potential for future property investment is even more significant. It has been estimated that the SWFs could reach total assets of $12 trillion by 2015,” Torto added. “A 7% allocation implies SWFs would make approximately $725 billion of net property investments over the next seven years.”

The influence of SWFs should be felt across the world. In order to achieve target allocations, SWFs will need to diversify future investment widely across geographies, sectors and investment vehicles. Thus far, SWF property investments have been largely concentrated in the U.S. and the Middle East.

“Although SWFs are likely to continue to focus on core real estate product in major markets, they will have to put capital to work in new geographies and emerging sectors. Favored future destinations are expected to include Japan, the U.K. and other countries with currencies that are not held in the SWF’s foreign reserves,” said Michael Haddock, director EMEA research at CB Richard Ellis.

“However, SWFs will have to look to both the indirect investment market and the debt market to fully meet their objectives in the real estate sector,” Haddock added. It is also very possible that we will see outright acquisitions of property companies – listed and unlisted – as a way of assembling a significant direct real estate portfolio rapidly as well as acquiring the property management infrastructure to go with it.”

Based on the SWFs’ existing approach to, and established investment profile in real estate as well as the experience of other major real estate investors, CB Richard Ellis estimates that the SWFs’ projected new investment is likely to be distributed as follows:

“Direct investment is expected to continue to make up the largest portion of the SWFs’ real estate exposure, but as they venture into more locations and more sectors, they will increasingly follow alternate routes into these markets. In particular, unlisted property funds will attract a growing proportion of the SWFs’ real estate allocations,” Haddock said.

….Source Co-Star http://www.costar.com/News/Article.aspx?id=98DBFFA0C1EE3BCC5F0253B04DB438F3#num4

The Wall Street Journal stated, despite declining property prices and the weakening economy, the nation’s commercial real estate sector appears to be holding up. According to Moody’s Investors Service, upgrades of bonds and structured products backed by U.S. commercial property mortgages outnumbered downgrades in the first six months of this year, although the vast majority of ratings actions were affirmations. Moody’s upgraded 234 portions, or tranches, of debt and downgraded 123, while affirming 1,452 tranches of such notes.

Overtime some advice and commentaries prove to be vastly more accurate and prescient than others.  One guy I follow very closely is Bill Gross, Managing Director of Pimco, a global investment management firm with more than $829.5 billion in assets.  He writes a monthly investment outlook that can be read on their website or can be downloaded on Itunes.   

You’ll find it not to be the easiest read, but well worth your time: http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/Investment+Outlook+Bill+Gross+Mooooooo+August+2008.htm

A couple months ago I posed the following question during an office meeting:  “what effects will a higher than normal inflation environment have on Real Estate Investments in general and on our portfolio specifically?”  We came up with a few answers that fell into 2 categories: postive and negative.   On the positive side, by owning existing buildings, you are at an advantage vs. to-be-built buildings as they will cost more to build given the effect of inflation on construction materials.  On the negative side, if you are holding properties with long-term, flat leases, the dollars that you put in your pocket after paying the mortgage will be worth less each year though no less in absolute dollars. 

And as if Mark Heschmeyer was in the room with us that day, he wrote this_article.

DW