A CRUCIAL TEST FOR A COMMERCIAL BROKER

Will property giant CBRE's diversification beyond sales and leasing help it weather the credit crunch?

Business Week
March 24, 2008

BYLINE: By Christopher Palmeri
SECTION: What's Next -- Real Estate: BW50; Pg. 56 Vol. 4076

Just a year ago, Brett White talked about a "global wall of capital" buying up office and apartment buildings, shopping centers, and industrial property. Now the chief executive of commercial real estate broker CB Richard Ellis Group

(CBRE) is doing everything he can to keep that wall from collapsing. Credit markets have seized up, making big sales tough. At the same time a looming recession has business tenants balking at renting more space. As a result, analysts expect earnings to fall as much as 12% this year. CBRE's shares have sunk to 18 from a July, 2007, high of 42.

Now, White is telling his salespeople to find creative ways to drum up new business, from pitching environmental consulting services to existing clients to devising novel ways to finance deals. White knows a downturn is inevitable, but he hopes to cushion the blow. "It's anybody's guess where the U.S. economy is going and how long this credit crunch will go on," he says.

UPKEEP IS A STEADIER GIG

Few companies rode the commercial real estate boom higher than CBRE. Last year the firm earned $390 million on sales of $6 billion, up from a loss of $35 million on sales of $1.8 billion in 2003. Those results landed it on BusinessWeek's 2007 list of the 50 top-performing big companies. Now comes a test of CBRE's diversification strategy. Hatched in the early 1990s and hastened by White, it culminated in the $2.2 billion purchase of rival Trammell Crow in late 2006. By then a string of acquisitions had made Los Angeles-based CBRE the world's largest broker, helping landlords and tenants lease space, manage property, and develop new buildings.

CBRE gets 58% of its revenue from leasing and property sales, which tend to swing with the real estate cycle. But that's down from 73% in 2000. Now more stable businesses, like property management--making sure light bulbs are replaced, toilets are cleaned, and such--kick in 23% of sales.

With new buyers and renters scarce, CBRE is working to expand those types of ongoing revenue streams. Its property managers now dispense green advice. Last year, CBRE helped shave $150,000 a year in electricity expenses at Phoenix Plaza, a pair of Arizona office buildings owned by General Electric's pension fund. CBRE installed energy-efficient lighting and cooling systems as well as sensors that adjust landscaping irrigation to reflect levels of rainfall. CBRE hopes to sell such expertise as consulting to other clients.

The outlook is bleaker for property sales. In January the volume of office buildings sold in the U.S. fell nearly 80%, to $4 billion, according to researcher Real Capital Analytics, after a 40% drop in the fourth quarter. Brian Stoffers, who heads CBRE's property sales business, says his brokers are developing alternative sources of loans for clients--getting sellers to finance transactions or, in the case of apartment buildings, seeking funds from quasi-governmental agencies such as Fannie Mae.

Property bulls note that the commercial market isn't nearly as overbuilt as it has been in prior slumps, such as the late 1980s. And so far, rising vacancy rates are confined to a few markets, such as South Florida and Orange County, Calif. CBRE depends mostly on the U.S., but it has built out global branches, particularly in Europe, that are holding up better.

Commercial real estate still faces a rough patch. Earl E. Webb, who heads property sales at rival broker Jones Lang LaSalle, figures that more than $50 billion in risky commercial loans may need to be refinanced in 2008. That could bring a wave of defaults. But it means opportunity, too. Macklowe Properties, unable to refinance its big debts, has put New York's General Motors building up for sale. CBRE is brokering the deal for the trophy property, which could fetch a record $3 billion.

Banks fear a new round of write-downs

The International Herald Tribune

February 20, 2008 Wednesday

BYLINE: Jenny Anderson - The New York Times Media Group

SECTION: FINANCE; Pg. 16

Wall Street banks are bracing for another wave of multibillion-dollar losses as the crisis that began with subprime mortgages spreads through the credit markets.

In recent weeks, one part after another of the debt market has buckled. High-risk loans used to finance corporate buyouts have plummeted in value. Securities backed by commercial real estate mortgages and student loans have fallen sharply. Even auction-rate securities, arcane investments usually considered as safe as cash, have stumbled.

The breadth and scale of the declines mean more pain for major banks, which have already written off more than $120 billion in losses stemming from bad investments related to mortgages.

The deepening losses might make banks even more reluctant to make the loans needed to prod the slowing U.S. economy. They could also force some banks to raise more capital to bolster weakened finances.

The losses keep piling up. Leading brokerage firms are likely to write down the value of $200 billion in loans they have made to corporate clients by $10 billion to $14 billion during the first quarter of this year, Meredith Whitney, an analyst at Oppenheimer, wrote in a research report last week.

Those institutions and global banks could suffer an additional $20 billion in losses this year on securities and other debt instruments tied to commercial mortgages, according to Goldman Sachs, which predicts commercial property prices will decline by as much as 26 percent.

Analysts at UBS go further, predicting that the world's largest banks could ultimately take $123 billion to $203 billion in additional write-downs on subprime-related securities, structured investment vehicles, leveraged loans and commercial mortgage lending. The higher estimate assumes that the troubled bond insurance companies fail, a possibility that, for now, is relatively remote.

Such dire predictions underscore the way the turmoil in the credit markets is hurting Wall Street, even as the U.S. Federal Reserve reduces interest rates. Already, once-proud institutions like Merrill Lynch, Citigroup and UBS have humbly gone to Middle Eastern and Asian investors to raise capital.

''You don't have a recovery until you have the financial system stabilized,'' Whitney said. ''As the banks are trying to recover they will not lend. They are all about self-preservation at this time.''

One of the latest areas to come under pressure is the leveraged loan market. In recent weeks the market for these corporate loans has plummeted, driven by fear that banks have too many loans to manage.

Prices have fallen as low as 88 cents on the dollar, levels not seen since 2002, when default rates were more than 8 percent. Loans to some companies, like Univision Communications and Claire's Stores, are trading in the high 70s, analysts say.

When banks make loans, they hold them until they can sell the debt to institutional investors like hedge funds and mutual funds. But lately the market for this debt has seized up and many banks have been unable to unload the loans. As the value of this debt declines, lenders must recognize as a loss the difference between the value at which they made loans and the prices of similar debt in the secondary, or resale, market.

''This correction feels a lot deeper and wider and more prolonged than what we have seen historically,'' said one senior Wall Street executive who was not authorized to speak to the media.

Many analysts say that the financial health of many companies has not deteriorated as much as loan prices suggest.

''People don't know what's out there, they haven't sorted out what's good and what's bad, so they are throwing all credit assets out,'' said Meredith Coffey, director of analysis at Reuters Loan Pricing. Median loan prices were lower than those in 2002 when defaults peaked, even though very few defaults have actually occurred.

There has also been a marked deterioration in the market for commercial mortgage-backed securities, which are commercial mortgages packaged into bonds.

To some, the troubles plaguing commercial mortgage securities seem a logical extension of the turmoil in the residential real estate market. But some strategists argue that the commercial real estate market is not as vulnerable as the housing market. The pressure to package loans that was so evident in the residential market never materialized in the commercial market, these analysts say.

Also, commercial loans tend to be made at fixed, rather than adjustable, rates, and are not usually refinanced for long periods of time.

Nevertheless, the cost of insuring a basket of commercial mortgage-backed securities has soared. Last October, for example, it cost $39,000 to insure a $10 million basket of top-rated 2007 commercial mortgages - super senior AAA, in Wall Street language - against default.

Today that price has increased to $214,000. For triple-B-rated securities backed by commercial mortgages the cost of protection during the same time has soared from $672,000 to $1.5 million.

The deterioration of the CMBX, the benchmark index that tracks the cost of such credit protection, ''started off as a fundamental repricing and then it escalated into something much more than that,'' said Neil Barve, a research analyst at Lehman Brothers. ''We think there is some downside in a challenging macroeconomic environment, but not nearly what has been priced in.''

Goldman Sachs seems to disagree. Its analysts predict commercial real estate loan losses totaling $180 billion, with banks and brokers bearing $80 billion of that in total and about $20 billion this year.

Fed chief sights room to reduce rates

The International Herald Tribune

February 15, 2008 Friday
BYLINE: Edmund L. Andrews - The New York Times Media Group
SECTION: NEWS; Pg. 1
DATELINE: WASHINGTON

Ben Bernanke, the chairman of the U.S. Federal Reserve Board, said Thursday that the economic outlook in the United States had worsened, leaving room for the central bank to reduce interest rates yet again.

Testifying before the Senate Banking Committee, Bernanke said he still expected the economy to grow at a ''sluggish'' pace in the next few months and pick up speed later in the year.

While continuing to avoid predictions of a recession, the Fed chairman told lawmakers that Fed officials had lowered their forecasts and would be ''carefully evaluating incoming information on the economic outlook and will act in a timely manger as needed to support growth.''

''The outlook for the economy has worsened in recent months, and the downside risks to growth have increased,'' Bernanke said, noting that the spiraling losses in home mortgages have dragged down the broader credit markets and shaken the broader economy.

Most U.S. economic forecasters now estimate that the risks of a recession are at least 50-50, and a growing number of analysts contend that an economic contraction has already begun.

Evidence of that weakness hitting European shores also mounted Thursday.

Data showed growth slowed in the euro region in the final quarter of 2007, even in Germany, which had been thriving on strong exports. (Page 13)

Bernanke said forecasts to be released by Fed policy makers on Wednesday would be lower than those in November and more in line with those of private-sector economists.

The Fed has already reduced its benchmark overnight Federal funds rate five times since September, including twice in the span of eight days last month. As a result, the Federal funds rate has fallen to 3 percent from 5.25 percent since August.

The Fed's rate cuts have led to a more modest decline in mortgage rates for borrowers with good credit, but they have done little to stop the meltdown in credit markets that stemmed from soaring defaults and home foreclosures tied to risky mortgages.

What began as a panic about subprime mortgages last summer has spread to huge losses at major banks and heightened fear by investors toward many forms of business borrowing.

Bernanke acknowledged that banks and other lenders had been pulling back, because of increased risk-aversion and because they had been forced to book huge losses from soured loans and to repurchase troubled mortgages and loans they had sold to investors.

The unexpected losses and growing pressures, he said, prompted banks to become more restrictive in their lending and more ''protective of their liquidity.''

Bernanke once again rejected predictions of a recession, saying that the economy would grow slowly but pick up speed later in response both to the Fed's lower interest rates and to the $168 billion economic stimulus package that President George W. Bush signed Wednesday.

''At present, my baseline outlook involves a period of sluggish growth, followed by somewhat stronger pace of growth starting later this year,'' he told lawmakers. But in cautioning that his outlook could turn out to be wrong, the Fed chairman left the door open to additional rate reductions.

Henry Paulson Jr., Secretary of the Treasury, sounded more optimistic. ''I believe we are going to continue to grow, albeit at a slower rate,'' Paulson told the banking committee, insisting that the plunge in housing and credit markets was a ''correction'' rather than a ''crisis.''

Bernanke acknowledged that a wide variety of economic indicators has declined in recent months, as the continuing meltdown in the housing and mortgage markets has rippled through the broader economy.

The Fed chairman said that the job market in the United States had worsened, noting that payroll employment dropped 17,000 jobs in January, according to the Labor Department. That was down from an average increase of 95,000 jobs per month in the final three months of 2007.

Unemployment, though still comparatively low at 4.9 percent, has edged up from 4.7 percent several months ago.

Nationwide, housing prices have fallen and show no signs of having hit bottom, while the stock markets have fallen sharply from their highs last year.

The economic situation is more than merely a ''slowdown'' or a ''downturn,'' said Senator Chris Dodd of Connecticut, chairman of the Senate Banking Committee. ''It is a crisis of confidence among consumers and investors.''

Bernanke noted that banks had been forced to book huge losses from mortgages on their balance sheets, reducing their ability to extend new credit, and that they had become ''protective of their liquidity'' and ''less willing to provide funding to other market participants.''

Bernanke said inflation had been pushed up in part because of steep oil and food price rises, and that the dollar had weakened against major currencies.

But the record-low dollar had lured foreign buyers to inexpensive U.S. goods, leading to a surge in export sales.