Boston Real Estate Observer

The Future of Commercial Real Estate

2009-11-06T12:51:20Z

At the annual New England CCIM Chapter meeting in Burlington last week, I had the opportunity to present a discussion on the future of commercial real estate values. The following executive summary attempts to provide some color to the Commercial Property’s Future presentation (37 KB PDF) that I prepared for the event.

I noted that all recoveries are really jobless as industry gains business and then hires as opposed to hiring and then hoping for more business. Ultimately, the employment environment trickles through all sectors of commercial real estate – depressing values.

The increased savings rate, while overall good for the economy in the long run, currently takes billions of dollars out of the economy which otherwise might have been spent on consumer goods and services (70% of our economy). This along with job loss and employee angst will keep a lid on retail sales.

A bright spot is that retailers and manufactures are keeping their inventory low and shortly will have to restock – meaning an increase in manufacturing and distribution with a positive effect in demand for warehouse space. However, if the economy has not picked up by then this may be a short lived increased demand.

The mantra in the financial sectors has been ‘extend and pretend‘ – kick the can down the road. If we don’t mark our borrower’s assets to market then we don’t have to recognize a decline in value and a technical default (even if they are paying) as the loan to values (LTV) are too high, the debt coverage is not there, and many of the mortgage covenants have been broken. However, this extend and pretend behavior cannot go on forever, and when the market values are reported, commercial loans will have even more problems as borrowers will not be able to refinance existing debt and will have to either kick in more equity and/or pay down the loan. What lenders will step into this void?

The landlord’s Catch 22 (after the Joseph Heller novel about trying to get out of the service by saying you are crazy, but if you know you are crazy then you can’t be) for those attempting to develop is that the landlord needs signed leases to get a loan, but the tenant needs the assurance that the project will go forward as evidenced by a loan in place before they are willing to commit to a project. Which comes first the chicken or the egg?

My predictions as to value, peak to trough are for Boston: Homes -25%; Retail -40%; Industrial -40%; Office -35% and Lodging -55%. Nationwide, I see home prices declining even further unless the administration extends the home buyer programs (which just recently made it through the Senate and House) in some form and commercial office real estate declining further due to depressed rents and economic uncertainty. At a national level, homes -35% and office -45%, while the remainder of the segments are in line with Boston.

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Downtown Condo Inventory Up Slightly

2009-11-09T01:13:51Z

While transaction sales volume in downtown Boston has been off year over year, meaning that there are less condos actually selling in 2009 versus that which sold in 2008, what’s happening to inventory? Inventory represents the supply of choice that buyers have in the marketplace, and given the economics of the situation, can have an impact on prices as well.

While downtown Boston condo inventory began the 2009 calendar year below 2008 levels, it has tracked very closely with numbers from the previous year. This trend continued up until August of 2009, when inventory levels did not drop off as substantially as in 2008 – August historically represents the month when inventory levels push down through a post summer dip, which typically lasts through the end of September.

November 2009 condo inventory is up approximately 12% from the same time period in 2008, yet the average days on market (DOM) that a condo is sitting for sale is virtually the same that was experienced in 2008. By reading between the lines, despite inventory levels being slightly up, transaction sales volume on a percentage basis is actually down more, thus, the absolute number of new listings hitting the market has decreased year over year. Nonetheless, choice, at least at the superficial level of number of current listings available for sale, is still quite good for buyers.

Downtown Boston neighborhoods considered include: Back Bay, Bay Village, Beacon Hill, Chinatown, Financial District, Leather District, Midtown, North End, Seaport District, South Boston, South End, The Fenway, Theatre District, Waterfront, West End

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Open House Reminder

2009-11-01T13:22:32Z

Bostonians have over 350 open houses to choose from today across the downtown neighborhoods, for homes listed anywhere from $219,000 for a South End studio to $3,100,000 for a Back Bay 3 bedroom 2.5 bathroom penthouse.

When planning out your day of touring, ensure that you have taken into account the end of daylight savings time that took place earlier this morning – check the official US time website to sync up your clocks if they have not already done so on their own.

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Pet Friendly Boston Apartments

2009-11-01T13:27:58Z

Searching for an apartment in Boston with a pet can be a frustrating experience. Once you’ve made it through the small selection of apartments that will allow your pet, you are likely to find even further restrictions according to breed and weight that makes it near impossible to rent in Boston with a big dog. Some apartment buildings in Boston allow only cats, while I have yet to find any that allow just dogs—normally if they allow dogs, they’ll allow cats too. Even if you can find a place that will let both you and Sparky live together, you might find yourself shelling out an additional $30-$75 per month in “pet rent.”

So how can you win as a pet owner renting in Boston?

Know your dog or cat’s weight and breed and plan accordingly. If you have a small pet under 50lbs (fully grown) it’s likely that most pet friendly apartment buildings and condo owners will accept them. Weight and breed restrictions mostly exist for insurance purposes. Although cats and small dogs may be more likely to scratch the floors and walls, they are generally quieter and less potentially harmful to other residents. Larger dogs get a bad wrap for biting and louder barking, which makes it harder to insure a building that allows these breeds. If you have one of these breeds you will have to focus your search on condo rentals and hope that you can either: find a landlord sympathetic to your breed, or negotiate a situation that is amicable for both parties, which usually can be done by offering to pay an additional security deposit.

Know Where to Search for Pet Friendly Boston Apartments

There are certain areas of the city with more dog parks and therefore more pet owners tend to live in those areas. Brookline, for instance, has more dog parks than most of Boston, while the South End is known to be relatively dog friendly. The Seaport District, with its open lofts and spacious apartments, has also become a popular area for pets. The areas to avoid with pets tend to be those with more compact city living: Downtown Crossing, Chinatown, the North End, and Copley Square / Prudential are not particularly pet friendly places to live compared with other areas of the city. This shouldn’t come as a surprise as the size of most apartments in these areas hardly accommodates more than one human, let alone humans living with pets.

My suggestion for large dog owners: buy a condo! Rarely do you see condo associations with the same pet weight and breed restrictions as you do with rentals.

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Understanding the HUD-1 Settlement Statement

2009-10-30T14:26:53Z

What is a HUD-1 Settlement Statement and When is it Used?

The HUD-1 Settlement Statement, which is commonly referred to as the HUD or the Settlement Statement, is a standardized form which provides a line item detail of all of the charges associated with a residential real estate transaction (i.e. a purchase or refinance).

The Real Estate Settlement Procedures Act (commonly known as RESPA) requires the use of the HUD-1 Settlement Statement for transactions involving a federally related mortgage and in which there is a Borrower and a Seller. However, the industry standard is to use the HUD-1 for cash deals and refinances as well.

How is the Settlement Statement Read?

Page 1 of the Settlement Statement identifies the loan type (e.g. FHA, VA, conventional), the Buyer/Borrower, the Lender, the Seller, the Settlement Agent, the property location, and the settlement and disbursement dates. In addition, the first page provides a summary of the transaction with the Buyer’s side of the transaction documented in the left column of the Settlement Statement and the Seller’s side recorded in the right column. If the transaction is a refinance, a summary of the Borrower’s transaction will appear in the left column and the right column will be left blank since there is no Seller.

Page 2 of the Settlement Statement provides a line by line accounting of the various settlement charges with the Buyer’s fees again accounted for in the left column and the Seller’s charges listed in the right column. These settlement charges are grouped by type. For example, Items Required by the Lender to be Paid in Advance (e.g. prepaid interest, mortgage insurance premium, hazard insurance premium) can be found in Section 900 of the Settlement Statement. All of the individual settlement charges are then totaled at Line 1400 of the HUD (titled Total Settlement Charges) and recorded again on Page 1 at Line 103.

Download a sample HUD-1 Settlement Statement (1.34 MB PDF)

Summary of the HUD-1 Settlement Statement

The HUD is a standardized form which provides a line item accounting of the transaction. It is commonly used for both purchases and refinances, although it is only required by RESPA in transactions involving a federally related mortgage and in which there is a Borrower and a Seller.

In preparing for a real estate closing, be sure to review the HUD before arriving at the closing table (presuming of course that time allows for the circulation of the final HUD in advance of closing; in practice this does not always happen as oftentimes there are last minute adjustments). Do not presume that the HUD is perfect. Although the settlement agent should thoroughly review the HUD prior to circulating the final version, it is entirely possible that a mistake was made while entering the data. If you have questions, consult with your attorney and real estate agent. By reviewing the HUD and addressing any issues in advance of the closing, you are setting the stage for a smooth and successful closing.

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Massachusetts’ Banks Report Card

2009-10-27T12:25:34Z

While the recession enders cheer positive signs in the stock market hailing the return of the bulls, everyone else seems to be wondering where the jobs are, and real estate industry folks are pointing at the long shadow being cast by the coming wave of commercial real estate problems. While I don’t have any answers to the employment numbers or the stock market, I do have a little real estate crystal ball and I’ll share it with you.

It is all about the banks. Banks not only control the reigns to capital and reasonable debt, at a time like this when debt positions are the only positions left in real estate, banks control a whole lot more. In fact recent bank data suggests that institutions are in control of hundreds of billions in real estate. How they handle it will affect us deeply. In this installment I’m going to show you what our 180 (more or less) local lenders are dealing with in terms of real estate and what to expect next.

Massachusetts’ banks are generally fairing better than the those nationally when it comes to real estate loans. Approximately 2.2% of all the banks in the US are headquartered in MA, while our banks only hold about .44% of the real estate problems. This is a good start. The most recent consolidated bank reports available show that MA banks hold only about $1.27B in problems. A drop in the bucket compared to the $290B+ in whole loan and REO problems with lenders nationally.

It’s not all peaches and cream though. Our software tracks a number of things, but 3 of those things fall into the distressed real estate pipeline 90 day late loans, nonaccrual loans, and REO. For each of these three columns we track residential, commercial, construction, and multifamily problems. In nearly all cases, and in almost every category, distressed real estate balances are growing nationally and locally.

Dollar Volume of Distressed Assets at MA Banks

Massachusetts based banks are reporting increased real estate problems.

Number of Massachusetts Banks with Distressed Assets

More Massachusetts based banks are reporting problems.

Do you notice a pattern?

Let’s ignore the first column for now because 90-Day-Lates are not as good a forecasting tool as non-accrual or non-performing loans. In nearly every category problems are mounting, not just with individual banks but across a greater number of banks. As the final numbers come in for Q3, I’ll make an update here. If a crystal ball exists though, here it is in the numbers.

I know I’m a bit of a bear but my money is on continued problems across the real estate spectrum, more struggling banks, more struggling property owners and certainly more great deals for those with capital. The next 18-24 months should prove to be very exciting for those prepared.

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Boston W Hotel to Open This Week

2009-10-25T12:14:11Z

Later this week, on Thursday, October 29, 2009, a long awaited opening event will take place at the Boston W Hotel. The opening, however, could be characterized as a “soft” opening versus a “grand” opening because there is still work to be done on the building.

The Hotel will open its doors, yet, the Bliss Spa, standard fare at the luxury W brand, as well as the signature bar and nightclub to be called Descent, are not scheduled to open until the spring of 2010. Hotel management will hold an official “grand” opening event once those amenities are fully operational.

Sawyer Enterprises, the developer behind the Boston W Hotel, has not yet fully built out the signature spa and showcase lounge because it does not currently have $10.4 million in capital to go forward with the construction. Sawyer is in negotiations with the City of Boston to obtain the additional financing to finish off the hotel, yet the City appears to be apprehensive to extend the financing because Sawyer’s collateral for the funds is the building itself, which has already been extended as collateral to other financiers.

The W will attempt to charge an average room rate of approximately $300 per night, a figure higher than other Boston luxury hotels are securing during times of peak demand. The 123 luxury residential condos on the upper floors of the building are currently still scheduled for a phased opening in the late 2009 or early 2010 timeframe.

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The Danger in Over-Pricing Your Home

2009-10-22T01:36:32Z

If you are like most sellers, you want your home to sell for as much as possible. It’s only human nature. Therefore, you may be tempted to list your home for the very highest possible price and hope for the best. But if you are really serious about selling your home, this mindset can result in a long waiting game in which you can end up losing – significantly. Not only will your house eventually sell for less than it is worth if it sells at all; you also will have forfeited your ability to move on with your life within a reasonable timeframe.

Let’s begin by reviewing a meaningful, time-honored truism. Are you aware that your home has the best chance of getting a reasonable offer within the first three to six weeks on market if it is correctly priced to sell from the very beginning? If it isn’t properly priced, you can bet that your home will help similar properties in your neighborhood sell long before yours. Assuming that you do not want your home to promote the sale of all other homes but yours, what should you do?

The first step is to get a competent Realtor^® to visit your home to understand what you believe are its best (and worst) features. Be honest, because buyers’ and especially their Buyer Agents’ eyes will be far more dispassionate and critical than yours. The next step is to have the Realtorshow you what similar homes in your area have sold for within the past three (3) months in this changing market (a six-month look back would be more appropriate under level market conditions), how long it has taken them to sell, and how many price “adjustments” were necessary before they did sell. Your Realtor will also point out homes that did not sell, and therefore have become what are known as “expired” or “cancelled” listings.

With all the information that is available to buyers on multiple web sites and the increasingly popular social media sites (Facebook, LinkedIn, Twitter and so forth), buyers are becoming incredibly savvy – and many can instantly spot an overpriced property on their own. (As an example of a consumer-friendly web site that provides this kind of information to both buyers and sellers, visit: www.homevaluesinmybackyard.info if you live in the greater-Boston area.) If a buyer is also working with a knowledgeable, reputable Buyer Agent, you can bet that your home will be identified as being overpriced virtually from the moment it is listed. The result is that your home will be overlooked by many potential buyers during the critical “first impression period”. The more it languishes on the market thereafter with a series of price reductions, the less desirable it becomes in buyers’ eyes due to the omnipresent “there must be something wrong with it” syndrome.

Under no circumstances should you choose a real estate agent who agrees to put your home on the market at “your” price without being able to back that price up with the aforementioned market statistics. Beware of agents who don’t know the local market conditions well or – far worse – an agent who will tell you exactly what you want to hear just to get your listing. In my profession, this unscrupulous practice is known as “buying a listing”. Under these circumstances, you can expect to hear shortly thereafter that the market has “suddenly changed”, and that your price must be adjusted at once (downward, of course). And perhaps again, and again.

By way of marked contrast, a more seasoned (and/or more ethical) agent will turn down the opportunity to list your home at an unrealistic price. Why? Because he or she has a reputation to uphold, and will not make an unrealistic promise that nothing short of a miracle will deliver. If he or she also pays out-of-pocket for your marketing materials, an overpriced home is a waste of both time and money. That said, there are also those of you out there (I’ve met you!) who will steadfastly dismiss a seasoned agent’s solid pricing advice. Please move on with my very best wishes. Otherwise, please respect your Realtor for the professional that he or she is – because the vast majority of us are knowledgeable, ethical and hard-working. Any buffoon can be an “order taker”. Is that really what you are looking for in a well-qualified real estate agent? Of course not!

In closing, I would be remiss if I didn’t share that pricing is not the only reason why some homes don’t sell promptly – or at all. And, believe it or not, sometimes pricing is not the reason for failure to sell whatsoever! Therefore, this particular article is intended to be the first in a three-part series. My next article will discuss the importance of properly staging your home to sell, followed by the significant consequences of choosing a good marketing agent as opposed to a mere listing agent. There is a world of difference – stay tuned!

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Bryant Back Bay Condo Auction Results

2009-10-27T12:57:28Z

Sold. On a crisp fall day at the Colonnade Hotel in Boston’s Back Bay , the second much anticipated downtown Boston condo auction of 2009 took place in front of a group of poised bidders and their real estate professionals. The market waited patiently for less than an hour to see what the results would show for the first large-scale Back Bay condo auction of the decade.

10 units at the 50-unit Bryant Back Bay high-end condo development on the border of the Back Bay and the South End were released by the developer for sale at auction, and were sold within 45 minutes of the auction commencing. Bidders, each with a $20,000 certified check in hand, watched the auction process unfold in front of them. The Bryant Back Bay is the fourth downtown Boston property to go to auction since 2006, following the Folio, Broadluxe, and the 1850 Lofts, and it is the first Back Bay property to partially go to auction this decade.

The development “partially” went to auction because there were approximately 45 units remaining for sale in the building before the auction began, the developer released 10 for sale at the auction event, and intends for the auction to set a market driven price for the remainder of units which will be sold at auction prices, but through a normal sales process.

The price point at which the developer was listing units for sale before the auction began was approximately $980 per square foot. The auction was coordinated with minimum bids that averaged $597 per square foot. The auction event itself resulted in the market setting an average price point of $675 per square foot, approximately 30% off original asking prices, and some $300,000 above minimum bid prices.

Download the full Bryant Back Bay Condo Auction Results (PDF 52 KB)

Accelerated Marketing Partners, the firm the Bryant’s developer hired to bring the property to auction, leveraged a similar tactic at the recent Nouvelle at Natick condo auction outside of Boston earlier this month, where they sold 43 units at auction prices, and used the newly established price point to drive further sales of remaining units at the development (see Nouvelle at Natick Condo Auction Results). The Bryant Back Bay will leverage the auction results as a bell weather for eventually moving remaining units in the building to a sold status.

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MA Declaration of Homestead

2009-10-22T01:38:35Z

In preparing for a recent closing on a refinance, it came to my attention that the Borrower did not have a Declaration of Homestead. A simple fix, but it is surprising how many property owners hold title without the protection afforded by the statute. Under Massachusetts law, an individual may declare a homestead in their principal residence thereby protecting up to $500,000.00 in their home from unsecured creditors (see General Laws of Massachusetts Chapter 188, Section 1).

Example: Joan owns a home, which is her primary residence, and has recorded a Declaration of Homestead. Joan’s credit card company seeks to attach $10,000.00 in credit card debt which Joan contracted for and defaulted on subsequent to the recording of the Declaration of Homestead. The credit card company would be barred from attaching this debt under the statute. It should be noted that Joan is still liable for this debt, but her interest in the property is protected.

Example 2: Dan owns a home, which is his primary residence, and has recorded a Declaration of Homestead. Dan has taken out a second mortgage with his local credit union. Dan then defaults on his second mortgage. In this example, the statute will not protect Dan. The credit union holds a security interest in the property and therefore is a secured creditor who would be exempt.

Summary:

A Declaration of Homestead protects the investment in one’s primary residence from the claims of unsecured debts up to a maximum of $500,000.00.
The Declaration of Homestead must be filed with the appropriate Registry of Deeds.
A Declaration of Homestead will not protect a homeowner from the following: (i) tax assessments, claims and liens; (ii) first and second mortgages; (iii) an execution issued by the Probate Court to enforce a judgment for support; (iv) court judgments based on fraud, mistake, duress, undue influence, or lack of capacity; and (v) debts contracted prior to the recording of the Declaration of Homestead.

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