Talking real estate in the Capital

Mark Thomton, the editor of Illinois Real Estate Journal, recently traveled to Washington D.C. and the mid-year conference of the National Association of Realtors. Here's a taste of what he found there.

I recently spent a few days in our nation’s capital, rubbing elbows with members of the National Association of Realtors at the group’s Mid-year conference.

The conference is a weeklong affair, but I was only able to attend the first few days. The fireworks really kicked off Tuesday morning when NAR hosted its first Real Estate Summit. The association of 1.2 million members was able to pull in some heavy-hitters for the occasion: Patrick Buchanan; former U.S. Secretary of Labor Robert Reich; Secretary for Housing and Urban Development Shaun Donovan; Harold Ford Jr….and that was just the morning session.

I was unable to catch the afternoon session (had to catch a plane), but in attendance were Alan Greenspan and Sheila Baer, chairman of the Federal Deposit Insurance Corp.

Needless to say, the place was packed.

I wish I could say it was a light affair and that the mood was upbeat, but the frustration that permeated throughout the room full of Realtors (overwhelmingly residential) was almost palpable. Who can really blame them? This is the worst housing market since the 1930s (which we were all reminded about several times throughout the morning).

It seemed that the repeating theme expressed by Realtors as they approached microphones to question the speakers was the extreme lack of liquidity in the market. Realtors (and taxpayers) want to know why banks aren’t lending the bailout money the government signed off on in February.

Multiple times, an exasperated and visibly upset real estate agent would approach the microphone and say something along the lines of, “I can find creditworthy borrowers, but the lenders who used to work with me are no longer issuing loans.”

They all wanted to know when the money would start to trickle into the market again.

Unfortunately, no one in the morning session was able to give a solid answer.

One member of the morning panel discussion (a 14-member panel discussion, mind you) asked the room to “put on their lender hats.” He noted that if prices were still declining and would probably decline for the short-term, would any of them be eager to loan money out?

He had a point.

There were other highlights as well…

Secretary Donovan got the biggest reaction out of the crowd when he announced that the $8,000 homebuyer tax credit will soon be eligible to use at the point-of-purchase for down payment purposes. That got the place rocking.

One of the biggest problems with the lack of liquidity is lenders are unwilling to lend to parties with little cash equity. This could solve that problem, and banks may be more willing to hand out loans.

Robert Reich was very funny and upbeat, despite labeling himself an economic soothsayer and saying that the economy had another 18 months of stagnant or recessionary activity before things began to turn around.

“The economy is not falling off a cliff anymore,” said Reich. “It is now slowly rolling down a grassy hill. That’s not as bad, right?”

He said that he is very positive about the country’s future and that four to five years from now, the United States would be in a very good place.

Here is to that sentiment.

Some good news for commercial construction

Tired of reading the bad news about the commercial construction industry? I'm tired of writing about it, so I can only assume that you're equally sick of seeing all those grim statistics and predictions staring back at you.

But, and this is a bit of a change of pace, there have been some encouraging signs for the commercial construction industry lately.

The Commerce Department in early May reported that spending on construction projects increased in March by 0.3 percent to $969 billion. That may seem like a minor increase, but it represents the first increase in commercial construction of any kind in six months.

According to the Commerce Department numbers, while residential construction spending was still down, certain nonresidential projects looked strong. Spending was up, for instance, on government structures and power plants.

There is hope that these projects will continue to increase as the federal government continues to distribute dollars from its economic stimulus packages passed earlier this year.

Let's hope this is just the beginning of the good news.

Still waiting for the bottom?

We're getting ready for the June issue of Midwest Real Estate News. As we put the issue together, I've interviewed several commercial real estate pros across the Midwest, and I always make sure to ask their opinion on whether they're seeing any signs of a rebound in the commercial real estate industry.

So far, commercial real estate pros have suggested that there may be a glimmer or two of hope out there. But for the most part, they say, business is still incredibly slow. The big problem, of course, is financing. It's a huge struggle, still, to get any.

James McShane, chief executive officer of Rosemont, Ill.-based The McShane Companies, summed it up this way for me:

"The good news is that we are not overbuilt in most categories. The bad news is that the economy is still not growing. There just is no need for a lot of new construction. We think that the spiral will come to a stop some time in the fourth quarter. But we are all interested in seeing what will be the first industries to come out of this recession."

There is a lot of uncertainty out there in commercial real estate. And it doesn't look to be going away any time soon.

Midwest cities dominate list of most affordable

Take it however you want, but the Midwest is apparently a pretty cheap place to live.

According to the latest rankings from the Center for Housing Policy, the 10 cheapest cities to own a home in the United States are all located in the Midwest.

Saginaw, Mich., and Youngstown, Ohio, ranked in a tie for having the most affordable housing. The median price of a home in these two cities stood at $73,000 in 2008. Next came Lima, Ohio, and Wheeling, located in parts of both Ohio and West Virginia, where homes had a median price of $75,000.

Battle Creek, Mich., and Springfield, Ohio, came in next, each with median housing values of $77,000.

The most expensive cities on the list are no surprise: San Francisco, where the median housing price came in at $575,000, topped the list. New York City was second with its median housing price of $455,000.

You may view the Midwest's affordability as good news. But let's be honest: The reason so many of these cities, especially those clustered in Michigan and Ohio, have such low housing values is because unemployment is sky-high in those areas. There aren't jobs there, and not much reason for people to live there. The unemployment rate in the Youngstown, Ohio, area earlier this year, for instance, was higher than 12 percent.

Housing values in these cities won't increase until jobs find their way back. And that's really not good news.

An innovative solution to cash-flow difficulties

We have some pretty smart people write for Midwest Real Estate News, Illinois Real Estate Journal and Minnesota Real Estate Journal, commerical pros who really understand the ins and outs of the challenging commerical real estate business.

Our columnists are one of our greatest assets. The information they provide can be invaluable.

William Cotter, a partner with the law firm of Coman & Anderson, PC, in Lisle, Ill., is one of these commercial industry experts. You can check out his column on the power of master leases on the REJournals.com Web site.

A master lease is a creative tool that owners can use to help shore up a cash-flow shortfall at their commerical projects. It's a complicated issue, and one that I can't do justice to in a blog post, but here is an excerpt from Cotter's column that explains it better than I can:

"In general terms, the master lease is simply a lease of all or some portion of a commercial project by a creditworthy 'master tenant.' This legal structure provides supplemental or secondary rent stream for the project. The master tenant will usually be the project owner, or an affiliate of the project owner (for example, a member in the owning LLC, or a subsidiary company). The obligations under a master lease are assigned to the lender as collateral."

Master leases can be used in a couple of ways. Property owners seeking to finance a commercial project, always a struggle these days, can use the master lease as a credit enhancement. Property owners can also use the master lease as a financial inducement to a buyer.

Like I said, Cotter explains it in far more detail. Check out his column: A master lease might be a tool that you can use.

Where are all the college graduates? Indianapolis

It's tough being a recent college graduate. You're barely making any money. The odds are you're working a job that requires the brainpower of a monkey. There are days you wake up and wonder what happened to those good old college days.

(When I first graduated from college I worked at a community newspaper and made a whopping $12,600 a year. Let the good times roll!)

But there are certain cities where it's easier to be a recent college grad. And top of the list, according to a recent survey from Apartments.com and CBcampus, is our own Midwestern city of Indianapolis.

Indianapolis, with an average rent of $625 a month for a one-bedroom apartment, topped the list. But it wasn't the only Midwest city on it: Cincinnati, with an average monthly rent for a one-bedroom apartment, of $691, was fourth, while Chicago, with its average rent of $1,133 for a one-bedroom unit, ranked ninth.

The survey considered both the jobs market and the cost of living in cities across the country.

Three cities in the top 10? That's not a bad haul for the Midwest.

The struggle to finance projects

It's become a standard part of just about any interview I have with a commercial real estate broker or developer: The complaints about how hard it is to get financing for new developments these days.

This came up again last week when I was interviewing commercial real estate professionals doing -- or trying to do -- business in Iowa. Acquiring financing is still a major hurdle here. And there are no signs that it's going to get any easier in the near future.

You've heard this before, undoubtedly. If you're in the commercial real estate business, you've probably heard this sentiment expressed a lot less delicately.

Kurt Mumm, president of Des Moines-based NAI Ruhl & Ruhl Commercial, went the more delicate route when we spoke. But that doesn't mean he wasn't accurate:

"We continue to see a lot of the same things that are happening with larger markets. It's all about the constraint in the credit markets," Mumm said. "There is a lack of equity and capital out there for so many of these real estate projects. It's putting a real strain on a lot of our local developers."

It's a shame, really, that developers are struggling so much to gain financing. It's hard for an industry to work its way out of a slump when there just isn't any money flowing into it.