Subprime Meltdown

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You didn't need to be a rocket scientist to see the subprimemeltdown coming, said Daniel Hurwitz, president/CEO of DevelopersDiversified Realty, from his seat on a panel discussing capitalmarkets at the Urban Land Institute's fall meeting in Las Vegas onWednesday.

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"We had a fee-driven lending industry that didn't care aboutcredit," he said. Their way around it was to package and sell thedebt to somebody else would then repackage it and sell it again."It was the financial institutions' hot potato," he said. "Whoevergot stuck with it last...."

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The recoil by lenders, whose debt drives deals, has slowed dealflow, said Ron Sturzenegger, head of real estate and lodging forBanc of America Securities LLC. "We still have more capital andmore liquidity than we've ever had in most of our careers,"Sturzenegger said. "What we have now is a debt problem; the greasethat spins the wheels is on hold."

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On the equity side, lenders, looking to lower their riskprofile, are requiring the borrower to put more cash into deals,said Christopher Cole, CEO of the multifamily-focused Cole Cos.They are doing so in part to lower the risk profile because theyaren't able to unload the debt in the same way they had in thepast, said Sturzenegger.

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"The lenders found themselves with loans they couldn't sell at(the price) they thought they could sell them at," Sturzeneggersaid. "Now they are holding (those loans) until the CMBS marketcomes back to a price they are willing to sell into."

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As lenders begin to see the pricing they want, Sturzenegger sayssome $50 billion of real estate loans will be sold between now andthe end of the first quarter of 2008. "It's a pricing problem, nota credit problem," he says.

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Recession? What recession?

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"I don't think we're headed for a recession," said ChristopherCole of Cole Cos. "Right now we are the most affluent society andeconomy and will stay that way for two decades until all the babyboomer wealth and inheritance makes its way through the economy; itwill be a real stabilizing force."

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Ron Sturzenegger, head of real estate and lodging for Banc ofAmerica Securities LLC, says that financial institutions may betaking substantial write-downs but are so well capitalized rightnow they can absorb and still remain strong. "The biggest concernis the consumer, and what happens to them when they can no longeruses their houses as an ATM, when their ARM ratchets up and theyhave to struggle to make the payment. "It's not a financial problembut what the consumers ultimately do," he said. "If a recessionsstarts it will be at that end."

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Daniel Hurwitz of Developers Diversified Realty, which as aretail focused company relies on the consumer, said there is realwage growth, job growth and retail sales growth, so any retailerhollering recession to explain their poor performance shouldinstead focus on their business model.

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"There are a lot of excuses for really bad merchandising onbehalf of retailers getting beat in their own sector," he said. "Ifyou really had an impact from oil prices and the subprime market,it would be equal across a sector, and it isn't. We'll see twocompanies in the same sector and one will be doing 8% comp(arable)store sales growth and the other negative 3%. The losers are alwaysgoing to look for an excuse; it's all overblown. There is norecession."

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Concludes Brian McAuliffe, chief investment officer for RreefAlternative Investments, "We're not quite as bullish as Dan, butwe're not planning for a recession," he said. "But we are makingadjustments in the form of growth rates."

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Property Fundamentals

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Brian McAuliffe, chief investment officer for Rreef AlternativeInvestments in North America, is very bullish on apartments.Speaking on a panel discussing capital markets and investmenttrends, he said existing tenants are staying in their units longerbecause of the subprime meltdown while new renters continue toenter the market.

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"Obviously (given those factors), we're confident renewal rateswill be increasing," he said. "The shadow effect of excess(single-family housing and condominiums competing with the rentalmarket) will occur only in select markets."

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Looking further out, he says there will be more garden apartmentconstruction because the lack of for-sale housing will bring downthe price of drywall and lumber prices.

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The office sector will remain steady due to the inherent valueof their leases, he says, and while the heretofore strongwarehouse-distribution market may slow down a bit, it stillpresents a solid opportunity for the smart investor.

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As for the retail sector, McAuliffe says "it's a market we feelhas peaked early and one here you have a lot of supply threatsexisting today."

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Daniel Hurwitz, president/COO of Developers Diversified Realty,sees the retail sector completely differently. "The supply pressurein retail doesn't mean it's overbuilt, it means it's underdemolished," he said. "If you look at vacancy rates they move alittle but not very much; that's because most retail projects have10% or less of spec space, it's all done on a build-to-suitbasis.

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"When we have a situation where we are taking tenants from otherprojects, (it's because) that other center is obsolete and needs togo away, which isn't the case for the apartment, industrial andoffice markets. So do we need to get more aggressive in how wereposition (retail centers) or take them offline, that's somethingall good companies do on a regular basis. But overall, if you lookat demand, it far outstrips supply."

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