CMBX Predictions

Readers of this blog know I have an ongoing fascination with the CMBX index. What is it exactly? Why was it so high? And why has it come down again? What exactly does it tell us about the future of commercial real estate?

Here are links to my earlier posts:

• Markit CMBX
  
• How Vulnerable is Commercial Real Estate?
  
• What is CMBX exactly?
  
• CMBX Index
  

Well, here's an updated picture of what it looks like today:

Apparently the CMBX index - the oracle that it is - no longer believes that there is a high risk for defaults in commercial real estate in the coming year. Remember that when the CMBX goes down, it indicates a lower 'spread' and therefore the prediction of a lower risk for default. This trend is happening just as real economic data is emerging that contradicts this sentiment: take a look at this post on Mish's Global Economic Trends. Here are some highlights:

Vacancies in commercial real estate is increasing rapidly -it is expected to peak at 18% in 2008. Architectural billings in the US are down almost 78% over one year. look at the right-hand side of this chart :

Shopping centre vacancies are increasing rapidly - already at 28%:

And yet the CMBX index seems to suggest that the likelihood of defaults in commercial real estates has now gone down? Is this realistic? Or is this index too heavily influenced by short selling and speculation to be meaningful?

I found an interesting opinion on this on another blog. Myles Lichtenberg writes on
Maryland Commercial Title's corporate blog about this. He quotes a report by Moody's:

“If sellers were forced to sell, as can occur when banks foreclose on loans and subsequently sell off the collateral property, a more dramatic drop in prices would likely result.
However, when sellers are not compelled to sell, prices do not or can not adjust. In fact, prices can hover at some level in nominal terms for an extended period before responding to a changed market environment.”

The insight here is that even though the performance of commercial real estate might decline on a cash-flow basis, this will not mean that prices will fall. Large financial and institutional investors will choose to weather the storm. the number of transactions is likely to drop off, but prices are likely to remain much more stable than in residential sector. Asset price stability and the presence of well capitalized buyers will protect even the over-leveraged in the commercial real estate market. If the market value of the assets remain and as long as there are a few buyers, an cash strapped owner can get out by selling. The value of the asset as collateral will also help in any 'work-out' with lenders.

So have investors realized this difference? And has this insight been reflected in the CMBX index? Or am I reaching here? -just to maintain my faith in the value of a derivative index?

Factoid: Markit, the creators of the CMBX index is a spin-off from the TD bank - a Canadian connection!

Audio Blog Posts

Did you notice the little button at the top of each post: 'listen now'? Go ahead, give it a click. This button comes to you courtesy of Odiogo. This is a web based service that reads blog content, converts it to spoken words and delivers it back to the browser. It allows you to listen to my blog as spoken by a robot voice!

It's remarkably simple to set up. You simply sign up at Odiogo, provide your rss feed and your email. An hour or so later you receive an email letting you know that the audio files are complete. It is then very simple to add a button to link the file from your blog.

So is this simply a novelty? Or are there other benefits? One key advantage of this tool is that it also generates mp3 files. You can access these from the 'listen now' button. You can quickly save audio versions of blog posts that you can listen to later.

Any Password

Like everyone else these days, I have a ridiculous number of user names and passwords. I have passwords for a bunch of websites, email accounts, services, network accounts and software. It's really hard to keep track of all of them and next to impossible to remember.
One strategy would be to make all of your user names and passwords the same, but this would not be advisable. What if a website somewhere turned out not to be as reliable as you thought? What if you had typed in the same information as you use for online banking? It is a very good idea to use as many different user names and passwords as possible to keep all of your accounts 'firewalled' from each other.

So how do you keep track of everything? For the last two years, I have been using a software called AnyPassword. There are several versions. The most simple and basic one - which I use - is free.

The program consists of a simple directory structure of user names and passwords. For each log in, you can store your user name, password, a URL, as well as notes. All of this information is protected by a single password. Now you only have to remember one thing. To keep the information safe, the file is encrypted using IDEA/MD5 algorithms.

A word of common sense advice: keep a backup copy of the installation software and always backup the data file!

Marketing Blogs

I've come across two excellent blogs on marketing. The first one is by Guy Kawasaki. Guy used to be the chief 'evangelist' at Apple and is now a VC, writer and all round guru. The blog covers a wide range of topics from new technology to marketing and management. It's got a lot of humour and the scope is very wide. My suggestion is to start from the 'Categories' list half way down the page on the right hand side and pick what you are interested in.

Here's the address: http://blog.guykawasaki.com/

The second marketing blog is by Paul Dunay. Paul currently is Global Director of Integrated Marketing for BearingPoint. This blog is more focused on specific marketing techniques. Paul has done a lot of work on integrated marketing and he has a great deal of experience with web based marketing, lead generation and social networking. A nifty aspect of this blog is that Paul conducts interviews with other thought leaders and managers. He makes these interviews available as pod-casts. He's in the iTunes store and you can subscribe to him for free! I've been listening to these podcasts on my way into work. They're really good. This blog (and podcast) is excellent for anyone who is interested in effectively using the web to expand business.

The web address is http://buzzmarketingfortech.blogspot.com/

You can find the podcasts in the iTunes store if you search for 'Buzz Marketing for Technology'

What Real Estate Can Teach Banking

There's a lot that banking can learn from the real estate industry. I still vividly recall the real estate driven recession in the early nineties. This was the environment I graduated into with a fresh, new architecture degree! There was no work around. Real estate had collapsed as a business and was dragging the rest of the economy down with it. Rampant speculation had led to massive over building. There was a glut of empty office space that could not be leased. Solid reputable builders and owners were destroyed and lenders lost billions.

Look at real estate in Canada now. It is probably one of the most open and transparent sectors that you can find. Long term investors such as pension funds and REITs have brought financial discipline to the industry. Buildings are bought and sold on verifiable financial metrics. Tenants lease space based on the expectation of accurate areas (which has contributed to Space Database growth!) and they expect landlords to justify and disclose all operating expenses. This stable sector is able to develop in close coordination with market demand. Our open and transparent market has become very attractive to foreign investors which has led to an inflow of capital and a stable rise in prices.

But it was not easy to get to this situation. Our biggest and boldest developers went bankrupt. The builders of all today's prestigious addresses in Toronto have been wiped out. The fallout included huge financial losses and a major recession, but in the end we have in Canada a mature, healthy and safe commercial real estate industry.

So what lessons can the banks learn from real estate?

The first lesson is that losses have to be taken to clean up the system. Failures have to happen for there to be a turn-around. In order for pension funds, foreign investors and REITs to reshape the real estate industry, the old developers had to be dismantled. In banking we must expect more firms like Bear Sterns to disappear. Protecting them will only extend the agony.

The second lesson is that reality will always catch up. In the late eighties, there seemed to be no limit for developers. New, big buildings were appearing at a furious pace. The problem was that the underlying economy was not growing at the same pace and there were not enough tenants for the space. Similarly today, finance has rushed ahead of the economy. According to The Economist, financial services companies in the U.S. accounted for around 40% of all corporate profits in 2006! This grew from a more reasonable 10% share in the early eighties. Just as there turned out to be no real tenants to pay for the new buildings in the eighties, so too now, it turns out that there are no real backers of the 'products' that banks have created.

The third lesson is that real value survives its creators. If you look at the skyline of Toronto, we still have the TD Centre, Scotia Plaza and BCE place. The builders are bankrupt, but what they created had real and lasting value. We are likely to benefit from what these developers created for another hundred years. What value does a company like Bear Sterns leave behind? Does securitization create value? Is it the concept or the implementation that was flawed? An industry that does not create, but only redistributes wealth is not sustainable and will hurt us all in the long run. If anything is to be salvaged, then banks have to figure out what elements of what they do create real value for society.

Speedtest

Here's a great little tool to test the quality of your internet connection. Go to http://www.speedtest.net/ . You will see a map of the world. The pyramids are points on the internet to which you can test your speed. The yellow pyramid is the node closest to you.

Once you click on a pyramid, the application will first test the download connection and then the upload connection. Give it a try. Is your connection slow, or is it your computer? Find out what your internet service provider is actually giving you!

HotPads

Here's another really cool map based real estate mash-up. In this case the subject matter is rather depressing. HotPads, a residential real estate listing site in the U.S. has created a 'heat map' to illustrate areas of high foreclosure rates. Using map data from Microsoft's virtual earth and combining it with listing data, they have created colour-coded maps to show the density of foreclosures.

This is cool for what they have been able to achieve by putting two data sources together on the web. But it is very depressing when you see what it tells you. Here is a map of Detroit. Most of the city has foreclosures on more than one in 150 houses. Here's a link to this view.

If you click on the houses, you get a pop-up that gives you details on the listing. If the map is depressing, these listings are absolutely alarming. Here's a nice big three bedroom house for $9,900:

And here is a map of the Niagara Falls / Rochester area. This is just across the lake from us. Even here there are regions where there are over 1 in 600 houses that are subject to foreclosure.

Take a look at this nice house in Buffalo: yours for $32,000

I love what they have done technically with this site. They've pulled in a ton of data. The mash-up conveys information in a clear way. It's simple to navigate and drill down to the listings. Unfortunately it creates a very vivid picture of how deep and serious the housing market crisis is in the States right now.

Your LinkedIn Profile

LinkedIn is a useful tool for building a professional network on the internet. It's a little bit like Facebook or MySpace, but without the goofy factor. On LinkedIn people post their credentials and experience. The value comes in when you link to useful and helpful people that you know, because you can then access their list of equally useful and helpful people. In this way you can leverage a network of contacts exponentially.

LinkedIn makes a point of reminding you to only connect to people who you know well and who know you. You will be sharing contacts. You may be asked about them. They may be asked about you. I would also add that it is important to think of the quality of the contacts you make. Are you connecting to people that have useful skills and knowledge? Do they know other useful people? Are they likely to be helpful in the network?

Another benefit of LinkedIn is that it can raise your own profile. Other people can find you and you can show off your expertise by participating in the Q&A section of the site. You should make sure that you have meaningful information about yourself. You should also consider posting this information on your public LinkedIn page.

Here's how to make sure you have a good public profile:

1. First make sure you fill your profile with details about your skills and experience.
   
2. Next, turn on your Public Profile - click the Edit link in Public Profile setting.
   
   
3. Choose the items you want to display to the world.
   
4. Change the URL of your profile from the default to something more meaningful:
   
   

Now you have a profile that is visible to the world and will be picked up by search engines!

The next thing to do is promote your profile. If you have a website or blog, you can easily create a link button to this page. Here's a button link to my profile:

And here is the code that you can use to link to your profile:


<a href="http://www.linkedin.com/in/YOUR_PROFILE_URL_HERE" ><img src="http://www.linkedin.com/img/webpromo/btn_myprofile_160x33.gif" width="160" height="33" border="0" alt="View YOUR_NAME_HERE's profile on LinkedIn"></a>

Good luck with building your network!

Onecle

The SEC filings is a goldmine of document templates. Search the database online at http://www.sec.gov/edgar.shtml and you will find every kind of contract. Employment contracts, leases, franchise contracts, stock option plans, and anything else you can imagine. But just as in a real goldmine, getting the value out is the problem. How do you extract and refine the value that is in there?

It seems that someone has already done the work for us! Take a look at Onecle. The owners of this site have mined the SEC filings and organized a vast number of legal contracts by category.

The site is supported by Google ads. From what I understand the name of the site is derived from OneCLE. CLE stands for Continuing Legal Education - which is ongoing study that lawyers must perform to maintain their credentials.

This site is a great source for document templates and contract precedence. It's not enough to fire your lawyer, but it may still be useful to read and review contracts used by publicly traded companies. Chances are they are using good legal advice!

Leases Are Confidential?

It's common knowledge that leases are highly confidential. They are one of a landlords most carefully guarded assets. Leases are secret. Everyone knows that.

Except for publicly traded companies! They have to file everything with the SEC. And the SEC posts everything online at http://www.sec.gov/edgar.shtml If, for example, you want to find out what Corel is paying for space at 1600 Carling Ave in Ottawa, you can find it here. It's $22.03 a square foot plus operating costs of around $16.77, by the way. It's the whole lease, so you can see all the terms and conditions.

Clearly the SEC's EDGAR system is not easy to search - it's not exactly user friendly. It's not easy to find loads of lease information, but it's there. If you are curious what tenants are paying in a building, take a look and see if there are any publicly traded tenants and do a search.

Interestingly, I looked to see if I could find leases on the Canadian system: www.sedar.com/ I could not find them there. I'm not sure if the disclosure rules are different, or if they are just filed differently. But chances are that any large public entity will have to file with the SEC anyway and the information will be on the U.S. system.