The Wall Street Journal reports,

“Office buildings often don’t show financial strain in the early stages of a downturn because they are occupied by tenants who have signed long-term leases. As long as the tenants stay in business, their landlords can even see revenue increases because of escalation clauses in their contracts.

The pain starts hitting when leases expire. In tough markets, landlords typically have to spend a lot to retain or attract tenants through brokerage commissions or incentives such as free rent or interior construction. The cost of attracting tenants is a factor that is cutting into funds from operations.”

Wilbur Ross, Billionaire investor thinks the U.S. is in the beginning of a “huge crash in commercial real estate.”

“All of the components of real estate value are going in the wrong direction simultaneously,” said Ross. “Occupancy rates are going down. Rent rates are going down and the capitalization rate — the return that investors are demanding to buy a property — are going up.”

Ross suggests “extreme caution” before putting money into commercial real estate, especially office space, because properties are losing tenants.

More here

Tom Barrack is the chairman of Colony Capital. He controls some $40 Billion worth of real estate, spanning from hotels, to office properties, to Michael Jackson’s Neverland Ranch. When foreign investors look to place their money in the US they look to Colony Capital as one of the top players.

Tom Barrack Comments

In my opinion it’s questionable whether or not it lives up to standard of a Class A property. I guess it all depends on who is delivering the message.

“The first Class A asset to sell downtown this year, McMorgan & Co. had sold its 311,000-square-foot 303 W. Madison. The 26-story building was purchased by an international real estate investor in a deal that closed Wednesday for a reported $60 million. Sold by CB Richard Ellis, which will continue to manage and lease the property, the building’s buyer is reported to be tequila maker Jose Cuervo.”

The proposed changes to the Statement of Financial Accounting Standards No. 13, known as FAS 13, which governs the accounting of leases, would reclassify “operating” leases as “capital” leases, ending the long-standing and long-debated practice of accounting for leases as off-balance-sheet transactions.

Costar has a nice segment on this found here.

The delinquency rate on commercial mortgages jumped 33 basis points to 3.34 percent last month, according to Credit Suisse Group AG. Payments on $22.4 billion of mortgages were at least 60 days late in September, the report from the financial services firm said, a sharp increase from the same time period a year ago, when $3.2 billion in mortgages were delinquent. Credit Suisse analysts attributed the uptick in delinquencies to poor underwriting on recent loans, as borrowers expected rents on space — particularly retail — to keep rising.