OMERS Grants Nomura Six Years Free Rent!

Global Pensions reports that OMERS grants Nomura six-year rent holiday as part of office lease deal (HT Greg):

Nomura has secured a six-year rent holiday after signing a 20 year lease in a new office development owned by Oxford Properties Group, a subsidiary of the Ontario Municipal Employees Retirement System (Omers).

The investment bank - which was advised by Drivers Jonas - said the move into Watermark Place, located on Angel Lane in the City Riverside district, will complement Nomura's current European headquarters in St. Pauls.

Nomura said that the deal is believed to be the largest ever non pre-let leasing transaction in the UK office market.

Drivers Jonas partner Mark Lethbridge said: "We've got what's probably a record breaking deal of almost six years. It's fantastic timing - this is a historic opportunity, to get this kind of quality of building on these kinds of terms, which is something you see once in a generation."

However, he conceded that the situation was worse for Omers - which is letting this property on a rent-free basis for six years.

Yet he said: "On the other hand, to secure any tenant in today's market would require a substantial rent-free period to be granted, although probably not as long as six years."

He added: "We were able to squeeze that bit extra because it's Nomura, which has taken the whole building for 20 years. For Omers, they wanted to secure this deal rather than go through a two-year painful period of letting the building."

Nomura will start paying rent in 2015 after a six-year holiday. Lethbridge said that although the base rent is £40 per square foot, this will rise to the mid-forties by 2015.

Nomura will begin fitting out the office immediately, and will start to occupy the premises in 2010.

WHOA! Did you get that? Six years free rent for prime commercial real estate on Angel Lane in the City Riverside district.

Elsewhere, Reuters reports that U.S. property recession through 2011:

Most of the U.S. commercial real estate industry is expected to remain in recession through 2011 with an industry-wide recovery not expected to begin until 2012, according to a quarterly survey commissioned by PricewaterhouseCoopers.

The apartment sector is expected lead the industry from recession with a recovery expected to start sometime next year and continue through 2012, said the third-quarter Korpacz Real Estate Investor Survey released on Tuesday. About 115 real estate investors were surveyed.

Investors expect the industrial and office sectors to begin to recover in 2011 but not dominate the sector until 2012. Washington D.C., San Francisco, Philadelphia and Long Island are the office markets expected to recover ahead of the overall national market.

In the warehouse sector, West Coast cities are expected to lead the recovery charge, including the cities of Oakland, Portland, Salt Lake City and Orange County, investors said.

But they do not expect the retail real estate sector to show even a slight recovery until 2012, according to the survey of investors in 28 markets. The Oakland-East Bay, Fort Lauderdale, Nashville and Houston markets are expected to recover first, according to the survey.

Overall, investors expect the U.S. commercial real estate market to continue to deteriorate throughout this year and the next, the survey said. They see rents and occupancy rates falling in the first year of new property investment.

The outlook for first-year cash flow is an important factor in prices offered for new properties.

In the national suburban office market, investors said they expect market rent to drop by as much as 20 percent in the coming months, the survey said. Central business district office rents are expected to be off 10 percent.

Investors also expect national power centers, developments anchored by major chain stores, and warehouse rents to decline by 10 percent.

Investors expect the biggest near-term market commercial rent declines to be in Manhattan and San Francisco -- as much as 20 percent. Those poor outlooks are followed by a 15 percent drop for Phoenix and 10 percent for Boston, Chicago, Denver, Los Angeles and San Diego.

U.S. commercial real estate sales remain at a near stand-still, as equity investors remain on the sidelines waiting to capitalize on forced sales and more motivated selling on the part of distressed owners, the survey said.

Despite falling cash flows and a drought of available financing for sales, owners are still hanging onto their properties as banks extend fixed-rate loans and floating rate loans remain manageable.

"Investors seem surprised at the lack of quality buying opportunities given the problems in the financial markets and the continued weakening of the industry's fundamentals," said Susan Smith, director of the real estate advisory practice at PricewaterhouseCoopers, and editor-in-chief of the survey.

The WSJ reports that Treasury, responding to the growing pain in the commercial real-estate industry, released new tax rules that make it easier for distressed property owners to restructure CMBS loans:

The new guidance from the Treasury makes it clear discussions involving lowering the interest rate or stretching out the loan term "may occur at any time" without triggering tax consequences. In addition, the guidance allows servicers to modify loans regardless of when they mature. The servicer only has to believe there is "a significant risk of default" even if the loan is performing, the guidance states.

"A stalemate now exists on CMBS loans that are not currently in default but need modification," said Jeffrey DeBoer, chief executive of the Real Estate Roundtable, a lobbying body for property owners and investors. "Today's announcement should help break the stalemate."

But some investors holding CMBS bonds are watching nervously because loan modifications, known as "mods," mightn't always be in their best interest. CMBS have junior and senior pieces, and the senior holders may be in a better position, when a borrower defaults, to foreclose and liquidate the property rather than modify the loan. Junior holders, on the other hand, might benefit from a mod because they mightn't get their money back in a forced sale.

"The standards of care for services are to all bondholders," says Patrick Sargent, president of the Commercial Mortgage Securities Association, a trade group.

In general, servicers are required by their contracts to act in the interests of the investors and modify loans only when that can be expected to reduce losses. That puts servicers in the tricky position of trying to figure out which borrowers are basically sound and when it makes more sense to foreclose quickly.

"The biggest concern is that the guidance could open the floodgate for everyone to try to get some sort of loan modifications," said Aaron Bryson, a CMBS analyst at Barclays Capital. "There is a tremendous burden on the servicers to uphold their end of the bargain."

The news in commercial real estate keeps getting grimmer by the day. This crisis will have severe implications for pension funds that are carrying these properties on their books and banks that are exposed to commercial real estate loans. In other words, the commercial real estate crisis isn't over - not by a long shot.