World's Best Places For Real Estate Buys

Ten cities investors will target in 2009.

In Depth: World's Best Places For Real Estate Buys

Washington, D.C., traditionally takes a back seat to world cities like London, New York and Tokyo when it comes to real estate investment.

That's likely to change.

 

Thanks to a proposed $1 trillion wave government spending, investors are flocking to D.C. for opportunities in the commercial and residential real estate markets. All these new programs will need offices, after all, and their employees will need places to live.

This year, Washington leapfrogged London for the first-place ranking in the world's best cities for real estate investment. But don't count out the world's financial capitals just yet--even with massive financial troubles in London and New York, those cities finished second and third, respectively.

 "Why? It's the appeal of long-term stability, and fears that emerging countries are going to take a harder hit. While the U.S. property market sputters, China is poised for its worst deflation in a decade, focused heavily on property price declines, according to Deutsche Bank (nyse: DB - news - people ).

"For the U.S. and U.K., part of it is flying back to safety," says François Ortalo-Magne, a real estate professor at the Wisconsin School of Business. " For China and India, there's a sense that we went there and tried it, but it wasn't producing."

Behind the Numbers
Forbes' rankings come from the Association of Foreign Investors in Real Estate, a research association that tracks where member investors are finding the best opportunities around the world. AFIRE surveys its 200 members, who collectively hold $700 billion in cross-border real estate.

U.S. cities surged up this year's list: San Francisco moved to sixth from 24th last year; Los Angeles moved to seventh from 19th; Houston moved to eigth from 32nd. Cities in the Asia Pacific region dropped: Sydney fell to 11th from ninth; Hong Kong dropped to 22nd from 10th place.

 

This year, investors know that valuations can't be trusted. In 2008, the American residential market fell 19%, according to the Case-Shiller index; U.K. prices dropped 16% according to Nationwide, a U.K. builder. Commercial values in both countries have started to soften due to recessions on either side of the pond.

In 2008, investors to spend tried to call the bottom and gambled in emerging markets. This year, they're looking at premium locations in cities with proven track records.

World's Best Places For Real Estate Buys
FORBES Magazine -- Matt Woolsey, 01.21.09
Ten Cities Investors Will Target In 2009
Washington, D.C., traditionally takes a back seat to world cities like London, New York and Tokyo when it comes to real estate investment.

 ZIP Code: 20815 Chevy Chase, MD
From: 12/01/2008 to 12/31/2008                Statistics generated on: 01/07/2009

Source: Metropolitan Regional Information Systems, Inc. - MLS Resale Data
Copyright 2009 - Information deemed reliable, but is not guaranteed.

By Katherine Shaver
Washington Post Staff Writer
Wednesday, January 28, 2009; A01

The Montgomery County Council's approval yesterday of a light-rail system linking Montgomery and Prince George's counties is a milestone in the more than 20-year effort to move people more efficiently between the two suburbs and spur redevelopment of older neighborhoods, according to officials and transportation planners.

The 16-mile Purple Line would connect Bethesda and New Carrollton, and officials predicted that it would rejuvenate inner-ring suburbs that are beginning to show their post-World War II age. Some transportation experts say the east-west transit line could help transform struggling Maryland communities such as Langley Park and Riverdale Park in the same way that Metro helped bring offices, retail, restaurants and apartments to Northern Virginia's Rosslyn-Ballston corridor.

"It represents a case study for how suburban areas are going to remake themselves for the 21st century," said Robert Puentes, a transportation specialist and senior fellow at the Brookings Institution. "It's not just the old notion of moving people from point A to point B," Puentes said, "but about remaking those places."

Despite some skepticism from residents about the plan's price and chances of securing federal funding, Maryland transit officials say a Purple Line would give residents of job-starved areas in Prince George's a faster and more reliable alternative to the sluggish buses they now use to get to work in areas such as Bethesda, Rockville and Gaithersburg. The rail line also would run to the University of Maryland's College Park campus and link Maryland's Metro, MARC and Amtrak stations.

Maryland Gov. Martin O'Malley (D) is expected to submit a Purple Line project to the Federal Transit Administration for funding this spring, entering the state in a fierce competition for construction money. The light-rail project has been endorsed by the Montgomery council, Prince George's council and both counties' executives and is estimated to cost $1.2 billion to build. State officials have said they can't afford that without the federal government covering at least half.

Transit advocates are optimistic that President Obama's plans to spur the economy by investing in infrastructure will mean more money for such projects. But the demand for construction money will probably continue to far outpace supply, they said.

Webb Smedley, chairman of Purple Line NOW, said the project will compete well, especially if the Obama administration considers how it would limit sprawl and serve lower-income riders.

"It really stands for itself with its ridership, travel time savings and ability to link Metro stations," Smedley said.

The local debate over the Purple Line has centered on its route -- mainly whether it would run along a popular wooded walking and biking trail between Bethesda and Silver Spring and how it would thread through some Silver Spring neighborhoods.

The endorsed proposal would run light-rail trains, which are similar to streetcars and use overhead electrical wires, primarily aboveground and along local streets, except for the four-mile trail portion. Trains would have their own lanes and run beneath or over most major intersections. It is estimated that the line would average as many as 62,600 trips a day by 2030. If the project gets federal funding, construction could begin in 2012, officials said.

Michael D. Madden, manager of the state's Purple Line study, told the Montgomery council that "pretty much all" of the trees on the Georgetown Branch Trail between downtown Bethesda and Columbia Country Club's golf course would need to be cut down. However, he said, trees could be spared in trail areas with wider right of way, such as through the country club's golf course and east toward Silver Spring.

The council voted 5 to 3 to ask Maryland transit planners to study in more detail the possibility of using a single track along parts of the trail to spare more trees. Council member Don Praisner (D-Eastern County), who recently received a colon cancer diagnosis, was absent from the meeting. Madden said his team would reconsider a single track but said such systems generally make trains slower and less reliable.

Council member Roger Berliner (D-Potomac-Bethesda), whose district encompasses the trail, said he thinks a rail line can coexist with it, particularly with heavy landscaping. Berliner said Montgomery bought the trail route in the 1980s to preserve as right of way for a rail line.

Still, he said, "anything we can do to minimize the impact on the trail, I think we have an obligation to do."

Geoff Gonella, a country club board member and executive director of the Alliance for Smart Transportation, which opposes the trail route, said the council's proposal is too expensive, would increase traffic around stations that draw development and would take relatively few cars off the road.

As for the trail, Gonella said, "I don't think anyone can reasonably look at this and think the trail is going to come back."

The council also asked the state to further analyze a tunnel option beneath downtown Silver Spring and some neighborhoods to the east. Madden said that idea would require more land on Wayne Avenue, which would disrupt nearby homes and Silver Spring International Middle School.

A Purple Line would be the first major east-west transit link to directly connect spokes of the Metro system, a trip that now must be made by car or a series of slow buses. As jobs have moved from cities to fast-growing suburbs over the past 20 years, planners say, the Washington area has joined Los Angeles, Chicago and other areas seeking ways to better move commuters who need to get from their suburban homes to their suburban jobs -- all as space to build roads has diminished.

"Our urban areas are expanding and encroaching on our suburbs," said Sarah Catz, director of the Center for Urban Infrastructure at the University of California at Irvine. Without room for new roads, Catz said: "What do you do? You have to start investing in transit."

Art Guzzetti, the American Public Transportation Association's vice president for policy, said transit systems such as a Purple Line would serve demographic trends. Those include a rise in one- and two-person households, which will increase demand for the kind of high-density housing that can be built around transit stops.

"I'm not saying the American love affair with the automobile is totally over," Guzzetti said, "but the newer generation of people don't seem to need it in the same way as the previous generation did."

Fed pledges to use all tools to help economy

WASHINGTON – The Federal Reserve, acknowledging the economy has continued to deteriorate, signaled Wednesday that it will keep using unconventional tools to cushion the fallout, including keeping a key interest rate at a record low for quite "some time."

Specifically, the Fed said it is "prepared" to buy longer-term Treasury securities if the circumstances warrant such action. At its December meeting, the Fed said it was merely evaluating that option. Such a move could help drive down mortgage rates and provide help to the stricken housing market, economists said.

The Fed also agreed — with one dissent — to keep the targeted range for the federal funds rate between zero and 0.25 percent. The funds rate is the interest banks charge each other on overnight loans. Economists predict the Fed will leave rates at that range through the rest of this year.

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, was the sole dissenter. He wanted the Fed to move forward on buying Treasury securities.

"The economy has weakened further," the Fed said. To provide support, it said it would keep rates at rock bottom levels for "some time."

Having taken the unprecedented step of slashing its key rate to record lows at its previous meeting in December, the central bank pledged anew to look to other unconventional ways to revive the economy.

Fed Chairman Ben Bernanke and his colleagues are battling a three-headed economic monster: crises in housing, credit and financial markets that — taken togheter_ haven't been seen since the 1930s.

Despite the Fed's aggressive rate-cutting campaign, a string of bold Fed programs and a $700 billion financial bailout program run by the Treasury Department, credit and financial markets are still stressed and far from normal.

Yet, the Fed said there's been some thawing of frozen credit conditions.

"Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight," the Fed said.

The Fed also said it stands ready to expand another program aimed at providing relief to the crippled mortgage market.

The central bank is buying up to $500 billion in mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. It also has agreed to buy up to $100 billion of Fannie and Freddie debt. Mortgage rates have fallen in the wake of the program's announcement late last year. The Fed said it could buy more of these securities or extend the length of the program.

The central bank also said it will be launching a program aimed at bolstering the availability of consumer loans.

Under the program, which is expected to start in February, up to $200 billion will be made available to spur auto, student and credit card loans as well as loans to small businesses. To do that, the Fed will buy securities backed by those different types of consumer debt. The Fed also hopes that action will lower rates on those loans.

The Fed said it will assess whether the program should be expanded in size or scope. Fed officials previously have mentioned the possibility of expanding the program to provide financing for other types of securities, such as those backed by commercial mortgages.

The central bank on Wednesday repeated its pledge to "employ all available tools" to turn the economy around. Since its last meeting in December, the Fed said the economy had lost even more traction.

"Industrial production, housing starts and employment have continued to decline steeply as consumers and businesses have cut back spending," the Fed said. "Furthermore, global demands appears to be slowing significantly."

Looking ahead, the Fed anticipates "a gradual recovery in economic activity will begin later this year," but cautioned that "the downside risks to that outlook are significant."

Warning that the nation is at a "perilous moment," President Barack Obama made a fresh plea to Congress Wednesday to enact a $825 billion package of increased government spending and tax cuts to stimulate the economy.

The recession, now in its second year, could turn out to be the longest since World War II.

The nation's unemployment rate bolted to a 16-year high of 7.2 percent in December and could hit 10 percent or higher at the end of this year or early next year. A staggering 2.6 million jobs were lost last year, the most since 1945, though the labor force has grown significantly since then. Another 2 million or more jobs will vanish this year, economists predict.

This week alone, tens of thousands of new layoffs were announced by companies including Boeing Co., Pfizer Inc., Caterpillar Inc., Home Depot Inc., Target Corp., Corning Inc. and Ashland Inc.

Meanwhile, consumer prices have been falling. At first that seems like a blessing for shoppers, but it if spreads to wages and already stricken prices for homes, stocks and other things for a long time, it could wreak more havoc on the economy. The country's last serious bout of "deflation" was in the 1930s. Holding rates at record lows would help fend off any deflation risks.

Against that backdrop, the Fed raised the specter of deflation — but didn't use the word. The Fed saw a risk that "inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."

With jobs disappearing, home values tanking, foreclosures soaring and nest eggs shriveling, consumers have sharply cut spending. That, along with the housing collapse, has played a big role in causing the economy's backslide.

Many economists predict data will show the economy contracted at a pace of 5.4 percent in the final three months of last year when the government releases the gross domestic product report Friday. If they are correct, that would mark the worst performance since a drop of 6.4 percent in the first quarter of 1982, when the country was suffering through a severe recession. The economy is still contracting now — at a pace of around 4 percent, according to some projections.

On the housing front, the Fed on Tuesday took steps to curb home foreclosures as required by a 2008 law. The relief would apply to mortgage assets the Fed is holding because of last year's bailouts of Bear Stearns and insurer American International Group. Distressed borrowers could see the amount they owe on their home loan lowered or their interest rate reduced, among the options for help.

Meanwhile, Obama nominee Daniel Tarullo was sworn in Wednesday as the newest member of the Federal Reserve Board. Formerly a law professor at Georgetown, Tarullo will participate in the Fed's meetings on interest rates and take part in other key policy decisions.

By Robert Schmidt and Alison Vekshin

Jan. 28 (Bloomberg) -- The Obama administration is moving closer to setting up a so-called bad bank in its effort to break the back of the credit crisis and may use the Federal Deposit Insurance Corp. to manage it, two people familiar with the matter said.

U.S. stocks gained, extending a global rally, on optimism the bad-bank plan will help shore up the economy. The Standard & Poor’s 500 Stock Index rose 3.1 percent to 871.70 at 2:40 p.m. in New York. Bank of America Corp., down 54 percent this year before today, rose 84 cents, or 13 percent, to $7.34. Citigroup Inc., which had fallen 47 percent this year, climbed 17 percent.

FDIC Chairman Sheila Bair is pushing to run the operation, which would buy the toxic assets clogging banks’ balance sheets, one of the people said. Bair is arguing that her agency has expertise and could help finance the effort by issuing bonds guaranteed by the FDIC, a second person said. President Barack Obama’s team may announce the outlines of its financial-rescue plan as early as next week, an administration official said.

“It doesn’t make sense to give the authority to anybody else but the FDIC,” said John Douglas, a former general counsel at the agency who now is a partner in Atlanta at the law firm Paul, Hastings, Janofsky & Walker. “That’s what the FDIC does, it takes bad assets out of banks and manages and sells them.”

Bank Management

The bad-bank initiative may allow the government to rewrite some of the mortgages that underpin banks’ bad debt, in the hopes of stemming a crisis that has stripped more than 1.3 million Americans of their homes. Some lenders may be taken over by regulators and some management teams could be ousted as the government seeks to provide a shield to taxpayers.

Bank seizures are “going to happen,” Senator Bob Corker, a Tennessee Republican, said in an interview after a meeting between Obama and Republican lawmakers in Washington yesterday. “I know it. They know it. The banks know it.”

Laura Tyson, an adviser to Obama during his campaign, said banks need to be recapitalized “with different management” so they start lending again. “You find some new sophisticated management unlike the failed management of the past,” Tyson, a University of California, Berkeley, professor, said today at the World Economic Forum conference in Davos, Switzerland.

Still, nationalization of a swath of the banking industry is unlikely. House Financial Services Chairman Barney Frank said yesterday “the government should not take over all the banks.” Bair said earlier this month she would be “very surprised if that happened.”

TARP Size

Obama is under increasing pressure to drastically revamp the $700 billion Troubled Asset Relief Program for the ailing industry. While setting up a bank to buy underwater assets is emerging as a favored approach, it could drive up the cost of the rescue in excess of $1 trillion.

Frank, a Massachusetts Democrat, told reporters that he would be open to expanding the size of the bailout if the Obama administration “can demonstrate the need for it.”

Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said yesterday he wants to hear more about the bad-bank idea when he meets in coming days with newly installed Treasury Secretary Timothy Geithner.

Geithner, who was sworn in Jan. 26, said today his department is considering a “range of options” for its financial-rescue plan, with the goal of preserving the private banking system. He told reporters the administration would move “relatively soon” to announce its strategy, without saying whether that would include a bad bank.

Soros’s Take

Billionaire investor George Soros said in Davos today the plan to buy toxic assets won’t be enough to get financial institutions to start lending again.

“It’s not the measure that would turn the situation around and enable the banks to lend,” Soros said in a Bloomberg Television interview. “You are nationalizing the debt and keeping the upside in private hands.”

Robert Rubin, who was Geithner’s boss as Treasury secretary in the late 1990s, warned that nationalizing the banks outright has “some serious problems.”

“You would have to find some way to insulate a nationalized financial institution from political pressure,” Rubin, who left as senior counselor to Citigroup earlier this month, said late yesterday in a panel discussion in New York. “You don’t want lending practices, I don’t think, of financial institutions subject to political pressure.”

Stimulus Package

The new administration is also pressing Congress to pass an $825 billion economic stimulus, which could complicate any effort to get additional bailout funds from lawmakers. Obama today met with chief executive officers at the White House on the stimulus.

A key question for the bad bank would be how to value the toxic assets it would buy. Geithner, in a Jan. 21 hearing before the Senate Finance Committee, outlined three possible alternatives: look at how the market is pricing similar assets; use computer model-based estimates from independent firms; and seek the judgment of bank supervisors.

“They all have limitations,” he said. “I think you need to look at a mix of those types of measures.”

Federal Reserve Chairman Ben S. Bernanke suggested on Sept. 23, when then Treasury Secretary Henry Paulson was initially considering buying bad assets, that the government should purchase them at values above the near fire-sale prices prevailing in the market.

Issuing Stock

Bair has said that cash from the TARP may help capitalize the bad bank and that commercial lenders may kick in some money of their own. One possibility that’s been discussed is issuing firms some kind of stock in the new organization as partial payment for their impaired assets.

“Along with the other agencies, we continue to provide our best thinking on potential policy decisions,” FDIC spokesman Andrew Gray said in an e-mailed statement. “I would refer you to Treasury or the White House on direction and timing.”

In any new rescue efforts, the Treasury is likely to continue to require banks to hand over ownership stakes to the government as a condition of receiving aid. Programs so far have sought preferred shares and warrants, which can be converted into common stock and cashed out on the government’s request.

Bernanke, who has endorsed the idea of a bad bank, is discussing fresh strategies for combating the financial crisis with central bank colleagues this week. The Fed today left the benchmark interest rate as low as zero, and said it’s prepared to buy longer-term Treasury securities to resuscitate lending.

Insured Assets

The Fed has participated in Treasury-led initiatives that insured toxic assets remaining on the balance sheets of Citigroup and Bank of America, and analysts said such measures could be used to complement the bad bank.

The government will likely use its ownership of toxic assets to rework soured mortgages and prevent foreclosures.

The FDIC is already modifying troubled mortgages held by IndyMac Federal Bank FSB, the successor to the failed lender managed by the agency since July. Bair, a longtime advocate of foreclosure relief, said the initiative was meant to serve as a model for the mortgage industry.

The Fed also said in a policy paper released yesterday by the House Financial Services Committee that it will ease terms on residential mortgages acquired in the rescues of Bear Stearns Cos. and insurer American International Group Inc.

Post Office Makeover in the Works for Bethesda

One of Bethesda's most ennui-inspiring edifices, the United States Postal Office site at 7001 Arlington Road, was recently approved for a mixed-use makeover - courtesy of the Keating Development Company (KDC), KGD Architects and a future wrecking ball. Though the Montgomery County Planning Board (MCPB) initially approved the project in 2007, the development plan was approved by the Montgomery County District Council in November of 2008.

The $10 million project aims to do away with the current 18,600 square foot postal facility at the site and, in turn, replace it with a 4-story residential development located above a new post office. Plans on hand call for up to 105 residential units (14 of which will be reserved as affordable housing), approximately 7,000 square feet for a new USPS retail store and 23,000 square feet of ground floor "workroom" office space that will house a re-jiggered and newly improved Bethesda Post Office. These will be joined by 299 parking spaces - divided between a ground floor garage for postal service customers and vehicles, and a below grade structure for residents and employees.

Amenities planned for the as-of-yet untitled development include a landscaped deck area that will connect to the adjacent Capital Crescent Trail. In conformance with the zoning requirements, the project will also feature the required 50% green area - a surefire improvement, as the majority of the site is currently devoted to a large surface parking lot.

KDC representatives declined to comment on the status of the development, beyond conforming that it had, in fact, received approval of the development plan from the County Council. No timeframe has been established for groundbreaking, and the current post office at the site remains open for business and in full operation for the immediate future.

Light Rail Locked for the Purple Line

In keeping with last month's staff report, the Montgomery County Planning Board endorsed light rail as the preferred mode of Purple Line transport in a 4-1 vote yesterday afternoon, decidedly nixing the prospect of a rapid bus transit alternative. The vote came at the end of two-session round of public testimony that drew nearly 50 speakers and hundreds of pieces of correspondence - many of them supporters of the embattled Capital Crescent Trail that shadows the Purple Line's proposed 16-mile route from Bethesda to New Carrollton.

Board Chairman Royce Hanson cited light rail's proclivity for speedier transport, greater passenger capacity, longer 50 to 60 year lifespan and compatibility with existing Metro and MARC systems as benefits of the selection. Despite any advantages, the new light rail will cost millions more than bus service; current projections predict that the cost of the project could rise as high as $1.6 billion.

Preliminary engineering for the Purple Line is scheduled to begin this August, although work on the line itself won’t begin before 2012, at the earliest. 

Winners and Losers in the Housing Slump

• David Crook
• Sunday January 18, 2009, 2:11 am EST