The Ground Floor

Concerned about Climate Change? Build an Ark

Most of the focus on climate change has been determining the reality, the causes, and the options to prevent it. A gloomier side of the issue looks at adaptation measures to cope with some of the worst impacts of weather extremes. For example, raising your house a level, making it float, or building an ark. (On a lighter note, "Noah and the Ark," a classic Bill Cosby piece, is available on You Tube). A new report, "Potential Impacts of Climate Change on U.S. Transportation," makes the case that climate change is happening now and that changes are needed in the way we design, build, and operate transportation facilities.

Nancy Humphrey, senior staff officer at the Transportation Research Board, noted at a meeting of the Road Gang in Washington on March 13, that the report, "turned the traditional finger pointing on its head." The report, authored by a committee of members of the Transportation Research Board and the Division on Earth and Life Sciences of the National Research Council, presents an overview of the scienfitic consensus on climate change relevant to U.S. transportation, identifies impacts on U.S. transportation and adaptation options; and offers recommendations for actions to prepare for climate change as well as additional research.

Economic Worries Take Center Stage in Webinar

Two industry experts -- Wharton School Professor Peter Linneman and Rosen Consulting principal Arthur Margon, moderated by ULI senior resident fellow Steve Blank -- addressed many of the worries and fears about the current economic downturn in a webinar yesterday, hosted by ULI. Their analysis? That yes, we are in a challenging time and people should be cautious, but things will eventually get better. View the archived webinar here.

Monday's Numbers and Newsworthy Notes

Newsworthy Notes

What's the Federal Reserve Board Going to Do on March 18th?

All eyes are on the Federal Reserve Board, waiting to see what it will do for an encore after engineering Friday's takeover of Bear Stearns by JP Morgan. Set your alarms for 2:10 p.m. EDT and make sure you have your seat belts tightened because whatever they do, whatever they say, it is going to be a volatile day and second guessed by many.

Don't Feel Sorry For Carlyle

We're not being hard-hearted or gleeful about someone else's troubles. You know the expression: you live by the sword, you die by the sword. As reported in the European edition of the Wall Street Journal on Friday: "...Carlyle Capital would exploit the differences between the interest earned on its investment in mortgage securities and the costs of financing those investments. The secret to making money was borrowing massive sums. Carlyle Capital managed only $670 million in client money, but used borrowings to boost its portfolio of bonds to $21.7 billion, meaning it was 32 times leveraged." If some numbers we did on the back of an envelope are correct, if Carlyle's directional play had worked -- if the yield on its investments had followed the downward yield curve of U.S. Treasury securities -- to the tune of 0.50%, Carlyle would have made about three times its investment. Similarly, if interest rates went the wrong way, or if the prices of its securities portfolio did not follow and align with the yields on Treasuries, Carlyle would suffer huge losses. It appears that Carlyle became mired in the same trap as Long-Term Capital Management did in 1998 when the flight to quality turned into a flight to both quality and liquidity. Carlyle got caught by one of those "Black Swan" events -- totally unexpected and therefore totally devastating. They made a strategic bet, backed with it huge leverage, and suffered the unexpected consequences. In a letter to investors Carlyle Capital management noted: Carlyle Capital "believed this [its strategy] to be a creative and thoughtful approach and one that was time tested in the markets for these types of assets."

"What a difference a year makes"

	March 8, 2008	One Year Ago	Change
Prime Rate	6.00%	8.25%	-2.25%
Federal Funds Rate	3.00%	5.25%	-2.25%
3-Month LIBOR	2.94%	5.36%	-2.42%
3-month Treasury	1.44%	5.13%	-3.69%
10-year Treasury	3.53%	4.80%	-1.27%
30-year Treasury	4.54%	4.91%	-0.37%

Year-to-Date Equity Market Performance

DJIA⁽¹⁾: -9.90%
S & P 500⁽²⁾: -12.27%
NASDAQ⁽³⁾: -16.58%
Russell 2000⁽⁴⁾ : -13.48%
MSCI U.S. REIT⁽⁵⁾: -4.46%

(1) Dow Jones Industrial Average.
(2) Standard & Poor’s 500 Stock Index.
(3) NASD Composite Index.
(4) Small Capitalization segment of U.S. equity universe.
(5) Morgan Stanley REIT Index.

U.S. Treasury Yields (as of March 15, 2008)

3-month: 1.16%
6-month: 1.32%
2-Year: 1.48%
5-Year: 2.40%
10-Year: 3.44%

Pricing of Various Tranches of Commercial Mortgage-Backed Securities (as of March 5, 2008)

Rating; Term; Spread to U.S. Treasury Bonds

AAA; 5 years; +463 basis points
AAA; 10 years; +409 basis points
AA; 10 years; +924 basis points
A; 10 years; +1124 basis points
BBB; 10 years; +1674 basis points
BBB-; 10 years; +1874 basis points
BB; 10 years ; +2500 basis points
B; 10 years; +2700 basis points

Source: Various Investment Banking firms such as Lehman Brothers, JP Morgan, and Morgan Stanley

Indicated Spreads for Conventional Commercial Mortgages (as of February 24, 2008)

	Commercial Mortgage Rate Spreads for 5-10 Year Fixed-Rate Mortgages
Property Type	<65% LTV	>65% LTV
Multifamily	+180 – 200	+220 – 250
Regional Malls	+225	+250 – 350
Strip/Power Centers	+225	+250 – 350
Multi-Tenant Industrial	+200 – 250	+250 – 400
CBD Office	+200 – 250	+250 – 400
Suburban Office	+200 – 250	+250 – 400
Full-Service Hotel	+250 – 300	+300 – 400
Limited-Service Hotel	+250 – 300	+300 – 400
	5-Year Treasury – 2.81%; 10-Year Treasury – 3.79%
Source: Cushman & Wakefield Sonnenblick-Goldman, LLC.