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THE CURRENT STATE OF COMMERCIAL REAL ESTATE FINANCING

June 15, 2008 on 4:34 pm | In Fascinating Information, Fascinating Office Real Estate Information, Funny...Money, Investment Opportunities, Statistics, Trends, Uncategorized |

THE CURRENT STATE OF COMMERCIAL REAL ESTATE FINANCING ACCORDING TO COSTAR
CoStar (http://www.costar.com) -the self-proclaimed “#1 Commercial Real Estate Information Company in the U.S. & U.K.” has released a very informative + well researched piece on the commercial real estate market called “State of CRE Financing Part I: Beyond What Was Expected Residential Depression — Not CRE Market Conditions — Is the Main Force Constraining “Commercial Real Estate Lending”
We found this highlight from the lengthy investigation to be an illuminating synopsis of where the commercial market is at, how it got there, and an enlightened speculation on where the market will go…

It All Starts with Housing

To understand current commercial real estate market conditions, the housing market deflation cannot be ignored. It all started with the unexpected rapid implosion of the subprime mortgage market in February of last year. That was the event that wiped out an entire support base on which housing sales were based: the first-time and low-income homebuyer.

When that support cracked, so did a second column of support: the speculative investor that hoped to flip a property in a year or two. Then the whole housing market came tumbling down.

It triggered an immediate drop in value of hundreds of billions of dollars of mortgage-backed securities, which triggered the substantial write-off in values of assets at financial houses, closed the spigot on the issuance of new mortgage-backed securities and eventually shut down additional real estate lending. It was the proverbial house of cards collapse.

The chain reaction effect is important to understand because it explains in a lot of ways why banks, lenders and Wall Street have so far seemed to be caught off guard.

“The real problem today is what’s happening ‘around’ our loans not so much what’s happening ‘with’ our loans,” said George L. Engelke, Jr., chairman and CEO of Astoria Financial Corp.

If you’ve got a community that’s got 50 houses for sale and they are all in foreclosures or financial trouble, Engelke noted, “People can’t get a transaction done.”

No matter how well banks monitored the individual loans in their portfolio or the performance of their customers, it was not enough to see how they would be impacted from the chain reaction. Likewise, no matter how good customers’ credit condition looks on paper, it is still hard to get a loan.

Because of that, it is not unusual now to see banks writing down the value of loans that they normally would not have and not making loans that normally would have.

Bryan Jordan, CFO of First Horizon National Corp. gave this account of one loan that was current and in good standing.

“We observed the draw inactivity on construction projects in California City [in Kern County east of Bakersfield, CA],” Jordan said. “Our investigation identified that the local city had placed a stock order on construction by this customer due to past due real estate pattern and additional lengths placed on the property. Although the loan remained current due to interest reserves, the credit was classified substandard in a new appraisal order. Following receipt and review of the appraisal, the loan was charged down to the estimated current realizable value.”

“Given the deteriorating market condition,” Jordan said, “we continue to be proactive in identifying problem loans and in writing them down to realizable value, which includes disposition costs and adjustments for market declines since the last appraisal.”

According to bankers, appraisers are also becoming more aggressive in writing down the value of real estate assets.

“What happened is that we are going through a very challenging time that when you have major developers like KB Homes and all of the big ones who are suddenly walking away from big developments in this kind of environment, appraisers are turning to extremely, extremely pessimistic views,” said Dominic Ng, chairman, president and CEO of East West Bancorp.

Trickle Down into CRE

John D. Schwab, executive vice president and chief credit officer of Citizens Republic Bancorp Inc. said his bank saw 36 commercial real estate loans slip into the non-performing category.

“About half of them were what I’m going to call much smaller income producing properties where these are retail strips where there is vacancies where the cash flows are no longer supporting the currency of loans,” Schwab said. “The chunkier ones happen to be, as I mentioned, both land development and income producing.”

Harris H. Simmons, chairman, president and CEO of Zions Bancorporation, said his staff is seeing anecdotal evidence of a little bit of commercial deterioration in trades and businesses that are related to that market, for example, firms such as plumbers, electricians and so forth.

John Allison of BB&T said his banks are seeing the housing impact trickle into a host of other commercial businesses.

“I think the impact in the automobiles business is pretty dramatic,” Allison said. “I think the fact that people have less comfort in the equity in their homes, [and that lack of] security makes them less willing to do bigger purchases. It’s impacting the furniture business pretty significantly. Obviously people buy furniture when they buy new homes and that’s a deferrable purchase and so you have furniture retailers struggling.”

Nonetheless, bankers are still generally comfortable with most aspects of their office, industrial and retail real estate portfolios and clients.

Whether you could translate auto dealer and furniture retailers’ problems into shopping centers problems is an unknown, Allison said.

“I am in the process and every spring I get to visit all 33 of our community banks and I am having the opportunity to talk to lots of our small business, middle-sized business clients,” he said. “And the story if you are in the residential construction development business is that you aren’t having any fun.”

That pessimism hasn’t hit the commercial market yet, Allison added.

“If you are in the commercial end of the market, most everybody says things are fine, although they may not be fine going forward. I am not getting anybody on the commercial side that’s not pretty optimistic,” he said.

“One thing is that in the early ’90s a lot of the downturn was commercial, not residential, because you had so much excess buildings,” Allison said. “And this time around, you probably have some excess buildings, but it’s nothing like the early ’90s, where you had so much excess lot development in retrospect on the residential side. I think that’s why you are having a much more serious correction on the residential versus commercial.”

Gregory Smith, CFO and senior vice president of Marshall & Ilsley Corp., said, “fundamentals in the apartment, medical office, and warehousing segments are positive. Fundamentals in hospitality are currently good, however, we anticipate softening reflecting the economy in general and high gas prices. Retail and office demonstrates softening.”

Dominic Ng of East West Bancorp, said the occupancy rates of shopping centers, hotels, industrial warehouses and office buildings in his Inland Empire market in Southern California are still holding up.

“Despite all of the concern about recession and so forth, we have not seen any kind of increase in vacancy rate in any substantial manner,” Ng said. “There’s a huge relief because interest rates have come down so much due to the Fed fund reduction. Now our customers used to pay about 7.5%, 8% to us and now they’re paying, about 5.5%, 6% and they may be even lower but the rents are not dropping, so they’re picking up even more cash flow.”

On top of that, Ng said, unlike in the residential sector in which there is a huge glut of inventory, there is very little supply of commercial properties.

**
Excerpted from a story from Mark Heschmeyer

Read the article in its entirety at:

http://www.costar.com/News/Article.aspx?id=3B32371C95EEDB636851A22C74B28A1E&ref=100

20 Comments »

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I must say this is a great article i enjoyed reading it keep the good work

Comment by Susan Kishner — June 15, 2008 #
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Comment by Dan Waldron — June 15, 2008 #
[...] Jodi Summers wrote an interesting post today on THE CURRENT STATE OF COMMERCIAL REAL ESTATE FINANCING. Here’s a quick excerpt: [...]

Pingback by THE CURRENT STATE OF COMMERCIAL REAL ESTATE FINANCING — June 15, 2008 #
This is the largest real estate data base for property in Florida, including houses, commercial property, townhouses, vacation homes, and more. Current Fund

Comment by Current Fund — June 15, 2008 #
Federal Reserve Chairman Ben S. Bernanke signaled he’s done cutting interest rates for now and raised his biggest concerns yet about the inflationary effects of the dollar’s 16 percent drop in the past year against the Euro.

Comment by Bloomberg — June 16, 2008 #
“I see a topping off in commercial building construction, and a decline in private non-residential construction spending,” observed NAR Chief Economist Lawrence Yun. “We project generally softer rent growth in commercial real estate, and modestly lower business opportunities in most market areas for commercial practitioners. As in the residential sector, areas with strong job growth are doing fairly well.”

Comment by Walter Molony — June 16, 2008 #
“We’ve had positive GDP for the last two quarters, but it’s been very weak,” noted University of California, Berkeley professor and economist Kenneth Rosen. “There’s a lot of worry about and we’re on very fragile ground. … We may be in the eye of the storm, and next leg is about to come down on us. Higher food, energy costs, job losses might lead to deeper recession. It’s going to take just one more bad thing happening.”

Comment by Randyl Drummer — June 16, 2008 #
Newly released data suggests that fear and panic on the part of investors in the capital markets, not necessarily erosion of fundamentals, have been largely responsible for the mispricing of commercial mortgage-backed securities (CMBS) relative to their fair value and historical risk-adjusted returns.

Comment by CoStar — June 16, 2008 #
George L Engelke, Ceo is certainly an authority on mortgage foreclosure fraud,- his bank Astoria Federal Savings & Loan stole my two NYC Condos by selling them to straw buyers in NY Supreme without jurisdiction while my case ML vs. Astoria Federal S & L was in Federal Court and under Federal jurisdiction, saying “who is going to stop us?”

Comment by marilyn lane — June 16, 2008 #
Today’s incomes are contracting in real terms, wage growth stagnant. The “wealth effect” is running in reverse, Americans with no resource to tap to offset huge increases in the cost of energy, food and health care. The big end of today’s financial system is insolvent, broke, liquid but without capital, huge losses still to be recognized, and credit shortage is spreading to small institutions.

The players in the credit markets have got three things out of whack — not necessarily wrong, but probabilities misunderstood.

Read about them at http://www.inman.com/buyers-sellers/columnists/loubarnes/fed-foolish-raise-rates-now

Comment by Lou Barnes — June 16, 2008 #
Banks miss an easy housing fix
Mortgage lenders say they are there to help homeowners who are having trouble making their monthly payments
but who can’t sell their home for what it is worth in today’s market. But real estate agents and others say both
homeowners and the banks themselves lose out when banks are unable to close so-called “short sale”
transactions.
Keep this in mind . . .
• In a short sale, homesellers ask their lender to accept a buyer’s offer that is less than the amount needed to pay
off the balance of the mortgage. Lenders who agree to a short sale also typically agree to forgive the remaining
debt.
• Many call short sales a win-win for lenders and homeowners. The homeowner avoids foreclosure and banks
avoid the cost of carrying the property through the lengthy foreclosure process, not to mention the hassles of
selling an empty property in a market saturated with other foreclosures.
• On average, lenders lose approximately 19 percent of a mortgage’s value with a short sale but lose an average
of 40 percent on mortgages that proceed to foreclosure, according to one source.
• The problem with short sales? Like other foreclosure mitigation efforts, the challenge is in determining which
financial entity “owns” the loan and, thus, has the final say on a short sale offer. Banks also have been slow to
ramp up internal processes needed to review and approve short sale packages. Delays and last-minute
dickering often prolong or even derail transaction closings and creates frustration for potential homebuyers and
their real estate agents.
To read the full story, please click here:
http://money.cnn.com/2008/05/28/real_estate/short_sales_long_waits/index.htm?postversion=2008052811

Comment by CNN Money — June 16, 2008 #
Detroit’s Office Vacancy Highest in 10 Years

The office vacancy rate in metropolitan Detroit climbed to 22.6% in Q2 from 22% during Q1. It is the region’s highest level of vacancy in almost a decade. Roughly 690,111 sf of space returned to the market in Q2. The vacancy rate in Detroit’s central business district remained flat at 28.2%, while Troy posted a 27% vacancy rate in the quarter. Dearborn was the region’s healthiest submarket with a 27% vacancy rate.

Comment by CRE News — September 9, 2008 #
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Comment by Danny Lipman — November 8, 2008 #
Where is the justice in the pure GREED that was exhibited by the banks and just WHY should future generations be paying for these greedy so called executives??

This view is absolutely right — there is no justice here. Taxpayers should not be in this position. But the bailout isn’t about justice. It’s about survival. The central thesis of the article was that without government help, there was a good chance that our banking system would collapse, and that would result in unbelievable pain for all of us

Comment by Richard Gibbons — February 21, 2009 #
Lenders declare foreclosure halt
Fannie Mae, Freddie Mac, JPMorgan Chase & Co., Morgan Stanley, and Bank of America Corp. announced they are halting foreclosures through March 6, while President Obama works out the details of his housing plan. Citigroup said it will halt foreclosures until the administration has completed the details of the program or March 12, whichever is earlier.

Comment by Market Matters Weekly Advisory — February 22, 2009 #
Fallout from the housing collapse spread to other areas. Builders cut spending on commercial construction projects by 21.1 per cent and house builders slashed spending at a 22.2 per cent pace.

Comment by Times Online — February 28, 2009 #
A joint venture of Van Nuys-based Sharp Capital Group and Axiom Real Estate has taken title to a 52-unit condominium project after acquiring a nonperforming loan on the property.

The condominium project that the Sharp-Axiom joint venture has taken title to is at the corner of North Union Avenue and West Temple Street in Echo Park. The price that Sharp paid was undisclosed, but it’s been revealed that the joint venture bought the loan at a significant discount, then foreclosed on the property and took title.

Comment by Bob Howard - GlobeSt.com — March 5, 2009 #
Nationalize both Citigroup and Bank of America right now for a pre-determined time frame of something like five years, and we can quickly get the banking system working again. Plus this way we wouldn’t have to worry about trying to figure out how to price those “toxic assets” currently on these bank’s balance sheets.

Comment by Robert Froehlich — March 22, 2009 #
High levels of construction have weakened fundamentals for medical-office buildings and could mute what has been comparatively strong investor demand in the sector.

Investor demand for the sector, commonly referred to as MOB, is slowing most markedly in the West/Pacific Northwest and Southwest/Mountain regions, where construction deliveries have bumped up vacancy rates and driven down rents. It expects investor interest to remain strong in the Southeast, Northeast and Midwest despite their own high levels of construction.

The study noted that nationwide, construction activity in the sector peaked at 17 million square feet last year. This year, another 14 million sf is expected to be added, increasing the total MOB inventory by 2.6 percent to 538.5 million sf.

Comment by Marcus & Millichap — April 21, 2009 #
Small-Cap Properties See Continued Rent Drops, But Less Than Before

Rents at small-capitalization properties continued to fall last month, but the rate of decline has tapered off somewhat, which might indicate that the worst could be over for the sector.

According to Boxwood Means Inc., a Stamford, Conn., research company that focuses on small-cap properties, all sectors continued to see rental drops, with industrial and certain retail buildings seeing the biggest drops. But those declines are nowhere near as large as they had been during the market’s freefall during the middle of last year, when monthly drops in some subsectors were greater than 100 basis points.

Another reason for optimism: Boxwood has found a strong correlation between the performance of the residential housing market and small-cap commercial properties. And the residential market has seen an uptick in sales and potential stabilization of pricing, which could portend a period of stabilization for many small-cap properties, particularly retail.

Comment by CRE News — August 15, 2009 #