NREI – With approximately $700 billion worth of loans coming due on distressed properties over the next four years, transaction activity in commercial real estate is picking up this year, albeit slowly, and is expected to intensify in 2011 and 2012.
Investment capital that had been waiting on the sidelines from mid-2008 and the first quarter of this year is getting back into the game as confidence returns in the form of the market’s stabilizing fundamentals.
“For example, life insurance companies, a traditional source of capital, are back in the market,” says Craig Butchenhart, the president and director of capital services for NorthMarq Capital, a national firm that offers commercial real estate investment banking. “And as more traditional sources come back to the market, there will be available capital to access.”
Many of the loans originated in 2006 and 2007 — the height of the commercial real estate boom — come due in 2011 and 2012. Morningstar, an investment resource specializing in fund investing, believes that will create an environment that fosters asset sales more aggressively than in 2010. To date, 2010 has produced better opportunities for refinancing than outright asset sales.
“Most institutions that we deal with believe that values are fairly stable now,” Butchenhart says. “Confidence that fundamentals are stabilizing and not deteriorating further is bringing these institutions back to the market.”
Of course, available capital is just one aspect of the picture. Financial institutions are lending again, but underwriting requirements remain conservative as stronger cash flows continue to be required as well as longer leases, and the ability of the borrower to pay back its loan.
One surprise that may generate more transaction activity in the near future is the return of the commercial mortgage-backed securities (CMBS) market. Many analysts hadn’t expected the CMBS market to turn around this early after it was considered dead for nearly two years during the recession. Since then, few CMBS-backed deals have occurred as investors and issuers, aware of the creditworthiness risks involved, painstakingly do their homework on these securities.
In June, JP Morgan Chase Commercial Mortgage Securities Corp. issued a $716.3 million CMBS-backed bond, primarily consisting of retail properties, in the second such deal this year.
“There’s a little life in the CMBS market,” Butchenhart says.
There’s significant maturity in the CMBS loan pipeline, and most of those maturing CMBS loans are being refinanced due to low interest rates as they are maturing at rates higher than the current interest rates. If they can’t be refinanced, the CMBS loans are being modified or extended for a period of time as the borrowers await capital.
“As long as those properties have maintained a reasonable amount of leasing, loans can be refinanced,” Butchenhart says.
FORTUNE – Investors have spent years dodging disaster in one area of the markets, only to find their investments coming to a bad end elsewhere. However, there is one sector that has been outrunning the grim reaper since 2007, and it’s the last place you’d expect to have survived so long: commercial real estate. For much of 2008 and 2009 CRE was awash in red ink, and yet it hangs on. Richard LeFrak, chairman of the LeFrak Organization, said at the Milken Institute Global Conference in April, “The failure that we were all anticipating in the commercial real estate market, it kind of didn’t happen. We blinked, it went away.”
The only question now is how long it can keep up the sprint while the ghosts of boom-time leverage haunt the sector, and $1.4 trillion in loan maturities loom three years over the horizon.
There is a sharp disagreement among experts in how things will play out. Some predict foreclosures, loan defaults and a national crisis of disastrous proportions. In that corner is Elizabeth Warren’s Congressional Oversight Panel, which flatly predicted this year that commercial real estate loans are heading for a crash that will bring down small banks, destroy small-business lending and create “a downward spiral of economic contraction,” in her ominous words.
On the other side, investors in commercial properties and buyers of commercial mortgage-backed securities believe that the commercial real estate market will continue to suffer until it hits a bottom, but it will never crash in the way that the residential market collapsed. They believe that commercial real estate will be an example of how a market can take the hits and keep on ticking, that not every spot of trouble results in a crisis, that an industry can actually, somehow, stop a crisis if it acts early enough and has enough support.
Peter Roberts, Chief Executive Officer of the Americas for property giant Jones Lang LaSalle (JLL), put it this way: “We’re not going to see a ‘crash’. We’re going to see a long work-through.” Roberts believes commercial property values are in the process of bottoming out and will get to the ground floor by early 2011.
He credits the government’s support programs in capital markets with reversing the psychology of nervous markets in 2009: “The powers that be are very focused in making sure that we don’t have a crash in the real estate market. That has infused the mindset of investors.”
Investors are making the most of their good luck while they can. There have already been deals of several different varieties that show us their plan for addressing the problem of high-water mark commercial mortgages coming due.
Of them, there’s no better example of temporarily sidestepping the debt monster than Blackstone Group’s clutch move with Hilton Hotels. The PE firm’s $26 billion buyout of Hilton in 2007 — with $20 billion of outstanding debt due by 2013 — is a prime example of the sweaty palms that high leverage deals can cause even savvy investors.
But in April, Blackstone (BX) bought back $1.8 billion of Hilton’s debt and restructured another $2.1 billion to turn it into preferred equity. Blackstone also pushed off the maturities of the remaining $16 billion until 2015, buying itself two whole years of breathing room. Hilton is still debt-laden, but it’s not dead — and hedge-fund investors speak approvingly of Blackstone’s decisions to face its problems early.
The deal has kicked off a quiet trend of what one real-estate investor at a hedge fund calls “mini-Hiltons” — a pending wave of real estate investors seeking to buy back and restructure their own debt to stay alive until the recovery.
In another pattern, auctions for distressed assets are becoming more and more competitive, giving troubled assets quick homes. One of the most notable was the acquisition of Corus Bankshare’s $4.5 billion real estate portfolio, sold for a mere 60 cents on the dollar in an FDIC auction to a group of real estate investors and hedge funds including Barry Sternlicht of Starwood Capital Group, TPG Capital, WLR LeFrak and Perry Capital. The FDIC kept the majority of the portfolio, but gave the buyers zero-percent financing — a sweet deal for any investor.
Since properties have become so hard to buy, many investors have turned with voraciousness to the bundles of securitized loans known as commercial mortgage-backed securities, or CMBS. If anything in commercial real estate stands ready for a reckoning, it is these securities.
Despite CMBS hurtling toward higher default rates, however, investors who have faith in them are practicing some serious compartmentalization. They say that there are only some CMBS — and some tranches of CMBS — that will be hurt. They believe that the highest-rated tranches, rated triple-A, are in no danger.
They also say that CMBS could never create as much havoc as their residential cousins because of their structure: They are made of whole loans that haven’t been chopped up as much in the Wall Street sausage factory, and are based on stronger assets.
The tranches most likely to be hurt, of course, are those with the worst ratings – the triple Bs. These were the biggest victims of lax underwriting standards. According to Commercial Mortgage Alert, the boom years of 2005 through 2007 saw a total of $602 billion in CMBS issuance. (The CMBS written during those three years, by the way, account for a whopping 49% of all CMBS written over the past 20 years.) Those are likely to be the problematic securities. The CMBS written before and after don’t have as much leverage put on them, say investors.
CMBS, however, accounts for only about 20% of the total loan market, according to Jones Lang LaSalle’s Roberts. The bigger danger to the capital markets — and to banks — are speculative commercial loans, like those in construction and land loans. Those aren’t backed by firm assets and are a key part of the reason that many smaller banks have failed in recent years. It is these loans, in particular, that worry Warren and others, and could yet bring a reckoning to CRE.
There is a lot riding on the outcome of commercial real estate’s do-it-yourself salvation. If the sector can escape the same kind of crash that took down residential real estate, then we have a case study in how investors and government can prevent a crash before it happens. If it doesn’t work, however, the economy could be hit again at a moment when it is least able to bear the punch
Commercial property transactions can be complex and require detailed analysis and care right from the due diligence stage to the deal structuring and closing phase.
The first step in the process is assessing a deals attractiveness. While less experienced investors would be strongly advised to consult with professional advisors before investing, there are certainly early indicators that can be sought to assess if this particular deal warrants further inspection.
Tenant:
When purchasing a building with a tenant in place, the identity of that tenant is of serious importance. The tenant isn’t simply living in your building, but doing business within your property. Their ability to pay your rent is predicated upon the health of their business and not just on their ability to draw a paycheck.
In order to lower your Tenant Risk you must understand the nature, and more importantly strength of the businesses of each of your Tenants.
Whereas in Multifamily you might stop at reviewing the Tenant’s background check and payment history … in Retail, Office and Industrial you have to go further and really research the viability of each Tenant’s business. This has never been more important than in today’s economy.
Losing a tenant and suddenly finding yourself with a vacancy to deal with can lead to serious ramifications for your investment.
Lease:
If your tenant, or more specifically anchor tenant, should fail or move out at the end of its lease, the building as a whole may require restructuring and retrofitting or, at a minimum, some downtime until a new anchor tenant can be found.
With this in mind, you, as the potential owner, are looking to see as long a period of time as possible remaining on the lease. Ideally, you want to have initiated your exit strategy before any new lease is required as this will mitigate any risk of being left with a large vacancy.
Market:
The investment documentation will most likely include a market analysis detailing the current environment and how the investment sits, or will sit, within the market. This is vital and warrants a thorough investigation by the potential investor. Are the figures taken from a reliable source? Are the figures relevant? Is the report based on assumptions, or true analytical data? Is the data current? Does it relate to the correct market?
Sponsor
Like all property investment opportunities, ultimate success truly rests with the sponsor’s ability to perform as planned. Their experience, and preferable success, in the market place is obviously the best indicator of the likelihood and one should be on the look out for a strong bio. In addition, one would like to see the sponsor contributing a percentage of the required equity themselves. This is a statement of their confidence in the deal, as they are not only risking your money, but their own.
Consultants say that investors are starting to put faith in prime residential real estate as an asset classes and they regard 2010 as a good year to buy.
Property continues to make up the largest share of high net worth individuals’ investment portfolios averaging 33%, states The Wealth Report 2010 from global real estate consultants Knight Frank and Citi Private Bank.
This mainly due to the tangible and straightforward nature of residential real estate, especially during these uncertain times, the report reveals, with some 71% of high net worth individuals saying 2010 will be a good year for property.
They are interested in property for long term capital growth rather than income and with most property markets experienced a horrendous time during the 2008 global economic crash, investors now see their chance to buy at a low point in the cycle.
For cash rich investors ultra low interest rates have meant bank deposits have looked distinctly unattractive, while the low yields on bonds and volatility in the stock market have given additional pause for thought, the report suggests.
‘Added to this, the impact of the financial crash has not been as hard on the typical ultra high net worth buyer of prime property. This has meant that many wealthy owners of property are again looking for investments,’ says Michael McPartland, managing director and head of residential real estate at Citi Private Bank.
‘The wealth market is relatively insulated. Our clients look for opportunities when everyone else is circling the wagons. Buying becomes opportunistic in a downturn, particularly as people turn to hard assets such as property when other assets experience dislocation,’ he adds.
How to buy has never been more sophisticated with a myriad of direct property investment options, funds and listed and unlisted companies, as well as more complicated instruments,such as derivatives, now on offer, he points out. ‘This allows investors to build up a portfolio spread over asset classes and sectors, as well as risk and reward,’ says McPartland.
For many, residential property remains the most attractive investment, given the dynamics that underpin key cities, such as London, New York and Hong Kong. There is a focus on the very prime areas, says McPartland, which are always in short supply and facing steady demand from buyers and tenants in global centres of finance and culture.
Liam Bailey, head of residential research at Knight Frank, says residential investment makes a lot of sense over the long term for these kinds of buyers. ‘In most locations supply of property either keeps pace or falls short of demand. Most high net worth investors tend to cluster around the best locations in the world,’ he explains in the report.
Key cities such as London with prices up 15% in the 10 months from March 2009, and Hong Kong, up by around 41%, have seen a sharp bounce in prime values since reaching their nadir last year, benefiting from the limits on building, growing demand and sustained investor requirements.
Although this could put downwards pressure on yields, rents are at last beginning to climb, adds Bailey. But there is still uncertainty about short term growth, says Bailey, particularly given the speed of recent growth. He points to the uncertain economic recovery, and the potential for rising unemployment and interest rates, as risks for house price growth.
ref: Property Wire
Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com
According to a new poll, Americans appear to be slightly more optimistic about the economy than at a similar stage last year.
A CNN/Opinion Research Corporation survey was released Friday morning indicating that 19 percent of the public now says that an economic recovery is underway. A marked increase from previous figures.
“While that’s not a great number, it’s significantly higher than the 12 percent who felt that way in January,” says CNN Polling Director Keating Holland.
Thirty four percent of people questioned in the poll says the economy is still in a downturn. Again, this figure was higher last year at thirty nine percent.
What is even more interesting, is that almost half of the public sample were of the impression that conditions have now stabilized.
The CNN/Opinion Research Corporation poll was conducted April 9-11, with 1,008 adult Americans questioned by telephone. The survey’s overall sampling error is plus or minus three percentage points.
Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com
The Federal Reserve has held interest rates near zero while also highlighting increased momentum in the US economy’s recovery, during its latest meeting on monetary policy.
The Fed’s nod to a firmer rebound from the deepest recession in decades hints that it is moving closer to dropping its promise to hold borrowing costs at rock bottom levels, suggesting rate hikes could come within several months.
Kansas City Federal Reserve Bank President Thomas Hoenig said the commitment to keep rates exceptionally low for an extended period was no longer warranted.
It said the US labour market was stabilising, which is a view that is more upbeat than at the last meeting in late January, when the policy-setting committee said only that deterioration in the labour market was ‘abating’.
The Fed also said business spending on equipment and software had risen ‘significantly’. Again, this is a brighter assessment than the one it gave in late January.
The US economy resumed growth in the second half of last year, and expanded at a robust 5.9% annual pace in the final three months of the year.
The Fed has allowed special lending facilities to close as financial markets have returned to normal after the crisis, and it recently raised the discount rate it charges banks for emergency loans to 0.75% from 0.5%. Fed officials stressed the move was in keeping with the settling of financial markets and was not a precursor to efforts to tighten lending conditions.
Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com
Should you pay upfront fees to secure financing for you real estate project? It is the 64 million dollar question. For developers it is hard to pay upfront not knowing if the broker will succeed in securing the financing. For the brokers it is often the only way that they can cover their overhead expenses. With ten deals a day to review but only 1 out of 100 getting all the way to financing it is important to have a regular income stream to cover the cost of deal analysis. So when should a developer agree to pay up-front application fees?
Here are 7 things to watch out for with up front fees:
- Is the fee a reasonable amount to allow the source to compete their due diligence or is it large enough that the broker can walk away satisfied even if the deal does not get funded?
- Can the fees be staged over a series of milestones – upon application, following site inspection, upon delivery of the lender term sheet?
- Following the signing of a NDA, will the broker disclose the name of the lender to allow the sponsor to do their own due-diligence before accepting the fee structure and loan proposal?
- Will the lenders accept the current appraisals or are they requesting that everything be redone?
- Has the broker got a solid track record that can be verified through references?
- Has the broker successfully funded deals over the prior 6 months to your request?
- Is there a clause that says that some of the fees are refundable if the term sheet is substantially different from the LOI?
If the answer to the above questions is yes then you may want to consider paying the fee if the lender has offered you a LOI that makes sense to your business model.
Good luck and good investing – The Equity Finder
Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com
We are all conscious of the dark cloud of commercial real estate debt which lingers on the brightening horizon – with $3.4 trillion in outstanding debt, $1.4 trillion of which is coming due by the end of 2012— many feel this will spur the next leg in the credit crisis and possibly derail the broader economic recovery.
The situation seems especially ominous given that commercial real estate values are out by up to 40% from market highs and credit markets are only now raising their heads from hibernation. This means indebted owners do not have the ‘get out’ option of disposing the property and repaying their mortgage with the proceeds.
It also makes refinancing difficult. Borrowers have to put more of their own equity into a deal and lenders have increasingly tighter standards. Loan-to-value (LTV) ratios are not only lower than they were at market peaks, but have to be based on the current value of the property, which again is much lower than it was years previously.
However, according to many real estate economists, this fear is largely misplaced. Commercial real estate debt will likely put a dent in the the recovery in the credit markets, but due to a few key factors such as the the limited impact of commercial real estate loans on the overall economy, it won’t bring about the same wave of distress as the housing downturn did.
“As far as the impact of commercial real estate on the overall economy, I don’t think it’s going to be the next shoe to drop,” says Robert Bach, senior vice president and Chief Economist with Grubb & Ellis. “These problems are focused in regional banks and the Federal Deposit Insurance Corp. (FDIC) has a tested method of shutting those down on Friday and opening them on a Monday under the auspices of a bigger bank. These are not too big to fail banks. I don’t see [commercial real estate] as an unmitigated disaster—I see it as a repeat of what happened in the 1990s, but the economy can handle it.”
The FDIC, however, faces some concerns. A recent analysis by the agency’s Office of Inspector General found that during the peak of the real estate market many banks ignored FDIC’s 2006 recommendation that they keep commercial real estate holdings at less than 300 percent of total capital. Meanwhile, after dealing with 100 bank bankruptcies last year, today the agency is facing a deficit for the first time since 1933 and might lack the funds to deal with the potential fallout of a commercial real estate crisis.
In 2009, bank failures cost the agency $25 billion on top of the $20 billion it doled out in 2008. To deal with the money shortage, the FDIC is requiring banks to prepay $45 billion of insurance premiums by the end of this year. The premiums would cover the fourth quarter of this year and all of 2010, 2011 and 2012. Overall, the agency is projecting that bank failures between 2009 and 2013 will cost it $70 billion.
Meanwhile, more than $1.4 trillion in commercial real estate loans are scheduled to mature between 2009 and 2012, including $320 billion next year, according to ING Clarion Real Estate, a real estate investment management firm.
That’s coming at a time when new sources of refinancing remain scarce and valuations of commercial real estate properties are getting battered by weakening fundamentals. In the first half of 2009, the volume of distressed commercial assets grew 122 percent, ING reports, to $138 billion, including $32 billion in the retail sector.
The good news is that total volume of commercial real estate debt is about a third of the total amount of outstanding residential mortgage debt, which stands at approximately $10.9 trillion, according to the Federal Reserve Board’s figures.
Another important factor to keep in mind is that the residential mortgage crisis affected almost every homeowner in the country and so had a devastating follow on impact on consumer spending. Americans had been refinancing their homes and using the proceeds in the high street. By contrast, troubles in the commercial real estate industry might cause damage to banks and large institutions, but will have a limited effect on Main Street, says Clint Myers, strategist with Property & Portfolio Research, a Boston-based real estate research firm.
Any potential damage will also be mitigated by the fact that commercial real estate debt has been largely concentrated on the balance sheets of regional banks, rather than the big national players, and that most of the loans issued before 2005 feature solid underwriting, adds David J. Lynn, managing director with ING Clarion Real Estate.
Today, 54 percent of all commercial real estate loan defaults come from loans sponsored through commercial mortgage-backed securities (CMBS), which were a major source of real estate debt between 2005 and 2007. Loans issued by national and regional banks account for only 12 percent and 11 percent of all defaults, respectively.
That’s not to say that all those commercial loans won’t cause serious problems in the credit markets. As long as banks avoid realizing losses on commercial mortgages, commercial asset values will remain artificially high, Myers says. That, in turn, will likely limit the flow of new credit into the commercial real estate market, leaving some owners cash-strapped.
“The real stress in the system [will be on] the banks,” he says. “The pace at which regional banks fail will probably accelerate from this year to the next. And what it will mean is that there will be very little new lending activity for commercial real estate and it’s going to be very hard to grow.”
Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com
The US economy grew at a faster than expected 5.7% annual pace in the fourth quarter, the quickest in more than six years.
The first estimate put Q4 gross domestic product growth at its fastest pace since the third quarter of 2003. The economy expanded at a 2.2% annual rate in the third quarter. Analysts had forecast GDP, which measures total goods and services output within US borders, growing at a 4.6% rate in October-December period.
Growth was boosted by a sharp slowdown in the pace of inventory liquidation, a factor that could serve to mask the strength of the economic recovery. However, even stripping out inventories, the economy expanded at an annual rate of 2.2%, accelerating from the 1.5% increase in the third quarter, reflecting relatively strong performance from other segments of the economy.
Business inventories fell only $33.5 billion in fourth quarter after dropping $139.2 billion in the July-September period.
The change in inventories alone added 3.4 percentage points to GDP in the last quarter. This was the biggest percentage contribution since the fourth quarter of 1987.
In the last three months of 2009, consumer spending increased at a 2% annual rate, below the 2.8% recorded in Q3 when consumption received a boost from the government’s car scrappage scheme.
Consumer spending, which normally accounts for about 70% of US economic activity, has been held back by the worst labor market in a quarter century.
Business investment in the fourth quarter grew for the first time since the second quarter of 2008 as the drag from the troubled commercial property sector was offset by robust spending on equipment and software. Business investment rose at a 2.9% rate.
The growth of spending on new home construction slowed sharply in the fourth quarter to an annual rate of 5.7% from an 18.9% pace in the third quarter. Export growth outpaced imports, leaving a trade gap that contributed half a percentage point to GDP growth in the last quarter.
Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com
LaSalle Investment Management today released the 2010 edition of their Investment Strategy Annual. A publication that provides an outlook for global real estate markets.
The report notes that the plunge in values has stopped in most major markets it follows and sings of increasing investor confidence are beginning to be seen.
LaSalle anticipates a further re-alignment in the pricing of risk with an increase in deal flow as sellers slowly move from denial to acceptance. Investors should seek an appropriate balance between total risk aversion and inappropriate risk tolerance. The former is already resulting in a surplus of capital targeting a handful of ultra-safe deals.
Jacques Gordon, Global Strategist at LaSalle Investment Management said: “Overall, investors in commercial real estate should be cautiously optimistic about the outlook in 2010. However, as a late cycle participant in the general economic recovery, real estate will behave differently from other asset classes. The income streams from leased buildings weathered the global recession in remarkably good shape, but as leases mature in generally weak markets, net operating income will be under downward pressure in many countries for several years to come.”
“At the same time, in terms of stimulus packages and bail outs, commercial property has been treated quite differently from residential real estate, banking and other industry sectors. And private equity prices have not yet recovered as robustly as stocks or bonds. All these differences mean that real estate’s diversifying power in a portfolio will be restored.”
The firm goes on to state that in 2010 investors can look forward to more rational pricing and, in cases of distressed properties and owners, some hugely interesting opportunities. As they develop investment strategies for 2010-2011, investors with a clear view of the returns they require can take full advantage, says LaSalle.
William Maher, Head of US Strategy, LaSalle Investment Management said, “Investment opportunities in North America will improve but are likely to remain limited in 2010, particularly in the United States and in Mexico. In the US, the best opportunities, both core and higher return, will evolve from the resolution of the large level of maturing and failing loans.”
La Salle go on to recommend that investors in the US focus on low-risk re-priced core properties. A large number of opportunities are expected to emerge from the problems caused by the excessive leveraging of the real estate sector over the past five years.
As regards high return strategies, the areas to focus on include distressed debt (public and private) and a wide range of structures that focus on the provision of “rescue capital” to private real estate funds, developers, individual assets, and lenders.
Not surprisingly, the major risks to Commercial Real Estate according to the report is with the capital markets, which are expected to be the main driver of performance, while economies are weak. Real estate capital markets could be quite volatile in the years ahead, says LaSalle. The unintended consequences of monetary and fiscal stimulus policies could lead to too much money flowing back into property ahead of a solid recovery in fundamentals. This excess liquidity risk is already building in China and, to a lesser extent, the UK. To manage this risk, investors should maintain a strict discipline that focuses on achieving a required return with realistic and diligent underwriting.
Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com
