Things are still not “good” but are looking up according to the Real Estate Roundtable’s sentiment index…
February 18, 2010
Congressional Oversight Panel recognizes risks to economy from CRE loans
A little light bed-time reading for everyone…the Congressional Oversight Panel has issued a 190 page report detailing the risks posed by CRE loans. Full document is below and the COP web site is here.
February 17, 2010
Harvard Endowment seeks to reduce real estate expsoure through secondary market sales
WSJ reports today that Harvard’s Endowment is putting up for sale a significant chunk of its real estate funds and other iliquid assets in order to improve its cash position and reduce future commitments / capital calls. It’s hard to see why this effort will fare better than previous attempts by the Endowment to sell private equity holdings in the secondary market, though, which resulted in offers to buy the stakes only at very steep discounts.
February 10, 2010
Cap rates for core properties are falling?
With cap rates having risen 100-300 bps on average, depending on the property in question, some recent deals have a lot of people shaking their heads a bit. It was apparent several months ago that quality core multifamily assets were commanding premium pricing with cap rates in the 6-7% range, with a few deals even trading at sub-6% cap rates. The Class A multifamily market has continued to attract great interest, and now core office deals with strong credit and limited near term rollover are getting priced around 6% caps again as well. What is going on? Are cap rates coming back down? Well, not across the board. The core deals trading at these levels are attracting a lot of interest because there is not much on the market and while everyone waits for the return of the early ’90’s bargain hunting, core deals are attracting interest as the closest to a sure thing as is available today. There is a lot of capital ready to be invested, resulting in upwards of 25-30 credible bids for solid core deals. I have to wonder whether this will hold, though, and whether it might just be a brief mini-bubble that has redeveloped for core assets. It seems like a simple case of supply and demand–not much quality product on the market and a lot of capital chasing the few deals available.
November 13, 2009
ULI Emerging Trends 2010
ULI’s 2010 emerging trends, available here, is a survey of about 900 key industry participants. This year’s survey seems to validate the consensus view which has been forming about the future of CRE. Among its observations:
- Property fundamentals will continue to deteriorate over the next year + as the economy remains weak
- Debt markets will remain compromised
- Recovery will be slow due to weak job growth
- Investors are retreating to top markets like NY, Boston, Washington, D.C., and San Francisco–high barrier to entry markets with strong demand drivers as nodes of international commerce
- Apartments and hotels will turnaround first (due to the absence of long term leases which delay recovery in other property types)
- Home sales/pricing stabilizes further in 2010, leading economic recovery
- Development hits all time lows in 2010–one participant said the term does not even make sense in this environment!
- Hundreds more bank failures likely
October 19, 2009
Moody’s CPPI reflects slowing price declines for CRE
Moody’s CPPI indices were released this morning:
- Pace of price declines shows continued slowing, more of that “less bad” phenomenon we’re all getting used to: most recent data shows a 3% decline in August after falls as steep as 8% in April and May
- Aggregate index now stands 40.6% below peak of October 2007 and 32.8% below one year ago
- Transaction volume picked up with repeat sales of $950 million (for August, 2009, latest data included in the index)
The report includes an interesting chart plotting the CPPI index vs CPI. Had CPPI tracked CPI, then prices would be slightly higher today than they actually are. In other words, have we overshot on the way down? If nothing else, the chart seems to support the notion that we must be somewhere near the bottom.
October 14, 2009
Cooper Village/Stuyvesant Town Emblematic of the Bubble Era of Real Estate
WSJ reports this morning that the Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan is “in danger of imminent default.” Gee, what a surprise! It was purchased in 2006 at the height of what some CRE pros are affectionately referring to now as the “cocaine era” of commercial real estate. Real Capital reports that the property was purchased at $5.4 billion, which equates to about $481,000/unit or a 3.2% cap rate. On a price per unit basis this is not unheard of for Manhattan. For a project of this size, though, and with so many rent regulated units, the 3.2% cap rate is really a headscratcher, and was even during the bubble days. Granted, Manhattan cap rates trend lower than most markets, and investors there seem to tolerate extremely low cap rates in return for the safety of investing in a market with incredible demand drivers and relative safety of principal. But the low cap rate, combined with aggressive underwriting and high leverage was a recipe for disaster once the recession hit and the owners’ business plan faltered.
Greatly compounding the risk in the deal was a high loan to value and extremely aggressive underwriting of operating performance. The deal was financed with 80% plus leverage, thanks largely to CMBS debt, which has now been transferred to special servicer CW Capital, one of the biggest players in the special servicing world (where CMBS loans go when they have or are about to go bad). The operating projections assumed that many of the rent controlled units could be converted to market rate and that overall operating income would triple (!) in just a few years. Well, needless to say but rents have not kept pace with projections, and a tenants’ lawsuit has largely kept the owners from executing on their plan to convert rent controlled units to market rate.
Most astounding is that some of this risk was in fact foreseen by the lenders. Why else would they have required a $400 million interest reserve? That’s right, the deal included a $400 million interest reserve to cover debt service shortfalls. Obviously the deal had “negative leverage”. The price paid was so high, and the leverage ratio so great, that the deal probably was forecast to run deficits–operating income could not cover the debt service until a few years down the road when operating income would, ahem, triple (allowing the owners to flip the deal at huge profit in theory). Given its size this deal will surely be closely watched as a gauge of how the CMBS system will handle troubled deals such as this and the outcome may affect sentiment, positively or negatively, about the risks which CRE presents to the wider economy.
WSJ link here .
Wikipedia:
Interesting blog about Stuyvesant Town: http://stuytownreport.blogspot.com/
Tenants’ Association: http://www.stpcvta.org/
September 25, 2009
Real Capital tracking increasing distress within Bank CRE loan portfolios
CMBS tops the list by lender type, but there is plenty of distress to go around. As has been discussed thoroughly here and elsewhere, unfortunately CMBS not only shows the greatest volume of distress, but due to the nature of how it is structured, has been the most difficult to move towards any sort of resolution.
CBRE Multi-Housing Group hosting regional client forums
CBRE announced via e-mail this morning that their multi-housing group will be running conference calls for six weeks in a row beginning October 9th to discuss multi-housing trends and transactions in each region of the U.S. Should be useful information as multi-housing has attracted probably the greatest interest during the recession from institutional investors.
Announcement below:
CBRE Multi-Housing Group
Regional Client Forum Series
Save the Date!
We are pleased to announce the schedule for our Fall 2009 Regional Multi-Housing Client Forum Series.
Beginning October 9 with the Northeast & Mid-Atlantic region, and continuing each Friday for six more weeks, the calls will bring in-depth insight into the multi-housing markets across the U.S.
Every Friday, Oct 9 through Nov 20*
11:00AM – 12:00 PM EST
Forum Schedule (subject to changes):
Northeast & Mid-Atlantic Region – Oct 9
Southeast Region – Oct 16
Florida - Oct 23
Midwest Region – Oct 30
Southwest & Texas – Nov 6
Southern California – Nov 13
Northern CA and Pacific NW – Nov 20
:: Topics include ::
Financial Market Overview
Local Market Overview
Who is selling?
Who is buying?
Looking forward: Market Expectations
Q&A
*Each call will be recorded and available for playback
For more information on any of the regional calls, please click here to send an email, or call 617.488.7241.
September 23, 2009
WSJ reports “Zell sells low in Kansas”. Really?
WSJ reports today that Sam Zell’s Equity Group Investments has sold an office building to tenant Black & Veatch in Kansas City. The article states that the sale price was $60 million, “just half of what it would cost to build now”. The impression the article gives is that Zell’s group has either lost money on the deal or certainly could not have made much money, right? Well, not so fast. No where in the article or on any of the available data services such as CoStar, Real Capital Analytics, etc., is the prior sale disclosed–or if it was a development deal, what was the original cost of construction some twelve years ago? This is fairly weak, semi-sensational journalism, lacking in the curiosity to get to the bottom line, real story.
It may be that the prior purchase (by Zell’s group) or development cost is not available or that the parties would not disclose it, but why then give the impression that the sale price is indicative of Zell taking a bath on the property? We just don’t know the facts enough to form that opinion. Anyone able to track down the Zell purchase or development cost?
For your reading displeasure, here is the link: http://online.wsj.com/article/SB125366697550532599.html
Udpate: CoStar reports the property was built in 1976 and the tenant was reportedly in the 12th year of a 15 year lease, so the prior sale is what we are looking for here to better understand the result for Zell.
Also on that page is a short piece about Taubman, the regional mall REIT, handing over the keys to a mall in Vegas. Only the second time they have outright lost a property with the last one being the Bellevue Center near Nashville in 1995. Another sign of the return of distressed opportunities a la the early to mid-90’s?
September 22, 2009
New Treasury guidance regarding CMBS loan modifications
Treasury has issued new guidance regarding CMBS loan modifications, clarifying that:
1) Loan modifications can be considered at any time without tax consequences for the trust in which the mortgages are held
2) Loans can be modified even though they may not currently be in default if there is significant risk of default at a later date
This should allow a lot more owners to hang onto properties and ride out the downturn in the economy, which is causing decreased cash flows and large value declines. Modifications will likely reduce the number of distressed property sales in the next few years, but there will still be plenty of distressed opportunities for sale. Many properties are simply so far “underwater” that it will make more sense for lenders, whether CMBS servicers or others, to foreclose or resolve the issue in some other manner. The extending and pretending (even with modifications) can only go on so long for many of these properties.
September 21, 2009
Moody’s/Real Commercial Property Price Indices – still falling
Given the continued fall in values reported by other indices and data sources, today’s Moody’s/CPPI report is not a shock. The National All Property Type Aggregate Index measured a 5.1% drop in July and now stands 38.7% below the peak of October 2007. The Moody’s/CPPI is a same property repeat sales index, and in July it recorded 74 repeat sales totaling $1.2 billion. The safe haven, if we can call it that, was apartments in the Northeast, which registered an annual drop of only 6% while the national apartment index declined by 24.4%. On the other end of the pain spectrum, in Florida the index shows apartments have fallen 40% in value over the last year and 50% from their peak. Unfortunately apartment values in Florida are likely to continue falling given all of the condo projects recently and still being completed, most of which are by necessity being thown into the rental market.
September 18, 2009
Latest Real Capital reports point to continued increases in cap rates, distressed assets
Real Capital has published their August Capital Trends reports, which point to continued upticks in cap rates and the amount of distressed assets:
- Median overall average cap rate now up about 100 bps from peak pricing in 2007
- Combined property sales still stagnating, but office property sales have rallied somewhat for the last 3 months
- $108 billion in distressed properties identified to date and growing; lenders still slow to deal with problems; only about 10% of identified troubled assets have been resolved
- Median cap rate for apartments for ’09 so far is 6.9% with ¼ trading at below 6.4% and ¼ trading at above 7.8%
- Sale of Worldwide Plaza in Manhattan accounted for over half of July office sales volume; price was 1/3 2007 price and seller provided 80% financing
- Average cap rates now at: 7.1% for apartments; 8.1% for office; 7.6% for retail; 8.1% for industrial; trend line of increasing cap rates has been fairly steep and steady since pricing reversed course in 2007
August 26, 2009
REIS Quarterly and Capital Markets Briefings show continued CRE slide
Highlights from the REIS quarterly and capital markets briefings:
Quarterly briefing:
- Apartment vacancy at 7.6%, highest level since 1987; forecasting peak of 8.1% next year
- -2% rent decline so far this year for apts.; total -2.6% forecast for year
- Office vacancy at 16.9%, expected to peak at 17.9% next year
- Office rents to decline by -8.6% this year and -5.0% next year on REIS forecast
- Retail vacancy at 11.0%, expected to peak at 12.8% in 2011
- Rental declines of -4.1%, -2.5%, -.8% for 2009-11
- Retail shows negative net absorption of over 20 million SF forecast for ’09!
- Industrial vacancy to hit 11.4% in 2009, peak at 11.8% next year
- Industrial rent declines of -3.7% and -1.3% 2009-10
- -65.8 million SF negative net absorption for industrial forecast for 2009
- Recovery is forecast to be tepid for all property types following the negative years
Capital markets briefing:
- Transaction volume slightly lower Q2 vs. Q1, 89% below peak level of Q2 ‘07
- $3.5 trillion CRE debt outstanding, $1.5 trillion of is at banks
- CRE mortgage delinquency rates still spiking up, now approaching 8%, almost on pace with residential
- Construction and development loan delinquency rate at 11%
- REIS counts $18.24 billion of loans in default or delinquent and $47.8 billion in special servicing (this is only for securitized deals; RCA totals up all distressed deals at north of $114 billion– check that…update from today on their site is $145 billion!)
- Overall, REIS views economy as showing some tentative signs of improvement, but no solid footing found yet, so continued deterioration in fundamentals and transaction volume not surprising
August 19, 2009
Joint Economic Committee hearing on CRE loan problems
On July 9th, 2009, the Joint Economic Committee of Congress held a hearing regarding the tight CRE lending environment during which Chairwoman Maloney referred to the problem as a “ticking time bomb”. Testifying before the committee were:
- James Helsel, Treasurer, National Association of Realtors
- Jeffrey D. DeBoer, President & CEO, The Real Estate Roundtable
- Richard Parkus, Head of CMBS and ABS Synthetics Research, Deutsche Bank
- Jon Greenlee, Associate Director, Banking Supervision and Regulation, Fed
Jeffrey DeBoer of The Real Estate Roundtable referred in his prepared testimony to CRE’s struggles with values and lack of loans as a “market failure of catastrophic proportions” with the potential for a “cascade of negative repercussions for the economy as a whole.” He went on to say that he was there to “sound the alarm bell.” DeBoer offered the most concrete solutions for mitigating the problem, which included:
- Extending TALF (subsequently it was extended)
- Establish a Federally backed credit facility or a privately funded guarantee program for originating CRE loans
- Amend or repeal Foreign Investment in Real Property Tax Act (FIRPTA) which has effectively discouraged foreign investment in CRE
- Encourage banks and loan servicers to extend performing loans and temporarily amend REMIC regulations to facilitate early review and loan modifications for securitized loans
- Reject new anti-real estate investment taxes such as the carried interest proposal and provide a five year carry forward for net operating losses of all businesses
Richard Parkus of Deutsche Bank basically reiterated his prior testimony from other hearings, essentially agreeing with DeBoer that the tight lending conditions for CRE are severe, consequences for the economy as a whole are enormous, and measures should be taken to revitalize CMBS and CRE lending in general. In follow-up questioning by Sam Brownback, Parkus said that he thought CRE would not see any real improvement until 2012 and that CRE values from peak to trough would drop 40-45%.
James Helsel of the National Association of Realtors and Jon Greenlee of the Fed offered little in the way of concrete solutions but provided additional testimony depicting accurately the current state of affairs in CRE.
Complete video and transcripts of the testimony are at:
