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"Lenders are likely to grow more cautious as the year progresses given sky high property valuations, tight loan pricing dynamics and historically tight CMBS spreads." --Lisa Pendergast, managing director of real estate finance and CMBS research at RBS Greenwich Capital, in reference to CMBS volume in 2004.

Property Markets Position for Rebound in 2005, Report Says
AEW Forecasts Stronger Commercial Market

RBS Greenwich Capital Forecast Approaches $70B in CMBS Issuance

California MBA Commercial Delinquency Report Shows Continued Strong Servicing Performance

HFF Arranges $126.3M for Multifamily Portfolio

MBA Hosts Mid-Level Regional Forum
MBA National Policy Conference March 9-10
Keep Up-to-Date With MBA Commercial/Multifamily NewsLink

People in the News

Heitman, Polimeni Form Joint Venture in Poland

MBA Hosts CMF Asset Admin/Technology Conference May 12-14

Davis Cable, director and CMBS and commercial real estate analyst at Wachovia Securities, said in the report that interest rate increases later this year would likely pressure property values, but the impacts would moderate based on a “hefty” risk premium (the spread between cap rates and risk free rate) built into current cap rates.

“For CMBS bondholders, it would mean a gradual rise forecast for CMBS defaults and delinquencies this year,” Cable said. “But as capital flows continue in strength, improving fundamentals should keep defaults and delinquencies at relatively low and manageable levels.”

For the “five food groups,” it means that an improving apartment rental demand would benefit from stronger job growth and rising interest rates later in 2004, Cable said.

“We expect nominal revenue growth in 2004 followed by 3 percent growth in 2005,” Cable said.

But he noted that continued supply growth, fueled by cheap debt, will mute the recovery this year, and we look for vacancy to crest in the coming months.

Meanwhile, office remains the most “worrisome sector” based on overcapacity and weak job growth for office workers, particularly for professional and business services.

“We expect increased hiring in 2004 to help the sector begin its crawl to recovery,” Cable said. “But given the lagging recovery in office, we expect delinquency rates to rise, particularly for suburban property loans."

The report said that retail should remain stable overall, but older grocery anchored centers, anchored by second and third tier grocers, might be the most vulnerable.

However, the hotel sector is in recovery, the report said, and barring event risk, it could benefit the quickest from the economic rebound and improved corporate profits.

 “We expect 4 percent RevPAR growth this year, and a return to profitability in 2005,” Cable said.

But the report also noted that the industrial sector shows a “nominal response” to economic recovery and lags GDP growth.

“Over-supply and weakness in tech and manufacturing will delay the start of recovery until late 2004 or into 2005,” Cable said. “Well-located functional warehouse properties continue to outperform.”
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AEW Forecasts Stronger Commercial Market
MBA (2/19/2004) Sorohan, Mike

Add AEW Capital Management to the list of advisors predicting a stronger commercial property market.

In its latest Market Outlook (Winter/Spring 2004), Boston-based AEW notes that although U.S. commercial property markets remain weak, a strong flow of capital into real estate has kept property values and pricing high. Such factors bode well for growth and re-pricing of risk, the report said.

"Most of the capital that is coming into the market is targeted towards core real estate rather than the 'value added' or 'turnaround' segment of the market,” said Michael Acton, AEW's director of research. “In our view now is a great time to be investing in underperforming properties that can be transformed into 'core' properties and delivered to the segment of the capital market that seems willing to pay a premium for core property."

The report details current U.S. economic conditions and the likely impact of economic recovery on the four commercial “food groups”—multifamily, industrial, office and retail—as well as the capital market response. It found that while the economic recovery still largely devoid of new job growth continues to have a negative impact the individual property markets, some improvement has emerged.

The report also said the flow of capital into commercial real estate has continued to accelerate “dramatically,” particularly from pension plans and other institutional investors. Total pension assets are once again growing, as a result of the rebounding stock market. Plan sponsors, especially public retirement systems, are aggressively increasing their allocations to real estate, resulting in billions of dollars of new equity capital flowing into the sector. New sources of real estate investment capital have continued to emerge as real estate garners the attention of a widening array of investors—from smaller pension plans, foundations, endowments, family offices and high net worth individuals to rapidly growing private real estate investment trusts. 

In the real estate securities market, the report said new capital has flowed from investment bank "wrap" programs, closed-end income funds and other products oriented toward individual investors. Foreign capital has also increased as the dollar continues to depreciate against the Yen, Euro and Canadian dollar.

"Real estate has moved from being its own capital market to being a fully recognized part of the broader capital markets, and this has had an impact on pricing and real estate values," said Douglas Poutasse, chief investment strategist at AEW. "In today's capital-flow driven public and private real estate markets, true valuation is more difficult to discover. Investors are paying more for real estate on an absolute basis than they have in the past, but relative to the yields available from other asset classes, real estate pricing today appears quite reasonable." 

Poutasse said improved market conditions would depend on “continued economic recovery, increased productivity and sustained job growth." Specific “food group” outlooks note the following:

• The apartment sector has begun to improve, but “further recovery is tied to job growth and increases in interest rates, which makes home ownership a less affordable alternative.” Vacancies could still edge up slightly in the near-term as new supply outpaces a recovery in demand, but over the longer term, favorable demographics will propel demand growth and lead to lower vacancies. 
• The industrial market continues to falter, with new development continuing to outpace relatively weak demand. “As industrial markets continue to adjust to an increasingly global market place and inventory management improves, AEW expects that metropolitan areas with major port facilities will continue to outperform inland markets,” the report said.
• The office market has suffered a sharp downturn and conditions will remain soft for some time as leases signed during the market peak in the late 1990s expire and space is renewed or re-leased at lower rents. “Competition for well-leased, core properties will be heightened in markets where this ‘loss-to-lease’ phenomenon is less significant or non-existent, as in the District of Columbia, for example,” the report said.  
• The retail sector continues to outperform the other property types. “Despite the relatively modest impact the national economic recovery has had on job growth and income levels, consumers continue to spend, generating strong retail sales and sustained demand for retail space,” the report said.
• Additionally, the report noted that the REIT market continues to post “spectacular absolute performance,” with total returns for 2003 of more than 37 percent.  “And strong capital flows are likely to continue, given interest in REITs from a broadening array of institutions and individuals, foreign and domestic.”
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Lisa Pendergast, managing director of real estate finance and CMBS research at RBS Greenwich Capital, said that a number of factors would determine CMBS issuance supply in 2004, including absolute rate levels, refinancings, new investment, and the pace at which the economic recovery begins to impact commercial real estate fundamentals. Pendergast noted that 365 loans with an original balance of $2.1 billion are set to mature in 2004.

"Lenders are likely to grow more cautious as the year progresses given sky high property valuations, tight loan pricing dynamics and historically tight CMBS spreads," Pendergast said. "Supply in 2004 is likely to follow the established pattern of pushing spreads out at the outset of a pipeline with spreads retracing the widening when that pipeline is exhausted."

But Pendergast also said that 2004 would likely usher in a new phase in the CMBS market in which pricing varies more dramatically from deal to deal, depending on the market's perception of its credit.

"The current bout of supply is not expected to negatively affect spreads longer-term given the significant amount of cash available for investment and the strong demand displayed recently for all types of CMBS in the secondary market," Pendergast said. "Not surprisingly, there has been broad-based selling at current rich levels."

However, Pendergast said that the selling has occurred during a period of light new-issue activity and amidst ample demand, with certain bonds, such as seasoned mezzanine classes, trading well through new-issue levels.

Commercial real estate related investments stand to benefit from an improving economy on a lagging basis with most major property sectors beginning to show improvement in 2004, Pendergast said.

"While CMBS delinquency rates are expected to rise in 2004, projections are that the peak will be modest at around 2.75 percent to 3.0 percent," she said.

The conduit CMBS loss rate remains low at just under 0.4 percent, Pendergast added, and even though the number of CMBS bond defaults increased to 29, it "pales in comparison to the number of corporate bond defaults in 2003 of 126 globally" as stated by Standard & Poor's ratings agency.

However, fixed-rate conduit/fusion multifamily loan performance "deteriorated dramatically" last year with the "weighted-average delinquency rate" up by 109 basis points for the year. The December 2003 delinquency rate rose to 2.03 percent for the month, passing the delinquency rate in both office and retail sectors. Despite the reduced spread pickup, RBS Greenwich Capital continues to favor Fannie Mae Delegated Underwriting and Servicing (DUS).

"We continue to favor FNMA DUS over benchmarks given their secured nature and the stability the sector has displayed in response to GSE headlines to date," Pendergast said.
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According to CMBA’s Quarterly Delinquency Survey for the period ending December 31, 99.65 percent of the California commercial real estate loans serviced by 18 mortgage banking firms were either current or only one payment delinquent—a delinquency ratio of .35 percent. This compares to a delinquency ratio of .29 percent three months ago and .14% a year ago. Seventeen of the 18 companies reported no loans more than 30 days delinquent.
 
Of the $59.8 billions of loans being serviced by the 18 California commercial mortgage bankers, $212 million, consisting of 21 individual loans, was two or more payments past due. The three largest loans, representing 40 percent of this total, were a $34.4 million loan on an office building, a $32.5 million loan on a hotel and a $17.5 million loan on a single purpose property. The 21 delinquent loans represent .21 percent of the 9,954 commercial real estate loans included in the survey.

A table that compares delinquencies by type of property is available. For a copy of the data please contact CMBA’s Marcella Rojas at 916/446-7100 or marcella@cmba.com.
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Managing Director Steve Gunther of HFF's Orange County office worked on behalf of the Real Estate Partners Inc. to arrange $96.045 million in 5-year, interest-only, first trust deeds to 70 percent through Wachovia Multifamily Capital, a Freddie Mac lender and formerly known as Lend Lease Mortgage Capital. Wachovia Securities, Charlotte, N.C., secured the remaining $30.25 million in non-participating preferred equity.

"This purchase is representative of a West Coast buyer combining high leverage financing at low interest rates with the comparatively higher capitalization rates offered in East Coast markets to achieve maximum return on their equity," Gunther said.

The multifamily portfolio, consisting of four complexes in Greensboro, N.C., totaling 1,373 units, one 208-unit property in High Point, N.C., two properties in Richmond, Va., totaling 606 units, and a 212-unit complex in Glen Allen, Va., have a total average occupancy of just under 90 percent.

"The combination of Freddie Mac debt provided by our agency lending group, and preferred equity provided by our structured finance group, enabled Real Estate Partners to maximize their buying potential," said Trevor Brotman, vice president at Wachovia Securities.

Meanwhile, the New Jersey office of HFF arranged $33.3 million in construction financing for Covington Village, a to-be-built 360-unit, active-adult condominium community in Lakewood, N.J.

Senior Managing Director Jon Mikula and Director Jim Cadranell worked on behalf of Covington Village at Lakewood, L.P. to secure the 2 ½ year, floating-rate loan.

The general partner of the borrower is residential real estate developer, Matzel Development. Financing was arranged with the New Jersey office of Wachovia Bank's Real Estate Financial Service Group.

Covington Village is located within Lakewood Township in northern Ocean County near Route 70, Route 9 and the Garden State Parkway for access to northern and southern New Jersey, Philadelphia and the New York metropolitan area.

"Ocean County has the ninth highest percentage of active adults in the country, with more than 1.32 million residents between the ages of 55-74," Mikula said. "Covington Village will provide these residents with an active adult community that combines luxurious suburban-style living with country club-type amenities."

Plans for the 35-acre gated community include twelve, three-story buildings with 144 one-bedroom/one bath, 72 one-bedroom/one-bath with den, and 144 two-bedroom/two-bath units. Unit size ranges from 826 square feet to 1,098 square feet. The property is due for completion in 2005.
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The Regional Forum is centered on increasing understanding of the commercial real estate finance industry, with a target audience of employees who are up and coming talent in a company’s office. The next event will take place March 18 at the Dallas Petroleum Club and costs only $75 for MBA members who register before March 11.

Entry- and mid-level managers will have the opportunity to:

• Hear from a rating agency about their viewpoint and the importance of the role the servicer plays in a CMBS deal.
• Hear about how loans come to exist, the origination of a loan. Panelists will discuss the importance of the due diligence period, with a close review of the property, including the underwriting, inspection, title, insurance and borrower credit-worthiness to closing a deal.  
• Learn about the key elements to understanding and reviewing financial documents. Hear from commercial lending experts how to determine what income and expense items should and should not be included, and how to calculate loan-to-value, debt service coverage and economic occupancy numbers based on specific property types. 
• Learn about the early warning signs for a potential defaulting loan. Learn the key elements that often lead up to a loan default. Understand the CMBS loan triggers and the legal document descriptions of an “event of default.” Understand the current market increase in defaults and the process surrounding loan defaults for CMBS and Portfolio Lenders.
• Learn about commercial mortgage-backed securities and the Portfolio market process.

Regional industry experts will lead the training sessions. Participants will have the opportunity to network with each other, as well as successful CEOs in the field.

Contact Katie Schwarting, kschwarting@mortgagebankers.org, or Belinda McGill, bmcgill@mortgagebankers.org, for more details.
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MBA National Policy Conference March 9-10
MBA (2/19/2004) MBA Staff

Influence the legislative issues that affect your livelihood by participating in the Mortgage Bankers Association’s “National Policy Conference: Advocacy in Action” (formerly the Washington Leadership Conference), March 9-10 in Washington, D.C.

Take advantage of this hands-on opportunity to represent the real estate finance industry and make a difference in its ability to thrive. Hear directly from lawmakers, Washington insiders and pundits. Visit with your Congressional representatives. Shape key legislation such as the reauthorization of the Terrorism Reinsurance Act, regulation of the government-sponsored enterprises (GSEs) and revitalization of the Federal Housing Administration.
MBA is sending the message to Congress that the real estate finance industry invests in America's communities to reflect the hard work and commitment MBA members have to building and strengthening neighborhoods and communities nationwide. It's this message the policymakers need to hear. And it's this message MBA members are carrying to Capitol Hill in March.

To be effective, you must be prepared. Get valuable tools and advice from MBA's government affairs lobbyists. Hear from experts to get the most up-to-date information on critical issues. Confirmed speakers include:

· Rep. Michael Oxley, R-Ohio, chairman of the House Financial Services Committee
· Rep. Barney Frank, D-Mass., ranking member of the House Financial Services Committee
· Tucker Carlson and Paul Begala, co-hosts of CNN's Crossfire
· Charlie Cook, editor and publisher of The Cook Political Report

MBA has refashioned the conference so all employees of MBA member companies who want to play an active role in the political process can do so through this unique, hands-on opportunity. Hotel accommodations are through the Washington Court Hotel on Capitol Hill; the hotel cut-off date is February 13.

Join MBA in Washington, DC, during the upcoming election year, one of the most exciting times to be in the nation's capital. For more information, go to http://www.mortgagebankers.org/conferences/2004/2401292_reg.pdf
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Keep Up-to-Date With MBA Commercial/Multifamily NewsLink
MBA (2/19/2004) CMF NewsLink Staff

EVERYONE IN YOUR FIRM CAN RECEIVE MBA Commercial/Multifamily NewsLink!

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If you are reading this issue but do not subscribe to MBA Commercial/Multifamily NewsLink , just click here or visit http://www.mortgagebankers.org/cmnewslink and click on "Subscribe" to receive MBA Commercial/Multifamily NewsLink each week.

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Allow your firm to keep track of property trends and CMBS news; find out the latest in current industry news; discover new and useful business tips; and keep up with MBA activities, committees and events.

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Walker has more than 22 years of experience and has worked in technology, services, mergers and acquisitions and high-growth business development. He held senior executive positions with Fidelity National Information Solutions (FNIS), Fidelity National Financial (FNF), Microsoft Corporation, US Connect, TRW, Hughes Aircraft, and DMR Group.

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Mark Montanari joined Prosero, a procurement outsourcing company, as executive vice president of operations. His role at Prosero includes managing and expanding the company's procurement outsourcing operations.

Montanari has more than 20 years experience implementing supply chain management initiatives.

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Tremont Realty Capital announced the appointment of Karen Canellis as senior director for its newly formed McLean, Va. office. She brings 20 years experience in the commercial real estate arena, most recently from GMAC Commercial Mortgage, where she was vice president of its Hospitality Industry Division.

Prior to GMAC, Canellis was a senior underwriter at J.E. Robert Companies, where she underwrote and closed more than $100 million in loans in less than two years.

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James McKay joined American Bank Systems , a compliance firms for banks and credit unions, as regulatory consultant. McKay is former FDIC compliance supervisor for Oklahoma.

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Sperry Van Ness, commercial real estate investment firm, announced that Jim Brady had joined the firm as a senior advisor. Brady has more than 32 years experience in commercial real estate lending and investment. Previously, Brady served as regional director for Sperry Van Ness in Florida.

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Principal Global Investors announced the promotion of David Blake to executive director of fixed income. He will oversee fixed income portfolio management and assume the additional responsibility of directing fixed income research and product oversight.

Blake has served as managing director of portfolio management of Principal Global Investors since 2000. Previously, Blake was a senior fixed income portfolio manager with Boatmen’s Capital Management and its predecessor, Boatman’s Trust Company.
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Christopher Merrill, managing director of Heitman's International Private Equity Group, said the joint venture with Polimeni reflects "confidence in the Central European property markets and our desire to increase our investment in retail properties in the region."

Heitman was an early entrant into the Central European property markets in the mid-1990s. This venture would increase Heitman's ownership to 23 shopping malls in Central Europe. And according to Merrill, it is an important venture because the firm looks to increase its presence in Central Europe.

Polimeni, with offices in Warsaw and Gdynia, involves itself in the pre-development and leasing phases of five projects in Poland totaling nearly 150,000 square meters or 1.5 million square feet.

More than six years ago, Vincent Polimeni, chairman and CEO of The Polimeni Organization, looked at popular areas of Europe, such as France, Germany and England. He found a Europe crowded with real estate developers. But Polimeni received a break by knowing someone who knew an aggressive business graduate from Poland who spoke the language.  It would not be long before both businessmen were speaking the same language.

"We've enjoyed major successes in Poland," Polimeni said.

But laws, regulations and an understanding for the culture in Poland hindered Polimeni's development. In the first two years, Polimeni moved in the "wrong direction" as he focused on large cities, such as Krakow and Warsaw, also loaded with competition.

But secondary cities, with populations of 100,000 to 150,000, had 1960's type of retail, similar to the "mom and pop stores" from the United States.

"We'd be the 'king of the mountain' for that particular location," Polemini said.

Recently, Polimeni International completed development on the "Konin Lakeside Galeria," a 25,000 square-meter shopping center in Konin. The shopping center is now 98 percent leased to tenants such as Hypernova, a retailer owned by the Dutch supermarket chain Royal Ahold; NOMI, a home retailer similar to Home Depot; and a multiplex cinema.

However, lease terms can only have a maximum of 10 years and mortgages can only amortize in 10 years. Polimeni said it puts "a huge burden on cash flow," but he said there are legal ways around the law.

"It took me six years to get my arms around the country," Polimeni said. Now,  he said he is now involved in so many deals that he needs help in his work, thus the joint venture with Heitman. Polimeni, however, believes that when Poland becomes a part of the European Union, possibly in 2006 or 2007, it could become easier to develop and invest in commercial real estate.

Polimeni watches his retail center in Konin through a Web cam half way around the world. He insisted there continues to be room for more retail, the only property-type that Polemini develops in Poland. Meanwhile, few U.S. developers are there.

"It's a major learning process," Polimeni said. "There's a major curve to overcome. It's scary. It's not that simple."

But Merrill said that the partnership now plans to incorporate similar concepts from Konin Lakeside Galeria to its own planned retail centers.

Phil Okun, president of Polimeni International, noted that many retailers in larger cities in Poland are now looking at entering secondary markets, such as NOMI, the highest grossing retailer in Poland. Okun said major retailers and Polimeni tenants Reserved, a European clothing chain, and Apart, a European jewelry chain, are also examples of Poland's larger retailers looking at secondary markets.

"The success of the Konin project has given us confidence in Polimeni's expertise as a retail developer. Working together, we feel certain that our upcoming projects will be just as successful," said Merrill.

Heitman's International Private Equity Group, a subsidiary of Heitman LLC, is active in Central Europe and has offices in London, Warsaw, Budapest, Frankfurt and Luxembourg.

Meanwhile, Polemini believes that the commercial mortgage backed securities (CMBS) market will find a home in Europe and Asia. The creative financing will not be in Poland for now, based on the stringent laws, but banks in Germany, France and the United Kingdom are reaping the benefits of an education from the U.S. CMBS market and its history.

"It's right there," Polemini said. "You have [firms] like ING doing it. They're not 100 percent there but they're right there. The next move will be that."
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Jeff Fisher, the current coach of the National Football League Tennessee Titans, will be the keynote speaker.

This year the two events—the Asset Administration Workshop and Asset Administration and Technology Conference—have merged into one exciting 2-1/2 half day event. There is now only one registration fee for this conference.

Early Registration
MBA Member fee: $675
Nonmember fee:  $775

Included in the conference fee is an opening reception, Exhibit Hall reception, luncheon, exhibition and multiple correspondent meetings, which allow MBA member companies the opportunity to network with their clients.

For more information, contact Katie Schwarting, kschwarting@mortgagebankers.org, or visit http://www.mortgagebankers.org/conferences/2004/2402020_reg.pdf.
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About MBA Commercial/Multifamily NewsLink Publisher: Cheryl Crispen, Senior Vice President - Communications and Marketing Editor. Electronic Publications: Mike Sorohan 202/557-2855 MSorohan@mortgagebankers.org Editor, MBA Commercial/Multifamily NewsLink: Michael Murray 202/557-2851 MMurray@mortgagebankers.org Advertising Opportunities: Bill Farmakis 203/966-1746 bill@jlfarmakis.com MBA Commercial/Multifamily NewsLink, a daily electronic publication, is free to you as an employee of an MBA member company. For membership information, visit MBA's website at www.mortgagebankers.org/membership (Back To Top )

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