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"It clearly is a confidence and uncertainty issue. As soon as we start to see a crack there, and a little more receptivity, you’ll start to see the flow. But, I don’t think anyone anticipates this torrid flow of capital is just going to occur in a month or two." —Thomas MacManus, CEO and chairman of Cushman & Wakefield Sonnenblick Goldman.

Investors Wary of Rating Agencies Past and Present
Capmark Partners with CampusMBA to Certify Servicers
In Brief: Apartment Vacancies in 2Q Up to 11.1 Percent

'Technicals' Catching Up to Fundamentals

Pressure on CDOs to Continue, Fitch Says

CWCapital Refinances $4.4M on First HUD Lean

Registration Open for Winter Capital Markets Conference
CampusMBA Announces New Fall Course Offerings
MBA Commercial/Multifamily NewsLink Reprints

MacManus: Current Cycle Unlike Any Other

The training initiative will cover nearly all of Capmark's U.S. commercial servicing staff in nine offices across the country as well as its employees in the company's offices in Ireland and India that service U.S. loans. Upon completion, Capmark staff will earn the Commercial Mortgage Servicer (CMS) designation.

"CampusMBA is eager to partner with Capmark on this large-scale training initiative to educate its exceptional commercial servicing staff," said MBA COO John Courson. "We at MBA equate professional education with real-world business results and will work with Capmark's staff to achieve these positive and measurable results through CampusMBA's commercial CMS program."

The commercial CMS demonstrates a professional's superior knowledge, experience and professional conduct in the servicing of commercial mortgage loans. The CampusMBA designation program consists of three levels of training including the achievement certificate (level I), professional certificate (level II) and the specialist designation (level III). Successful completion all three levels earns the professional the commercial CMS designation.

"We are looking forward to working with CampusMBA to initially certify 150 of our top commercial mortgage servicers with the ultimate goal of providing training to more than 700 of our current staff," said Capmark Executive Vice President Michael Lipson, head of the company’s global services operations. "A robust training curriculum has always been core to our success; we feel the CMS program and its structure are aligned with our business goals."

CampusMBA's commercial servicing training partnership with Capmark will work through its Enterprise Training arm, an all-encompassing and customized program designed to fit the overall needs of an organization by drilling down to train its core resource, its staff. Enterprise Training can include any of CampusMBA's certification and designation programs, which include those in residential underwriting, loan origination, servicing, regulatory compliance, quality assurance and commercial servicing. Additionally, general education programs are offered for all levels of experience and industry expertise in both commercial and residential real estate finance.

To learn more about CampusMBA's Enterprise Training opportunities go to www.campusmba.org/corporatetraining or call (202) 557-2826. For more information on CampusMBA's Commercial CMS program go to http://www.campusmba.org/IndustryDesignations/CommercialCMS.htm or call (800) 348-8653.
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In Brief: Apartment Vacancies in 2Q Up to 11.1 Percent
MBA (8/28/2008) MBA Staff

Apartment vacancy rates increased during the second quarter. The U.S. Census Bureau vacancy rate for all rental apartments—buildings of five or more units—increased to 11.1 percent, up 0.4 percent from the previous quarter and 1 percent from a year earlier.

The second quarter multifamily vacancy rate hit its highest mark since the first quarter of 2005, said the National Multi Housing Council.

Multifamily permits and starts increased, while completions fell in the second quarter. Permits for five units or more increased to a seasonally adjusted annual rate of 364,300—up 21 percent from the first quarter but down 1.2 percent from the previous year.

NMHC said the quarterly figure was pushed upward by a last-minute push in June from New York City developers to qualify for an expiring
tax-abatement program.

*****
Larew, Doyle & Associates, a mid-size real estate mortgage banking firm placing debt and equity capital into the marketplace, opened its new offices in Providence, R.I., Westport, Conn., and Syracuse, N.Y.

The new firm provides real estate investment banking services on behalf of its public and private clientele.

The two principals, Alan Doyle from Providence and Andrew Larew of Westport—formerly partners of Boston-based Goedecke & Co. during the past six years—arranged more than $1.1 billion for their previous firm in commercial real estate debt and equity financing through institutional capital that included insurance companies, commercial banks, Fannie Mae, Freddie Mac and joint venture equity sources.

Doyle and Larew were involved in a $237 million tax-exempt bond for structured parking at the new Yankee Stadium in New York City and the recent $70 million construction redevelopment financing of the historic Ocean House hotel in Watch Hill, R.I. Another major transaction involved $110 million in office and retail acquisition financing on behalf of Boston-based Barrington Capital Partners and its Australian pension fund client.
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Rick Williamson, principal of WLJ Partners, Coral Gables, Fla., said “technicals” in the commercial mortgage-backed securities market—spreads and pricing driven wider by CMBX synthetic derivatives that caused a disconnect—are beginning to catch up to property fundamentals.

Williamson, a former commercial real estate bank lender, said banks will need to “shrink” and not lend anymore on commercial real estate because of prior lax underwriting.

“A year and a half ago, it was just crazy,” Williamson said. “Money was free, and the deals that were getting done were just insane. At the bank, for the last two years, we were just sitting around twiddling our thumbs saying, 'this is crazy. We can't participate in these deals.' It was extremely hard but, I'll tell you, the folks that are still at the banks are sure glad they didn’t."

Michael Grupe, executive vice president of research and investor outreach at the National Association of Real Estate Investment Trusts, said economic events, including consumer spending and corporate investment, are true unknowns that can affect commercial real estate property fundamentals.

“There are clearly some structural problems in the economy,” Grupe said. “It is reasonable to expect that some of those problems—perhaps excessive levels for debt in the household sector that could constrain spending on the retail side going forward—those are challenges going forward. They are real. They cannot be ignored.”

"Retail is definitely hurting,” Williamson said. “They are already talking about a bust to the 'back to school' season, saying it will carry over to the bust in the Christmas season. I don't see how they avoid it. I think you are going to see alot more bankruptcies, a lot more store closings from January to February. They will be out there for one last gasp—the 'Hail Mary'—hoping that Christmas saves them. I don't think it is going to happen. Come January and February, it is going to be a real thud."

Some industry analysts view commercial real estate as a lagging indicator of the residential real estate market. Reports have Lehman Brothers, New York, trying to rid itself of $40 billion in commercial real estate assets.

The New York Times reported last week that Wall Street banks were trying to unload bridge equity and floating-rate loans made to hotels, office developers and retail strips. It said holders of nearly $100 billion of CMBS feared problems in the commercial property market could lead to more write-downs.

Commercial Real Estate Direct.com reported the previous week that CBRE Realty Finance wrote off $40 million in mezzanine debt used by Macklowe Properties to finance their acquisition of four office properties from the Blackstone purchase of Equity Office. Macklowe and their senior lenders had been trying to sell the buildings but “indicative bids came in at below expectations.”

Williamson said office properties in Orange County, Calif., are closing down as a result of the residential subprime crisis.

Matthew Mowell, analyst at Property & Portfolio Research, Boston, compared the economy in the Inland Empire—the Riverside and San Bernardino counties in Southern California—to Cleveland or Detroit. 

“Most of the economic indicators—job growth and unemployment—paint quite a dire picture,” Mowell said. “A recovery here will require the housing market to stabilize, net migration to pick up to steadier levels and restored consumer confidence.”
 
Mowell forecasts “severe occupancy losses” for the next four quarters in office properties—not much change from the past year.

“The metro is seeing the weakest demand in over a decade, and although construction is slowing, it is still a force to be reckoned with," Mowell said. "The Inland Empire will rank fifth for occupancy losses over the next year—down by 330 basis points."

Grupe, however, said commercial real estate property fundamentals remain at a “decent balance” compared to prior cycles.

“It’s not like we started off with significant excess supply of space,” Grupe said. “I think we were pretty well balanced and, in that respect, should be able to handle any weakness in far better shape than we might have otherwise.”

"Multifamily seems to be holding up better, but that's also going to follow because, as we get further and deeper into a recession, household formation is going to fall and reverse itself—entry level workers moving back home with their parents or combining into one apartment,” Williamson said. “There is a huge shadow market of condos and empty houses out there competing for established multifamily properties. The multifamily market is going to be hurt as well."
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The report, CREL CDO Trends: Repurchases, suggests that even as asset mangers actively manage their CREL CDOs by exercising their rights to repurchase assets, such repurchases may become more difficult in the face of more loan delinquencies.

Karen Trebach, senior director at Fitch, noted that Fitch's CREL CDO Delinquency Index, while rising in recent months, has remained relatively low, which she said was attributable in part to asset managers removing underperforming loans. The Index rose to 1.46 percent in July from 0.36 percent in October 2007 when Fitch began tracking the index. The current delinquency rate, when accounting for cumulative repurchases, could grow to 2.6 percent, she said.

Nearly two-thirds of asset managers have repurchased nonperforming or subperforming assets from their CDOs to date, Trebach said; however, half of those asset managers face varying degrees of capital constraints that limit their ability to continue to repurchase underperforming assets on an ongoing basis.

“Reduced CDO cushions are becoming more commonplace with the dual pressures of reduced liquidity and increased delinquencies,” Trebach said. “Constrained liquidity may also lead to more managers modifying and extending loans rather than repurchasing them, which, if not merited, may only serve to delay the possible realization of losses on these loans.”

Trebach said Fitch views reduced repurchases as a factor that could contribute to increased delinquencies in CREL CDO pools.

“In periods of economic stress and constrained liquidity, Fitch anticipates increased delinquencies, especially for the type of loans found in CREL CDOs, which inherently require a sustained period of economic growth to achieve business plans necessary to achieve loan performance,” Trebach said. “While even this rate is considered low relative to the credit enhancement in these transactions, an accumulation of impaired assets much beyond this level, may result in more bonds from CREL CDOs being placed on Rating Watch Negative or downgraded.”
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Providing timely and relevant insight from industry experts, MBA’s Commercial/Multifamily Capital Markets Winter Conference 2008 presents information from all sectors of the commercial real estate capital markets to keep you abreast of the latest developments in this evolving environment.

This program is especially intended for those who work either directly or indirectly in the commercial real estate capital markets. This is also a great forum to earn eight CPE credits.
Topics to be discussed include:
•      State of the capital markets, current challenges and future solutions
•      Challenges of complex loan structures in today's market
•      Changing role of investors in commercial real estate
•      Effect of rating agencies on commercial real estate finance
•      Exit strategies/default management
•      Fundamentals of commercial real estate finance for investors
•      Impact of managed CRE CDOs on commercial real estate finance
•      Legislative and regulatory developments impacting real estate finance
•      Managing credit risk in commercial real estate portfolios
•      Servicing and default management in an uncertain market
•      View from Wall Street analysts
•      Election results and potential changes for the industry

Visit the conference Web site for more information or to register today.
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CampusMBA Announces New Fall Course Offerings
MBA (8/28/2008) Royer, Denise

CampusMBA, the education division of the Mortgage Bankers Association, has opened registration for a new lineup of fall course offerings, including its popular Multifamily Property Inspection Workshop, taking place September 8-10 at MBA Headquarters in Washington, D.C.

CampusMBA worked closely with Government Sponsored Entities Fannie Mae and Freddie Mac to provide the industry with a course that successfully prepares inspectors for GSE-financed multifamily properties.

The Multifamily Property Inspection Workshop, a newly revamped two and one-half day course, is designed to help asset managers, underwriters, servicers and those responsible for inspecting multifamily properties better understand the physical condition and nuances of multifamily properties in order to perform effective, efficient physical inspections.

Successful completion of this course--passing the exam--results in a certificate from MBA, recognized by Fannie Mae and Freddie Mac.

Additional CampusMBA Fall Offerings:
September 11-12, Human Capital Management Symposium, Washington, D.C.

October 18-19, Introduction to Commercial Real Estate Finance, San Francisco, Calif.

October 18-19, Commercial Loan 301, San Francisco, Calif.
(registration to open soon)

October 22-24, Multifamily Property Inspection Workshop, Dallas, Texas

November 17-18, Commercial Loan Origination 101, Dallas, Texas
November 19-20, Commercial Loan Origination 201, Dallas, Texas

To view a full list of commercial/multifamily education resources visit http://www.campusmba.org/AllLearningProducts/Commercial.htm?wt.mc_id=CMFNLCREF.
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MBA Commercial/Multifamily NewsLink Reprints
MBA (8/28/2008) MBA Staff

Articles appearing in MBA Commercial/Multifamily NewsLink are available as reprints for a nominal fee. Reprints are done on quality paper or can be sent electronically as a .PDF file. Reprints can be distributed to your employees, to illustrate presentations or for other communication purposes.

For reprint information on stories in MBA Commercial/Multifamily NewsLink, contact Stefanie Lauff at (800) 394-5157 Ext. 26.
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THOMAS MACMANUS: We think we can cross-sell and create good market share in those markets…At the end of the day, there are certain markets we are going to gain market share. Even in a declining market, if we have little market share in certain markets because we are not there, it makes natural sense to be there.

We are a big, international company. We have a unique skill set, in some respects, that we deal with equity, [recapitalizations] and note sales. We are not just out looking at debt or what type of debt. We do first mortgages, we do mezzanines, we do equities, we do recapitalizations, we do joint venture arrangements, we will engage in structured note sales or distressed situations.

Of course, Cushman has a variety of other services. We are also on the hospitality sales side as Cushman & Wakefield Sonnenblick Goldman. So when it comes to solutions in the capital markets arena, it makes natural sense if we have investment sales, or leasing services and advisory, consulting and valuation in certain select markets. For us to have financial solutions for those other services that are cross-sold, it makes all the sense in the world. In fact, in some respects, some people would see our platform as a little bit more attractive than a platform that does just one thing.

NEWSLINK: You mentioned hospitality sales. A recent report from Jones Lang LaSalle Hotels said investors were “net sellers,” meaning that they were selling more property than buying. With weakening fundamentals and higher average-weighted cost of capital, [JLL Hotels] said the cap rate pressures on hotels were moving upward. Do you agree with that?

MACMANUS: Do I think that, in general, the upward pressure on cap rates would certainly seep into the hotel sector? Yes. I mean they are not exempt from that, for sure. There has been a bit of a barbell effect with the high-end market that seems to do reasonably well—and we do have a fair amount of that business that is a little bit insulated. No one is completely immune, but it is somewhat insulated. That market seems to be reasonably solid.

Like in all sectors, obviously, we’re selling properties. Someone is buying them—right? If someone can say there is a net increase in sales, it must mean someone is buying them because you can’t have a sale without the buyer.

We represent the sellers in many cases as the selling agents, but we also represent a lot of buyers on raising capital and debt. We’re finding that in a de-leveraging climate like this—to be honest with you—we certainly have more relative business in the recapitalization and equity-raising side of the business than we ever had. That makes sense because, in a de-leveraging climate, people need more equity and have less debt just by definition of what is happening in the marketplace.

That, coupled with some signs of stress—where we will be able to provide solutions to institutions for owners that have either assets or loans—that’s a natural progression of some of the services we provide in all those asset classes as well.

NEWSLINK: The capital markets crisis is causing a lack of liquidity not just in CMBS but even for pension funds, life companies and the money that they need to raise. Are you seeing this out there?

MACMANUS: It’s a little perplexing in a way because you hear about the so-called availability of capital, and it tends to be very plentiful. I would describe it as a combination of capacity and availability, but there isn’t necessarily as much willingness. You have capacity and availability with a question mark on willingness.

It is certainly tempered by a discipline—because of the uncertainty—that things are getting done, but they are getting done at a much slower pace, at a much lower leverage level and there are some people that would like to do something, but they are just uncertain, and uncertainty temporarily results in a lot less activity.

NEWSLINK: And when you say "unwillingness," are you talking about it from an investor standpoint?

MACMANUS: In general. Unwillingness as to whether it’s because there is a disagreement on the price—the risk-adjusted return—or whether there is a disagreement on the risk profile; whether there is a sense that if [buyers] can wait, they can buy it a little cheaper or whether there is a sense that they would love to do this deal, but they have enough exposure here and they want to wait a little while.

For a portfolio lender who has a lot less in loan payoffs, it means that as much new money as [that lender] is going to put out—if looking at the total position and the loan payoffs have slowed because the pace has slowed—then they are probably not putting out as much as they would have thought because they are looking at a net-balance position.

It is a combination of all of these things. When I say "willingness," these are the factors that affect willingness.

NEWSLINK: From speaking to some investors, they are not really confident about the market. Perhaps most of all, they lack confidence in the ratings agencies—and if you don’t have confidence in the ratings agencies, isn’t it tough to get back into a securities market?

MACMANUS: Also there’s been some talk about what that means in terms of CMBS. There will either be a special designation for the CMBS structured deals versus other securities.

I think you’ve hit the nail on the head. It clearly is a confidence and uncertainty issue. As soon as we start to see a crack there, and a little more receptivity, you’ll start to see the flow. But, I don’t think anyone anticipates this torrid flow of capital is just going to occur in a month or two. I think we’ll see some clarity benefit at the end of the year.

We’re doing better than our peer group, but it doesn’t mean we’re happy with the level of activity. It’s certainly down. Even though we’re able to do more equity, recapitalizations…some ventures we’re putting together…it’s still difficult when you have a significant reduction in your activity level.

The good news is that we don’t need to do a sale of real estate to necessarily have an event, whereas people who are purely relying on a sale of real estate—as opposed to an interest, a recap or a refi—it’s a challenge. It really is. No question.

And, we have recently signed a couple correspondent arrangements with some Fannie and Freddie players to facilitate the relationships there to try and get some more multifamily financing done through that vehicle or means—although we have yet to know at this time what kind of buying that will lead to.

NEWSLINK: What about concerns on who will purchase securities from Fannie Mae and Freddie Mac?

MACMANUS: There is a lot of uncertainty as a result of all this. The answer to all of this is that maybe it becomes more of a price point because if you do believe in the short run that Fannie and Freddie’s cost of capital rises based on what they are experiencing—if it ultimately becomes more of a perceived direct or indirect obligation of the Feds, whether there is more clarity there—then you know you have the credit support. I just think it is uncertainty—that’s all.

NEWSLINK: This is a intense cycle, and analysts are now saying the residential market will not return until 2010 or possibly 2011 or 2012 after hitting bottom in 2009. What are your thoughts for this on commercial real estate?

MACMANUS: It is really a function of what happens in the rest of the economy. I think it’s too early to tell. What will really have the most impact on the commercial sector will be the overall economy—whether it’s job creation or job losses.

We want confidence to come back to the extent that we just have a normal flow of capital. Never mind the fundamental side. I would expect the mid-to-latter part of next year we will start to see a notable improvement in the flow of capital. That could mean that there has been an adjustment of risk-adjusted pricing, that buyers and sellers, lenders and investors have recognized where they want to be on the price point and now they are doing business at a different price point so there’s flow, but it’s done based on different fundamentals—an assessment of risk, vacancy and other data.

The best thing that can happen to us is in the confidence level where capital flow is decisive—even if the decision is in paying less based on cost of capital or not paying as much because of vacancy [movement]. At least that’s data which results in decisions. Right now, there is a lack of confidence and a lack of data points because of the insufficient transactions necessary to reflect the lines on these data points.

NEWSLINK: During the savings and loans crisis, the commercial real estate market’s fundamentals eventually led to poor fundamentals in residential real estate. Do you see it as reversed this time around—that residential is going to cause poor property fundamentals in commercial real estate?

MACMANUS: Real estate is local in many respects. As the economy goes, you will see appropriate adjustments in the commercial sector. That will be the lagging indicator or consequence from an economic downturn if and when that proves to be a sustained fact. Right now, we don’t know that.

NEWSLINK: Based on past cycles, how do you see the CMBS market moving out of this cycle, particularly if the economy and property fundamentals weaken?

MACMANUS: It is a little different cycle. There was an unusual liquidity crunch during the Russian ruble crisis back in 1998, and that was more of a capital markets event—not a fundamental real estate problem.

In the late 1980s and early 1990s, we went through that last real estate recession. That was very much a function of loose money and loose underwriting, excessive capital and excessive supply of real estate. There was a lot of spec lending and spec development going on. We do not have that level of speculative development except—granted—there was the hype in the condo for-sale market, but it was not necessarily elsewhere in the commercial sector.

This doesn’t look exactly like anything we have seen in the past, so it is difficult to project what the outcome is going to be. If there is, in fact, a sustained downturn—and I’m not saying there will be, but if there is—the challenge to the capital structures that have been put in place are going to be very interesting because the solutions to the workouts from 20 years ago were different. Those capital structures were not as complicated as the capital structures are today.

The good news is that complications might be great in good times, and people are comfortable with that. But, if you’re trying to reconstruct the capital structure through a workout, that could prove quite challenging.

NEWSLINK: When capital flows do return, how do you see the market? Would it be back to something more in line with 2002?

MACMANUS: I would see more simplicity, transparency in structures. Again, it could be creative, but they have to be sufficiently transparent even if they are creative structures. That will be the first step that we will see. You might even see CMBS come back and look a little bit more like a true investment-grade loan on real estate with not so much reliance on the mezzanine and b-note.

It might have a very high quality, low leveraged securitized loan, and the b-note, or b-piece, is taken by someone that truly owns the risk and may not be distributed as far through the capital sources distribution network as it has been lately.
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