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“Uncertainty stemming from the credit crunch and the deteriorating economy has led to a continued pull-back among both lenders and borrowers. The need among most investor groups to conserve capital, and the uncertainty of how the slowing economy will affect property fundamentals, is fueling a prolonged pause in all aspects of commercial real estate activity.” —Jamie Woodwell, vice president of commercial real estate research at the Mortgage Bankers Association.

Credit Crunch, Economic Concerns Slow Commercial/Multifamily Lending
In Brief: Retail REIT, CMBS, CDOs Face Maturity Issues

Industrial Sector Seen Softening through 2009

Global Credit Crisis Stalls Construction into Next Year

CBRE Arranges $10.85M Medical Office Construction with Principal

Winter Capital Markets Conference December 4-5 in D.C.

CRE Executives Balk at Green Premiums, Survey Says

Will Abusive Real Estate Syndications Resurge?

Decreases in total commercial/multifamily mortgage originations continued to be led by a drop in commercial mortgage-backed security conduit loans and loans for commercial bank portfolios. These numbers show the impact of the recent credit crunch and other market disruptions.

The decrease in commercial/multifamily lending activity during the third quarter was driven by decreases in originations for all property types.

When compared to the third quarter of 2007, the overall 53 percent decrease included an 87 percent decrease in loans for hotel properties, a 61 percent decrease in loans for office properties, a 59 percent decrease in loans for health care properties, a 39 percent decrease in loans for industrial properties, a 30 percent decrease in multifamily property loans, and a 30 percent decrease in retail property loans.
 
Among investor types, CMBS conduits saw a significant decrease of 93 percent compared to last year’s third quarter. There was also a 71 percent decline in loans for commercial bank portfolios, and a 27 percent decrease in loans for life insurance companies. The dollar volume of loans for government sponsored enterprises, Fannie Mae and Freddie Mac, saw a 15 percent increase.

Third quarter mortgage originations were 11 percent lower than originations during the second quarter of this year.

Among investor types, loans for commercial bank portfolios saw a 55 percent decline in loan volume compared to the second quarter, loans for conduits for CMBS saw an increase in loan volume of 67 percent compared to the second quarter, life insurance companies increased by 27 percent during the same time span and GSE volume increased 12 percent from the second quarter to third quarter. On a quarter-over-quarter basis, the size of the decline in loans for commercial banks overwhelmed increases among other investor groups.

Compared to the second quarter, third quarter originations for hotel properties saw a 71 percent decrease. There was a 42 percent decrease for health care properties, a 28 percent decrease for office properties, a 22 percent increase for industrial properties, a 9 percent increase for retail properties, and a 9 percent increase for multifamily properties.

To view the report, please visit the following Web link:
http://www.mortgagebankers.org/files/Research/CommercialOriginations/3Q08CMFOriginationsSurvey.pdf

Other detailed statistics on the size and scope of the commercial/multifamily origination market are available from these MBA commercial/multifamily research reports:
 
• Commercial Real Estate/Multifamily Finance:  Annual Origination Volume Summation, 2007
• Commercial Real Estate/Multifamily Finance Firms: Annual Origination Volumes, 2007
• MBA Annual Report on Multifamily Lending, 2007
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In Brief: Retail REIT, CMBS, CDOs Face Maturity Issues
MBA (11/13/2008) Murray, Michael

GGP Seeks Debt Refinancing
General Growth Properties, a Chicago-based retail real estate investment trust, said it holds nearly $900 million of property-secured debt and nearly $58 million of corporate debt scheduled to mature by December 1 that still needs refinancing or an extension.

The REIT’s stock was down nearly 20 percent to 40 cents per share as of mid-day trading yesterday. The company said it is working with its syndicate of lenders to extend November 28 maturity dates on property secured debt for Fashion Show and The Shoppes at The Palazzo —two of its Las Vegas properties—and marketing them for sale.

GGP stopped development, construction or opening of project near and in the middle of new development and redevelopment. "As a result, all future development expenditures other than expenditures for projects that are near completion and approved projects at our jointly owned properties have been deferred," it said.

Nearly $1.74 billion of new and/or replacement financing funded since June 30, and all loans previously scheduled to mature this year through November 5 have been refinanced, continued or repaid.

Marketwatch.com reported shares of Developers Diversified Realty Corp., Beachwood, Ohio, were down nearly 60 percent this month as it also has "significant debt coming due."

Fitch: Special Servicers on Ice, CRE CDO Delinquencies Increase
The liquidity freeze could limit flexibility from special servicers on workouts in commercial mortgage-backed securities, said Fitch Ratings, New York.

The ratings agency’s commercial real estate loan collateralized debt obligation delinquency index showed 14 new delinquent loans led to the fourth straight monthly increase in CREL CDO delinquencies—up to 3.13 percent for October this year from 2.39 percent in September.

Mary MacNeill, managing director at Fitch, said lending markets would open slowly, potentially opening the door to more defaults and higher loss severities in CMBS loans. She added that the number of 2006 and 2007 loans already transferred to special servicing one to two years after securitization hold particular interest for Fitch.

The ratings agency’s CMBS portfolio consists of 475 transactions with an unpaid principal balance of $556 billion.

Fitch also rates 35 CREL CDOs of nearly 1,100 loans and 350 rated securities/assets with a $23.8 billion balance. Nearly 90 percent of all new CREL CDO delinquencies in October—67 percent of Fitch's CREL delinquency index—were considered matured balloon loans, showing difficulties to refinance loans.

While nearly 75 percent of matured balloon loans continue to make monthly payments, nearly 26 percent, or 18 percent of the delinquency index, were non-performing with inadequate cash flow to meet debt service obligations. Sponsors refused or were unable to infuse additional equity into the projects in these cases, Fitch said.

Asset managers reported 35 new loan extensions in October as they repurchased assets out at par to manage the credit quality of their pools. They also traded some delinquent loans out of CDOs at a loss, with little impact of those losses on credit enhancement and realized losses at a small percentage of the transaction’s par.

Karen Trebach, senior director at Fitch, said borrowers meeting all extension requirements by loan maturity continues as a challenge with the increase in matured balloons in October reflecting a longer process to negotiate and document an extension.

Japan CMBS Loan Delinquencies Increase at Rapid Pace
The first delinquency of a Japanese commercial mortgage-backed securities loan in June this year was followed by nine delinquencies totaling nearly $408.9 million by the end of October, said Tetsuji Takenouchi, senior vice president and CMBS team leader at Moody's Investors Service and author ofJapan CMBS Market Update Part 3: Stressed Liquidity Boosting Loan Delinquencies.

Takenouchi said cash flow of CMBS properties remains stable overall, but stressed liquidity from the recent financial crisis boosted delinquent loan volume in Japanese CMBS. In its July market update report, Moody's said impact of CMBS loans would be limited because of the overall volume of maturing loans.

However, its view "has become much conservative" based on current financial turmoil that could pressure refinancing on one large loan, in particular.

Moody's estimates delinquent loan amounts ranging from more than $511.12 million to more than $1.4 billion this year. The ratings agency said not all delinquency events would induce downgrade actions.

JLL Launches Value Recovery Services
Jones Lang LaSalle, Chicago, launched its Value Recovery Services to assist banks, insurance companies in operational and occupancy needs and financial institutions with challenged assets and liabilities.

Fundamental changes in the global financial system in recent weeks rippled into the broader economy and "in particular, the commercial real estate sector," said Peter Roberts, CEO of Americas Jones Lang LaSalle.

Value Recovery Services would include receivership services for lenders to direct in managing distressed assets—including office, hotel, retail, industrial, land and multifamily—which could involve sales of the asset. It would provide valuations, asset management, loan servicing and disposition services to banks and insurance companies with challenged assets and liabilities on their balance sheets—including loans, securities and owned investment real estate.
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Grubb & Ellis Research, Chicago, said industrial vacancy rates increased in four consecutive quarters to 8.5 percent, its highest level in more than three years. Despite low but positive absorption levels and less construction, researchers expect fundamentals in the next few quarters to soften.

“The industrial market has softened for four consecutive quarters, and the recent shocks to the credit markets coupled with incoming economic data that have measurably worsened are signs the market will face several more quarters of softening before hitting bottom,” said Robert Bach, senior vice president and chief economist at Grubb & Ellis.

The Institute for Supply Management’s manufacturing index fell in September to its lowest level since 2001, with some retailers filing for bankruptcy or plannning to close stores. Circuit City this week said it plans to close 155 stores, representing more than 20 percent of its U.S. locations.

“The key drivers of demand for industrial space are flashing red, including falling retail sales, store closures, a manufacturing sector that is weakening rapidly and a slowdown in global demand for U.S.-made goods and equipment,” Bach said. 

"Demand for warehouse space is waning in many larger markets," said Ray Wong, director of research operations at CB Richard Ellis, Los Angeles. "Coastal markets, in particular, are feeling the effects of weak imports and repercussions from the subprime crisis. Reluctant consumers are the driving force behind eroding industrial market fundamentals as their inability to maintain prior spending levels has reduced demand for imports."

The National Association of Industrial and Office Properties' Vital Signs 2008 Survey Observations, conducted by Wong and Doug Herzbrun, global head of research at CB Richard Ellis, showed nearly one-third of property owners said local industrial market rents deteriorated this year as 21 percent expected more rent declines in 2009.

“Capital availability is at its lowest point since the survey’s inception as the current lack of financing has jumped to be a paramount concern,” the report said.

Grubb & Ellis reported Austin, Texas and Phoenix posting vacancy increases of more than 400 basis points while California’s Inland Empire—Riverside-San Bernardino-Ontario area—Las Vegas and Orlando had 300 basis-point increases in the past four quarters.

“Not coincidentally, the housing slump has been particularly nasty in this group of markets with the exception of Austin,” Bach said.

"New supply has been for the most part kept in check in 2008 and is expected to be limited in 2009,” the NAIOP/CBRE report said. “Most pessimistic are the respondents from the Mountain region and the Southeast/Florida where 42 percent and 25 percent believe rents will worsen. The economy/demand has surged as the greatest threat to the health of the industrial market, followed by the lack of financing and construction materials costs. It is expected that manufacturing will be negatively affected by the global economic slowdown, further weakening demand already hurt by weak U.S. imports."

NAI Alliance reported gross absorption for industrial property in Reno, Nev., during the third quarter reflected a “national malaise” rather than a regional or local problem.

At nearly 828,000 square feet during the third quarter and more than 3.1 million square feet year-to-date, gross absorption reflected nearly 60 percent of its total from the third quarter of 2007. Vacancy during the third quarter jumped to 12.74 percent, up from 10.79 percent three months earlier.
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The future medical office will be entirely occupied upon completion; the medical foundation will use the new medical office facilities to perform women's health services. The future office consists of a 20,570 square-foot Class A, three-story medical office building with two levels of underground parking.

Since 2007, the debt and equity finance group of CBRE placed more than $1.5 billion in financing, throughout the San Francisco Bay Area for 2007 and year-to-date.
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Investor Landscape: Spread and Return/Continued Volatility
In this special session hosted by the Commercial Mortgage Securities Association, panelists from public companies, sovereign wealth funds and private equity share their views regarding the investor landscape. Panelists discuss spread volatility as related to real estate values.

Capital Markets Landscape: The Outlook for the Reconstructed Market Model
Wall Street investors, lenders and a rating agency representative discuss their outlook for the capital markets model.

Borrower Landscape: Debt/Equity Proposition in Today's Market
Given the economic outlook, borrowers discuss the biggest challenges in managing their current portfolios. Discussions include changes in demand for space, rents and concessions, as well as the procurement of financing.

Multifamily Landscape: Fannie Mae and Freddie Mac
Panelists discuss the latest developments related to the conservatorship of Fannie Mae and Freddie Mac and consider what’s next for the multifamily industry and the future of the GSE model.

Download the conference brochure for more information or click here to visit the conference Web site and register today.
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Nearly 70 percent of more than 400 commercial real estate executives surveyed in September and October found sustainability a critical business issue for their real estate departments—22 percent more than last year's survey conducted by CoreNet Global, Atlanta, and Jones Lang LaSalle, Chicago.

This year, 40 percent rated energy and sustainability as a “major factor” in their companies’ location decisions, with 36 percent more executives calling it a “tie-breaker” between locations that are otherwise competitive.

However, despite the high level of importance companies place on sustainability, 42 percent of executives are now willing to pay a premium—typically 1 percent to 5 percent—to lease green space. And 53 percent said they would pay a premium to retrofit property they own to gain sustainability benefits. By contrast, more than 75 percent surveyed last year said they were willing to pay some premium level for green space.

“A year ago, most CRE directors believed that improving energy efficiency and reducing carbon emissions would cost money, at least in the short run,” said Dan Probst, chairman of energy and sustainability services at Jones Lang LaSalle. “Today, they realize they can meet sustainability goals and save money at the same time.”

Nearly 75 percent of firms implemented broad recycling procedures, which required little upfront costs. Another 20 percent implemented limited procedures.

“[This] reinforce the idea that corporate real estate directors are continually looking for ways to deliver greater strategic value to their organizations at a lower cost,” said Prentice Knight, CEO of CoreNet Global. “They have climbed a steep learning curve on sustainability in the past two years, and have learned how to achieve the benefits of sustainability without overspending to get there.”

Energy management, the strategy with greatest potential for cost savings, has been broadly implemented at nearly 60 percent of firms and implemented on a limited basis at another 30 percent.

Purchasing green power and investing in renewable power sources, which could help environmental issues but offer companies less-promising cost/benefit equations, the survey said, were broadly implemented at less than 20 percent of companies.
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Being a Texas appraiser in the 1980s, I saw syndications morph into another, more malevolent form. The general partner was a successful developer who would have had no problem receiving 100 percent loan-to-value financing from a Texas bank or savings and loan for most anything he wanted to do; as was common in Texas banking of the 1980s.  But when commercial real estate values started to decline, these savvy real estate entrepreneurs, who would have normally grabbed good opportunities exclusively for themselves with 100 percent  financing, instead touted their successful real estate experience in reeling in large numbers of limited partners for a syndication. 

The limited partners were typically doctors, dentists, airline pilots or lawyers—wealthy, but not financially astute. These new types of public real estate syndicates were chronicled, for instance, in William Brueggeman’s widely used textbook, Real Estate Finance:

"In an operation of this kind the syndicate general partners share few of the risks. They may have originally bought [the property] through another business entity and sold it to the syndicate at a profit.  Through another company which they own they may receive substantial remunerations for management services. Above all, as the general partners, all earnings and capital gains not contracted away to the limited partners accrue to their benefit…This has been a matter of increasingly grave concern to state and federal securities sales regulators." [7th edition, 1981]

As commercial real estate markets sank, I witnessed how each syndication seemed to make the general partner richer while making the limited partners poorer. “Syndication” became a dirty word.

In recent months I've seen major real estate purchases by syndicated real estate partnerships at above-market prices. To skirt federal and state securities laws, they conduct “private placements” which curtail their ability to publicly market limited partner interests on a grand scale.

The blatant conflicts of interest are plainly disclosed, however, in the "private placement memorandum", that voluminous, catch-all legal document which discloses everything their attorneys tell them to disclose, in the moral equivalent of “fine print”.

A private placement memorandum I saw recently was a good example of an abusive syndication. The general partner purchased a piece of land from itself, on behalf of the syndicate, at a $20 million profit after a one year holding period, in a market with a growing inventory of large land parcels for sale at much lower prices. In addition to the $20 million profit, the general partner and its affiliates earned fees of about $3.3 million in selling commissions, $500,000 in wholesaling fees, $800,000 in placement fees, $600,000 in reimbursement of offering costs, $350,000 in underwriting fees, and $5.2 million in reimbursement of offering and organization expense fees. This represents over a $30 million profit on a property that has probably lost value since its purchase as the demand for residential land has waned.

These types of syndications are not necessarily confined to the United States, either, and are increasingly taking on an international flavor. Perhaps a Canadian syndicator might gather Canadian and U.K. investors to purchase worthless mountain land in a [third-world country].

What should be worrisome is that such syndicators are applying for mortgage financing in an industry where most of the loan underwriters are either too young or too forgetful to remember abuses of the past. 

The purchase price agreed to by the syndication is often treated as prima facie evidence of market value by lenders and appraisers, and the loan is consequently underwritten based on the inflated purchase price. Is anything illegal going on? That is for future courts to decide, but the present consequences to commercial mortgage lenders can be significant.

The opinions in this article do not necessarily reflect the views and/or policies of the Mortgage Bankers Association.
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