|
CRE Senior Executives Express Negative Sentiment for 2009
Webinar on Maximizing Adobe PDF Tuesday, December 2
Week's News Furthers CMBS Blues
Retail Outlook Sparks CMBS Exposure Concerns
'Pound is Sinking' in U.K. Property Values
PNC Funds $80M for Mixed-Use, Multifamily in California
MBA/CMSA 'After Work Seminar' December 3 in Washington
Winter Capital Markets Conference December 4-5 in D.C.
Begala, Carlson in Opening General Session at CREF 2009
Cross-Border Investment Key to Global Property Return
Weak Economy Keeps CMBS on Hold Until 2011, Cohen Says
CRE Senior Executives Express Negative Sentiment for 2009
MBA (11/20/2008) Murray, Michael
While 90 percent of real estate senior executives said commercial real estate market conditions dropped below last quarter’s levels, more than half said conditions are "much worse" than one year ago, based on The Real Estate Roundtable's fourth quarter sentiment survey.
"Real estate is now experiencing a seismic liquidity shock. Even though loan delinquencies in the sector are very low, the ongoing lack of credit and drop in asset values has paralyzed the market," said Jeffrey DeBoer, president and CEO of The Real Estate Roundtable. "It is now clear that unless bold policy actions are taken to specifically assist commercial real estate markets, this problem will intensify to mammoth proportions."
Nearly 40 percent of respondents expect real estate market conditions to worsen in 2009, up from 24 percent in the previous quarter. Nearly 70 percent of respondents said commercial real estate values would be lower next year while 27 percent believe values would go "much lower.”
"Weakness in the overall economy is affecting commercial real estate with declines in property values and rising vacancies," said Patrick Kelleher, senior vice president and CFO at Genworth Financial Inc., Richmond, Va., during its third quarter earnings call. "However, given the lower loan-to-value of our portfolio, which is around 55 percent and is very diverse in nature, [our] portfolio should continue to outperform benchmarks."
With 84 percent of respondents saying credit availability is "much worse" than it was one year ago, 51 percent characterized equity financing as "somewhat worse" than 12 months ago and 23 percent said equity financing conditions are "much worse."
Nearly one-quarter of respondents expect conditions in the capital markets to worsen next year while others forecast improvement, the survey said.
Michael Fraizer, chairman, president and CEO of Genworth, said a leader in this environment wants to prepare for the worst and be surprised by an upside.
"I mean that the financial market sort of ground to a halt in the credit market, you've seen it ripple through every type of investment, you have seen it ripple through the equity market and if you have seen a positive economic forecast around the world, I'd like to see it. Because, they have only compounded and gotten worse," Frazier said.
(Back To Top)
Webinar on Maximizing Adobe PDF Tuesday, December 2
MBA (11/20/2008) MBA Staff
The Mortgage Bankers Association’s Commercial Technology Initiatives Committee invites interested members to join in an education Webinar on Tuesday, December 2 at 2:00 p.m. ET.
The webinar, “Maximizing the Potential of PDF”, features an online presentation by Chip Greenlee, director of the financial services industry division of Adobe Systems Inc.
The PDF file format has changed, from a static presentation or “view” of a document, to a flexible and powerful tool that marries view and data seamlessly. The latest versions of the PDF format provide extraordinary opportunities for commercial firms.
Join this Webinar to find out how. Lawyers, lenders and servicers will all find something of value during this one-hour presentation.
This Webinar is one of an ongoing series of educational presentations by MBA’s Commercial Technology Committee to provide valuable and relevant information to the commercial industry.
Availability is limited, and pre-registration is required. Please contact Dan Szparaga at MBA (dszparaga@mortgagebankers.org) in order to reserve your seat at this presentation.
(Back To Top)
Week's News Furthers CMBS Blues
MBA (11/20/2008) Murray, Michael
Commercial mortgage-backed securities in the United States continue facing higher delinquencies with events from last week producing fewer signs of investor confidence returning to the market.
U.S. CMBS delinquencies jumped by six basis points in October to end the month at 0.51 percent, based on the latest loan delinquency index from Fitch Ratings, New York.
Fitch identified 274 fixed-rate loans at $987.8 million and 29 floating-rate loans at $2.4 billion in its CMBS portfolio of transactions scheduled to mature in November or December this year with extension options remaining on all but two floating-rate loans, likely to extend as performing loans. Fitch expected fixed-rate loans with high coupons and strong debt service coverage ratios to find financing earlier in the year, but now the loans face maturity defaults as lending stalls from the credit crisis.
"Timely repayment of maturing loans will continue to be a concern until global economic pressures subside and both lender and investor confidence are restored," said Susan Merrick, managing director and CMBS group head at Fitch Ratings.
Credit Suisse Group analysts reported a $209 million Westin Portfolio loan and a $125 million loan for Promenade Shops at Dos Lagos—loans bundled into bonds—were about to default on their debt.
The Westin loan was backed by hotels in Tucson, Ariz., and Hilton Head, S.C., and The Promenade Shops is in Corona, Calif., heavily hit by the housing crisis.
Cash and synthetic spreads “blew out” in part to reaction to Chicago-based General Growth Properties’ announcement last week questioning its own ability to refinance and the company’s viability as “an ongoing concern,” said Alan Todd, head of CMBS research at JPMorgan Securities, New York.
The S&P 500 removed the mall real estate investment trust from its list and Moody’s Investors Service, New York, downgraded the firm.
Last week's GGP refinancing concerns combined with a November 10 Chapter 11 bankruptcy filing by a firm that arranges tenant-in-common properties— Boise, Idaho-based DBSI—showed property managers had significant difficulties refinancing upcoming debt.
Todd said continued negative news around commercial property valuations would weigh further on sentiment and spreads for CMBS transactions during the next few months as fundamentals continue to deteriorate and loans transfer to special servicing—particularly loans approaching refinance dates and with refinancing more unlikely to occur because of the credit crisis.
“When a loan is transferred to special servicing, additional fees will be siphoned away from the trust, contributing to interest shortfalls—and likely ratings downgrades, as well—up the capital structure,” Todd said.
Fitch said a proportion of non-performing matured loans within its loan delinquency index increased "significantly” during the past year and particularly showed upward trends in recent months.
In October 2007, non-performing matured loans were 16 percent of new delinquencies and 4 percent of the overall index compared to 42 percent of new delinquencies and 15 percent of the overall index for non-performing matured loans in October of this year. Fitch’s loan delinquency index measures loans at least 60 days delinquent within all Fitch-rated transactions, which consists of 475 transactions of $553.1 billion.
"With CMBS issuance at a standstill and portfolio lenders cautiously managing their balance sheets, borrowers are facing increased difficulty accessing capital to refinance maturing loans,” Merrick said. "Given the illiquidity in the market, we expect the proportion and dollar balance of maturity defaults to continue to grow at a fast pace with delinquencies approaching close to 75 basis points by the end of this year."
Todd said the Treasury Department’s announcement last week not to use funds from the Troubled Asset Relief Program to purchase distressed mortgages prevented life insurance companies from alleviating balance sheet pressures and could result in their using bid-wanted-in-competition lists to lighten their exposure to CMBS. BWIC lists allow securities dealers to make bids for securities on the lists, which Todd said could “add incremental supply for very limited demand.”
(Back To Top)
Retail Outlook Sparks CMBS Exposure Concerns
MBA (11/20/2008) Murray, Michael
Retail properties backing commercial mortgage-backed securities face store closings, bankruptcies and a tight credit environment.
Tim Quinlan, economic analyst at Wachovia Economics Group, Charlotte, N.C., said retail sales are dropping faster than retailers can trim inventory. He said numbers for September do not yet reflect October for its lowest consumer confidence rating on record and its highest monthly drop in retail sales ever. Retail sales in the United States fell a record 2.8 percent last month and now retailers have an unintended build-up of inventory.
Electronics retailer Best Buy Inc. forecast lower earnings, while J.C. Penney Co. and Abercrombie & Fitch Co. reported a sharp drop in their third-quarter profits and gave lower outlooks for the fourth-quarter and full-year, as did Kohl's Corp. and Nordstrom Inc.
"It will get worse before it gets better," Quinlan said. "While retailers seem to have been managing their inventories lower to meet softer demand, stockpiles at manufacturers and wholesalers have been growing in recent months.”
Tightening credit increased refinancing concerns among retail investors. General Growth Properties, a Chicago-based real estate investment trust, warned investors that it could file for bankruptcy if it is unable to refinance or extend its debt during the current credit crisis.
“We expect that refinancing efforts will continue to be challenging in 2009 and 2010, as an increasing number of retail loan maturities come due,” said Larry Kay, managing director at Standard & Poor’s, New York.
However, in S&P’s report, The Potential Impact of the Troubled Retail Sector on Rated U.S. CMBS, the ratings agency said collateral securing loans from GGP "generally have low loan-to-value ratios, strong debt service coverage, and high occupancy."
"The likelihood of transfers to special servicing resulting from a GGP bankruptcy would depend in part on the structure of each loan," Kay said. "Many of the borrowers are structured as bankruptcy-remote special-purpose entities, which should reduce the risk that they or their assets would be consolidated with the bankruptcy proceedings of the parent entity."
S&P said specialty clothing and department stores and teen and luxury segment retailers showed declines, while discounters, wholesalers and drug stores had increases in sales during the year.
“While we believe the overall picture seems bleak from a macro perspective, in our opinion, the aggregate data hides the fact that certain types of stores are actually performing quite well in this environment," Kay said. "Clearly, consumers are favoring locations that offer a 'one-stop' shopping experience [Wal-Mart], as well as those that offer the most value for their dollars in this tough economic environment."
Despite some success for one-stop retailers, current weakness in retail still concerns some analysts at the cusp of the holiday shopping season.
“The weakness in retail sales means that consumer spending will almost certainly decline in the coming quarters and could be a harbinger of real trouble this holiday season,” said Anika Khan, economist at Wachovia Economics Group. “We expect holiday sales will decline between zero and 2 percent.”
After Circuit City Stores filed Chapter 11 bankruptcy earlier this month, Realpoint LLC, Horsham, Pa., found 278 Circuit City properties, including the company’s Richmond, Va. headquarters, securing 281 CMBS loans with more than a $4 billion allocated property loan balance across 181 CMBS transactions.
The credit ratings agency said six properties secure more than one loan and 11 loans contain more than one Circuit City property.
"In our view, the collateral properties where Circuit City occupies more than 20 percent of the space are the most at risk," said Frank Innaurato, managing director at Realpoint.
S&P’s report said CMBS transactions with exposure to retail tenants declaring bankruptcy trump tenants that announce store closings. Mervyn's, for example, filed for bankruptcy July 28, and announced liquidations of all its stores on October 17.
“Underperforming stores are usually systematically selected for closure, and the market is typically made aware of closures well in advance,” Kay said. “Tenant bankruptcies, however, can sometimes put a chain of stores out of business in a relatively short period of time.”
Prior to Circuit City’s filing, the electronics retailer announced 155 store closings and despite its bankruptcy, the company said it would keep stores open for business during the holiday season.
"[Circuit City] store closings will lead to diminished cash flow in the near-term and ultimate collateral performance may be dependent upon the ability of borrowers to secure new tenants for the vacant space. Also, lease payments from other tenants could be affected due to co-tenancy clauses, which would also negatively affect cash flow," Innaurato said.
S&P rated 288 CMBS transactions with exposure to troubled retail tenants and said overall exposure by transaction is “very low, reflecting the industry and tenant diversity found in CMBS deals. The highest troubled tenant exposure in a transaction is 8.3 percent,” Kay said.
(Back To Top)
'Pound is Sinking' in U.K. Property Values
MBA (11/20/2008) Murray, Michael
Commercial property capital values in the United Kingdom plummeted by 4.3 percent based on London-based IDP's UK Monthly Property Index for October. It represents the largest monthly drop in IPD’s 22-year history.
Total returns dipped 3.7 percent in office properties, driven by the 4.3 percent drop in capital values. Rental value growth dropped by 0.7 percent, deepest in nearly five years, based on IDP's index.
“The pace of capital value falls over October fully confirms market expectations and it remains to be seen, from this point, whether values have now fallen to a point where equity investors are prepared to
step back into the market in any force," said Malcolm Frodsham, director of IPD.
All property total returns fell to -3.8 percent, slightly lower than December when they were at -3.7 percent. All property total income returns were steady at 0.5 percent for the third consecutive month.
Across all sectors rental value growth fell for a sixth-month, by -0.3 percent, and at a quickened pace relative to September’s -0.2 percent fall. This, combined with a -4.2 percent yield impact, were key drivers for capital value declines during the month, Frodsham added.
The steepest capital value falls were in the retail sector with a 4.7 percent drop, another record monthly decline, comparable to last November’s 4.3 percent fall. Total return in retail stood at -4.2 percent in October. The industrial sector, however, had a 3.2 percent drop in capital values, lowest among UK commercial property sectors. Total return for the industrial sector was at -2.7 percent.
"The industry is braced for further falls in the remaining two months of 2008 but so rapid have been the falls that it is possible that the asset price deflation will soon have run its course," Frodsham said. "The key indicators to watch in the industry are the level of new money and redemptions from retail and institutional unitized funds in the IPD Pooled Funds Index and the level of voids in the IPD Monthly Index—particularly especially after the Christmas and January sales period.”
(Back To Top)
PNC Funds $80M for Mixed-Use, Multifamily in California
MBA (11/20/2008) Murray, Michael
PNC Bank, Pittsburgh, provided nearly $80 million through PNC Real Estate Finance for mixed-use development and multifamily properties in California.
PNC Real Estate Finance provided a three-year, $65 million secured subscription facility and led syndication on a transaction to the Merlone Geier Partners LP, a San Francisco-based real estate investment firm focused on retail and mixed-use development and redevelopment.
Merlone Geier said it would use the $65 million for retail investment and continuous working capital needs.
PNC MultiFamily Capital arranged a $3.8 million Fannie Mae Supplemental Loan for The Landmark Companies LLC, developer of Brandon Place Apartments. Built in 1997, the 197-unit property in Riverside, Calif., consists of 16 garden-style buildings targeting seniors 55 and above, earning 50 percent to 60 percent of area median income.
The loan follows two previous transactions with The Landmark Companies for Brandon Place.
The Calabasas Hills, Calif. office of PNC ARCS provided a $2.15 million loan for the Chateau Oaks Apartments, a 40-unit property in Sherman Oaks, Calif. The Fannie Mae Small Mortgage product was for a 10-year term/30-year amortization at a 5.8 percent fixed rate.
Built in 1978, Chateau Oaks Apartments is a garden-style community with amenities that include intercom access and underground gated parking.
The San Francisco office of PNC Arcs originated loan a $3.301 million loan through Fannie Mae for the Sandalwood Apartments, a 40-unit property in San Jose, Calif. The loan includes a seven-year term and three years of interest only. Built in 1962, Sandalwood is a garden-style community.
The same office also originated $4.653 million Fannie Mae loan for Marin Gardens Apartments, a 46-unit garden-style property built in 1964 in San Rafael, Calif. The loan consists of a seven-year term/three years of interest only at a 6.2 percent fixed rate.
(Back To Top)
MBA/CMSA 'After Work Seminar' December 3 in Washington
MBA (11/20/2008) Royer, Denise
An "After Work Seminar," jointly sponsored by the Mortgage Bankers Association and Commercial Mortgage Securities Association, will kick off MBA's Commercial/Multifamily Capital Markets Winter Conference on Wednesday, December 3 at 6:00 pm ET in Washington, D.C. at the Washington Marriott.
Hear a lively panel of industry leaders discuss The Servicing Landscape: Opportunities and Challenges. The discussion will include economic environmental impact on delinquencies and defaults, the master/primary servicer relationship, borrower issues and projections and predictions.
The panel, moderated by Kevin Donahue, senior vice president at Midland Loan Services Inc./PNC Real Estate, addresses the current state of the commercial real estate market, where it is headed and how this differs from previous cycles.
The "After Work Seminar" runs from 6:00-7:30 pm, followed by a networking reception from 7:30-8:30 pm ET. This event is open to MBA and CMSA members, as well as nonmembers. The seminar and reception will take place at the Washington Marriott at 1221 22nd St. NW, Washington, D.C.
To register, download the registration form and return it to MBA (contact details included in form) or register online at http://store.mortgagebankers.org/ProductDetail.aspx?product_code=M2901240/REGIS.
*Note: Regular Registration ends on Thursday, November 27. After that date, only on-site registrations will be accepted.
(Back To Top)
Winter Capital Markets Conference December 4-5 in D.C.
MBA (11/20/2008) Royer, Denise
Sign up now for the Mortgage Bankers Association’s Commercial/Multifamily Capital Markets Winter Conference and take advantage of significant savings on hotel and registration fees. The cutoff date to receive MBA’s special discounted hotel room rate and early registration fee is November 26.
With a market meltdown, a shifting investment banking model and unprecedented regulatory and legislative actions, MBA’s Commercial/Multifamily Capital Markets Winter Conference presents information to keep you abreast of the latest developments in this turbulent environment. This program is especially intended for those who work either directly or indirectly in the commercial real estate capital markets.
Some highlights of this year's conference include:
Opening General Session: Post-Election Economic and Political Landscape
MBA advocacy experts Steve O'Connor, senior vice president of government affairs, and Francis Creighton, vice president and chief lobbyist at MBA, with other key lobbyists, discuss their views of anticipated legislative and regulatory changes expected from the recent election cycle.
Also, get an update on the state of the economy with Jamie Woodwell, vice president of commercial/multifamily research at MBA.
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. Moderated by J. Christopher Hoeffel, managing director at InvestCorp, New York.
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. Moderated by Michael Berman, CMB, president of CWCapital, Needham, Mass.
Borrower Landscape: Debt/Equity Proposition in Today's Market
Given the economic outlook, this borrower-focused session discusses 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. Moderated by Jack Cohen, CMB, CEO of Cohen Financial, Chicago.
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.
(Back To Top)
Begala, Carlson in Opening General Session at CREF 2009
MBA (11/20/2008) Royer, Denise
Former co-hosts of CNN’s popular political debate program Crossfire, Paul Begala and Tucker Carlson, are scheduled to speak during the Opening General Session at the Mortgage Bankers Association's Commercial Real Estate Finance/Multifamily Housing Convention & Expo 2009 on February 9 in San Diego.
MBA's CREF Convention & Expo takes place February 8-11, and it is your source to help you work smarter and faster in today's challenging market climate.
From the White House's Situation Room to CNN's news program of the same name, Begala's experience gives him an unmatched perspective on politics and the media as he comments on the 2008 political season.
As a political strategist or pundit, Begala has been at the center of every election cycle of the past 20 years. The CNN political analyst and former top aide to President Bill Clinton was reportedly the first person to predict the Democratic takeover of the House in 2006, and as senior strategist to the campaign of Sen. Bob Casey, D-Pa., he helped unseat the third-ranking Republican in the U.S. Senate, allowing the Democrats to take control of that chamber as well.
Carlson is a senior campaign correspondent for MSNBC. Until March 2008, he was the host of MSNBC's Tucker, a fast-paced, no-holds-barred conversation about the day's developments in news, politics, world issues and pop culture. Carlson joined MSNBC in February 2005 from CNN, where he was the youngest anchor in the history of that network. At CNN, he hosted a number of shows and specials, including the network's political debate program, Crossfire. During the same period, Carlson also hosted a weekly public affairs program on PBS, Tucker Carlson: Unfiltered.
For more information about MBA’s CREF Convention & Expo and to register today, click here to visit the conference Web site.
(Back To Top)
Cross-Border Investment Key to Global Property Return
MBA (11/20/2008) Murray, Michael
The United States lost its foothold as global leader for cross-border commercial property investors this year, but an overall 60 percent decline in global commercial property sales might mean only a short-term loss in status.
Peter Slatin, editorial director and associate publisher at Real Capital Analytics, New York, said in his article, “A Shift in Real Estate's Global Positioning System,” that turbulent markets caused cross border property investors to veer away from U.S. commercial real estate into emerging global markets.
Slatin said the Europe/Middle East/Africa region led for the third straight quarter this year with $56 billion in commercial property sales volume—more than one-third of the $36.3 billion in the Americas and nearly three times Asia Pacific’s $22.1 billion in sales.
"Investment in emerging econonmies almost doubled in proportion compared to overall investment," Slatin said.
At a global structured finance conference in Tokyo this week, Robert Vrchota, managing director at Fitch Ratings, New York, said senior investment grade-rated commercial mortgage-backed securities bonds should continue to perform as expected in Asia, but the liquidity crisis continues to negatively impact global economies.
"Fitch believes this will result in weakening commercial real estate fundamentals across property types and geographic regions, leading to increased delinquencies and losses, which will primarily impact non-investment grade rated CMBS bonds,” Vrchota said.
"The prices of many structured finance bonds have declined dramatically," he added. "Fitch believes the prices of many of these securities and the related losses now being recognized by many financial institutions reflect the overall risk aversion of the market and mark-to-market financial accounting rules more than the deterioration in credit fundamentals alone."
Chicago-based Jones Lang LaSalle’s November Global Market Perspective reported Brazil, Russia, India and China as no longer immune to currency devaluation and stock market declines, but the deteriorating economy continues to impact property markets in the U.S. and Europe and Asia Pacific could experience a slowdown.
“Unsettling news from the U.S. on retail and auto sales as well as employment fed the sense of unrelenting market upheaval,” Slatin said. “But Asia Pacific’s rapid rise and even more rapid fall since early 2007 signals that something else may be afoot: emerging markets, led by China, appear to be headed back into the shadows, at least for the time being.”
The article said land sales in China dropped by 78 percent this year andby 85 percent year-to-date, based on “new restrictive foreign investment regulation as reduced capital flows.”
China's $586 billion stimulus package, announced earlier this week, was followed on Wednesday by a report from Business Today that China’s retail sales increased by 22 percent to $148 billion from 2007.
In Japan, CMBS loan delinquencies increased to six from zero this year based on the global economic turmoil and reduced liquidity, said Moody’s Investors Service, New York.
CB Richard Ellis/Torto Wheaton Research, Boston, said Tokyo registered a 7.1 percent decline in prime office rents in the three months ending September—its third straight quarterly decrease—marking the end of a positive cycle in which rates had risen continuously for four years.
Masaaki Kudo, managing director at Fitch Ratings, and Atsushi Kuroda, senior director, said Japan's domestic structured finance market continues to experience a significant downturn as global financial turmoil spreads.
"The senior notes will survive the most severe value decline scenario," Kudo said. "However, limited availability of property financing raises concerns of increasing loan defaults as a substantial number of loans are expected to mature in the next couple of years."
Fitch revised its ratings on 12 Russian banks yesterday—four European banking subsidiaries of Russian Bank VTB and two Russian leasing companies—to negative from stable and affirmed their ratings after revising its outlook on Russia's issuer default rating to negative from stable.
The Moscow Times reported Russia's Agency for Housing Mortgage lending, AIZhK, unveiled a liquidity plan that includes $18.55 billion worth of guarantees offered to mortgage-backed securities. The plan would allow commercial banks to attain more loans from the Central Bank at a time when the global credit crunch keeps funding sources scarce.
CBRE/TWR said commercial property prices—like all assets—will remain under deflationary pressure, and "stabilization will depend in great measure on the number of sellers that are in the market. All regions are showing leasing weakness following a rapid rise in prime office rents in the 2005–2007 period,” the firm reported.
CBRE/TWR also reported major European office markets increasingly split between seeing actual rental declines—most notably in London but also Dublin and Barcelona—and those where prime rents held firm—Paris, Frankfurt and Madrid. In several markets where prime rents held, analysts expect rents would come under downward pressure in the fourth quarter or early next year.
“Europeans want their money because they have their own problems,” said Raymond Mobrez of asiaecon.org. “England is in a huge foreclosure process right now.”
Jones Lang LaSalle said the retreat of German open-ended funds was “the latest blow to the European property markets with pricing adjustments slow to come in that portion of the globe."
"The Middle East is experiencing its own meltdown with many major real estate companies instituting deep cuts in future projects, while many say the worst is yet-to-come in the Asia Pacific region,” JLL said.
Slatin said stability of developed countries in the Americas and EMEA would emerge for risk-averse and cash-constrained global property investors as “a renewed draw,” particularly for yields comparable to ones in emerging markets.
Jones Lang LaSalle analysts expect transaction levels in the U.S. to remain low until the first quarter of 2009, based on reduced liquidity in the debt markets and a “wait and see” approach by lenders.
“Global efforts to shore up the banking system and restore liquidity have had unintended consequences as investors flee from high risk investments into safer vehicles, with many demanding redemptions on open-ended and unlisted funds,” JLL said.
“Of course, in times like these, all markets are emerging,” Slatin said. “How or where they will come out will in part be determined by investor appetites."
(Back To Top)
Weak Economy Keeps CMBS on Hold Until 2011, Cohen Says
MBA (11/20/2008) Murray, Michael
Jack Cohen, CMB, CEO of Cohen Financial, Chicago, spoke with MBA Commercial/Multifamily NewsLink about the current liquidity crisis and how it impacts commercial real estate and securitization markets.
MBA COMMERCIAL/MULTIFAMILY NEWSLINK: Without Treasury purchasing toxic assets through the Troubled Asset Relief Program, life insurance companies could be stuck writing down commercial mortgage-backed securities on their balance sheet and hold less liquidity, JP Morgan Securities said last week. Where do you see capital coming from in the next year if life insurance companies become more stretched and CMBS tries to get back on its feet? Where is liquidity going to come from in commercial real estate?
JACK COHEN: Let’s answer your question with a question. How much liquidity is really the right amount? Consider the possibility that everyone has to give up their mental memory of the future, and the possibility that everyone and anyone waiting for life to come back in any semblance to the way it was, is going to miss the boat.
The reality is—do you want to take a guess how big the capital markets were in 2003-2004? They were at $100 billion to $200 billion. We had transactional volumes not because of great players or great deals but because of an artificially buoyant marketplace. In 2006 or 2007, deals that would normally have happened in 2008, 2009 or 2010, were brought forward in 2007 because the money was so easy.
CMF NEWSLINK: Why do you think the capital markets will go back to 2003-2004? Why not go back as far as the early 1990s?
COHEN: Let’s approximate for progress. Life companies always did $20 billion to $30 billion of business. Banks always did $40 billion, maybe $50 billion of business. Fannie [Mae] and Freddie [Mac], combined, always did $15 billion to $25 billion of business. If I just add that up, I’m over $100 billion and that’s before securitization comes back, and that’s before pension funds or finance companies. And, there are loans that will rollover that will bring us not just the need but capital that exists that is larger than a marketplace that goes back 10 to 15 years.
There are many things from previous cycles that will come back forward but the reality—in my view—is that the first thing that has to happen is everyone has to give up their entitlement expectation that to survive and prosper, we need a $500 billion transaction marketplace.
CMF NEWSLINK: Is that going to change the role of commercial mortgage bankers going forward with regard to borrowers? Has that role changed this year since CMBS has been out of the picture, and will it change next year?
COHEN: Something that mortgage bankers, mortgage brokers and investment sales brokers have to accept is that the core competency of being an auctioneer is no longer valued. But, in the olden days, bankers, brokers and investment sales people actually knew their deal, knew their customer, had an opinion about right and wrong, advocated it and were able to persuade and maintain a relationship on both sides of the transaction.
Consider the possibility that the largess—the fast, loose money—created a skill-set atrophy. Consider the possibility that it was a competitive disadvantage to actually know something about your deal and say that the property or loan was not worth more than what it was eventually sold at or the amount loaned on it.
Long term, this is great. As the skill sets improve, as knowledge and relationships matter, the borrowing community is going to need good intermediaries more than ever—so long as good intermediaries actually exist.
The people who have the business will be the ones who are relied upon for knowledge and relationships more than anything else.
CMF NEWSLINK: As a strong advocate for borrower service in CMBS, did the securitization market in general—residential or commercial—move further away from borrower needs to investor needs because the mortgage banker’s role fell in the middle between borrower and investor. Did it lean too much toward the investor?
COHEN: Although it is a good question, I don’t really know. There are a lot of things different about this time than prior times, but one thing I always want to remind people is that the [commercial] real estate business didn’t take us into this mess. We didn’t have overbuilding or poor underwriting to the extent that brought everything down.
We’re in this mess because financial institutions [around] the globe started the process of deleveraging a year ago, and it is that deleveraging that is going to go to corporations, assets and human beings that is shifting the amount of debt that exists in the globe—less of it and where it stands.
The fact that these institutions bought these bonds or lent securitized, they are not innocent bystanders but they are also unintended consequences to all of this, as opposed to the ‘perfect storm’ that hit in the late 1980s and early 1990s where lenders actually should have stopped lending and did not.
Now, residential is a different problem because of all that went on with subprime, but that just lit the fuse. That didn’t keep this thing burning, and it is not going to be what the ultimate train wreck is going to all be about. Subprime is only $700 billion to $800 billion of this problem. We are sitting with $1.1 trillion of credit card debt that the public owns and that is going to keep the mess alive for much longer than any one thing—vis-à-vis commercial real estate fundamentals.
Whether or not securitization went to the borrower or lender, it kind of doesn’t matter because it wasn’t part of the problem that exists right now.
CMF NEWSLINK: So then, how will securitization look moving forward?
COHEN: It won’t come back. It is not going to come back until at least 2011, and when it comes back it has to come back in a different form. It cannot come back until somebody resolves mark-to-market.
One of the reasons securitization imploded was because all the growth it created—$500 billion of growth, et. al.—all that growth was a by-product of crossover bond buyers who bought securitized bonds. Those fixed-income investors had portfolios that were subject to mark-to-market.
When there was no market, deleveraging starts [and] there are only two ways to de-lever—you sell assets or raise equity. When everyone does it at the same time, prices fall. An unhealthy institution sells assets at a below market number because it needs liquidity means a healthy institution has to mark-to-market and, therefore, that [poor-performing] portfolio affects the healthy institution in a way nobody ever considered.
Securitization cannot come back as another mark-to-market bond vehicle because no chief investment officer who remembers this period of time when AAA went from—what everyone believes was a secure band—between 20-30 basis points over swaps and became as wide as 550 [basis points] over swaps, nobody will ever go back into that product-type on that basis.
The hedge funds that used to buy, the life companies and the fixed-income buyers that used to buy on that basis are not coming back.
When we come back, it is going to have to be some kind of private-public vehicle that, in the end, is not subject to mark-to-market or mark-to-market rules are changed. Otherwise, it’s not coming back.
CMF NEWSLINK: It does seem financial institutions have been allowed to perform mark-to-model instead of mark-to-market as a change in FAS 157 rules. Does that make a difference?
COHEN: Yes, that does matter. It gets back to a hold-to-maturity mentality. But, until that settles, the people who are temporary to the business—who were really not committed to the industry and were just buying the product—they are not coming back.
Again, I am not suggesting anybody did anything wrong. I am just suggesting—my earlier point—to give up your mental memory of the future. Expect not that something from the past will show up in the future but that something in the future will actually be different than what we experienced in the present or the past. That is why I don’t think the securitized world comes back anytime soon.
It is necessary and it has a role, but its time is not now.
CMF NEWSLINK: If rules permanently go to mark-to-model, is there a chance of securitization coming back then?
COHEN: I think that is one solution, there may be others. The interesting thing about this business is what we need is to reduce volatility. Risk is volatility of outcome. If you don’t know if it is market-to-model or mark-to-market or some other thing, [investors] are not going to jump into this.
Once the rules are in place, [industry players] are exceptional at changing their business model to adapt to the rules and then move on. But, as long as the rules keep changing, nobody is going to step in because they cannot alter [the models]. This is why there is a housing issue, we have a public debt issue and a number of other issues…we are rebuilding the financial infrastructure of the globe on the fly.
The Treasury Department is going to invest in these banks—there’s a change as we start having unintended consequences [and] that is what 2009 will all be about. Then, in 2010, after two years of a weak economy, no real new loans, liquidity stretched, an economy having problems—maybe bankruptcies, maybe delinquencies—then, in 2010, we start having securitized rollover and we start having problems at the exact same time.
The system was not designed for that kind of stress, so we are going to have a huge traffic jam in 2010 tied to the existing securitized world. That is why I say nothing happens anew until at least 2011.
CMF NEWSLINK: In the future, are commercial mortgage bankers going to have more ‘skin in the game’ and would that carry into residential mortgage lending?
COHEN: I don’t know a lot about residential, but the reality is that financial institutions, corporations, assets and human beings will have to have less leverage. They will have to have a lower cost of goods sold, and they will have to have less debt on their balance sheets. This means that more equity will be required and that equity will be, at least, a little bit more expensive.
The world starts lending again when financial institution balance sheets stop contracting and start expanding again. There is a strong need for us to recognize that one of the reasons why we got into this mess is that as [former Federal Reserve Chairman Alan] Greenspan kept interest rates as low as he did for as long as he did, the financial institutions—in order to get their return on equity—needed more internal leverage.
When the internal leverage went away, the system seized. And, the internal leverage is not going to come back anytime soon. So, yes, financial institutions will have to change their balance sheets; therefore, cost of capital that they have will increase. That means, they will need a higher cost of capital on their lending which means the borrower will have a higher cost of capital and [the borrower] will have to either expect more out of the property or pay less for the property.
CMF NEWSLINK: How will that affect refinancing these assets? Will there be a problem with that?
COHEN: I’ve always said, ‘All real estate makes money. The only question is who owns it at the time.’ On that refinance, if the borrower does not have the capacity to put more equity in, he or she will not be the borrower much longer.
CMF NEWSLINK: What does that say about potential delinquencies?
COHEN: I don’t think it says much. If the borrower doesn’t have equity, the lender will take the loan and sell it to someone who has equity and it will continue on.
CMF NEWSLINK: So you’re not so concerned about delinquencies or CMBS delinquencies.
COHEN: I’m not, I’m not. It is so unnecessarily low right now that, to me, that’s kind of noise.
We will have vacancies; we will have problems in terms of rent rolls and, therefore, NOI. We will have some coverage issues, which gets back to leverage, but at the property level we will have some cash flow coverage issues and, yes, we will probably have some delinquencies.
But, the difference this time from last time is that I don’t think the lending community is going to mess around. If the borrower cannot afford the deal anymore, then the lender is going to take the deal and give it to someone else who can.
CMF NEWSLINK: You mentioned equity and, earlier, hedge funds. Hedge funds look like they will be losing money and private equity capital invested in hedge funds and could lose money. Some analysts say private equity is on the sidelines waiting to pour in to invest in commercial real estate assets—perhaps even acquire troubled assets no longer purchased through TARP. What role do you see private equity investors having in commercial real estate lending in the next year?
COHEN: They’re key—equity is the one thing that we are going to need as an industry.
CMF NEWSLINK: Will it be there?
COHEN I believe so. The borrowing community is going to have to change the business model. Many people came into the business with a belief that high leverage meant they did not need equity partners. That worked while it worked, but now that it is not working anymore, they are going to need equity.
A great example is [Warren] Buffet. What did Buffet do? He saw a great brand, great business, well run [and] overleveraged in Goldman Sachs and in GE. He came in and helped them reset the balance sheets and let them run the business, but he receives a preferred equity position. He gets an opportunity to not just be a lender to them but to benefit long term from the rebalancing of their balance sheets.
Since the best original ideas belong to somebody else—and, therefore, steal freely—why isn’t that the right business model for the real estate business? Private equity comes to the borrower with a really good property. It happens to be situationally overlevered. The lender lets a borrower pay down on it or refinance at a lower level and private equity comes in. Winner!
CMF NEWSLINK: Of course, again, will private equity have the funds and want to invest in commercial real estate?
COHEN: Some will, some won’t.
CMF NEWSLINK: What are your views of the ratings agencies in the next year? Are they going to need to reevaluate or change their model on how they rate CMBS, who they do that for and how they are paid?
COHEN: Yes, I think so. I’m not in the camp that wants to point a finger at anyone—least of all, the rating agencies. What we had was greed, stupidity and lack of oversight and that is how we got to this point—and I would say that starts with our government.
I am not anti-rating agencies, but I tell everybody to consider the possibility that everyone’s business plan [or] business model is now flawed—some more so than others.
So, yes, if you want to talk about everyone, we can talk about everyone and one of those ‘everyone’ is the rating agency and the rating agencies will have to consider who their customer is or what their product is. There is a role for a third-party entity giving advice about the investment. The [rating agency] business is going to have to evolve just like everyone else’s.
CMF NEWSLINK: Just to follow up, do you see any evolution in technology so that the investor can get their arms around the commercial real estate property so they can almost rate it themselves from the data they see?
COHEN: This is where I’m kind of ‘pollyannish.’ I really do think smart money actually has their own opinion of value and performance, and they use ratings agencies and other third parties to confirm or dispel how they identify, assess and price risk—and that should never change.
CMF NEWSLINK: Let’s move from the macro to the micro. How is this current economic environment—the credit crisis—affecting Cohen Financial directly? How does it affect your business?
COHEN: We have had to get better. We have had to take a look at ourselves and some of the flaws I pointed out earlier about the brokerage community. We had to self-assess and take a look at who in our shop was doing what.
Our business model is still the same. We want to do debt placement and equity placement in the primary and secondary market, and we want to do loan servicing. We continue to do that.
But, in June of this past year, I shrunk the business by one-third and at the end of the last month, we took another 10 percent out. If you believe my speech about the capital markets shrinking, then so too should all the service providers shrink themselves.
I want us to provide for our customers a remarkable experience so that it is a service excellence business proposition as opposed to size or geography. People are not going to grade Cohen Financial high only because of the states I have offices in or states I do business in but, in theory, people should rate Cohen Financial highly in the company we keep—that is, to say, the customers we are serving and how we are supporting their business model.
We recapitalized the business [two to three years ago] with a public company out of Toronto called First Service, which has an investment in a global Colliers franchise and made investments in other businesses like PGP, which is appraisal, and PKF, which is hotel feasibility and a Canadian project management business MHPM.
We are participating in the creation and delivery of an integrated business service offering that is service-specific as opposed to specialty or geographic-specific for clients.
We are evolving our business model to try and offer not transactions but knowledge and helping augment customers with their strategic solutions. All of that started in June 2006 and continues to accelerate as we ‘trim the fat’ in our organization and focus our business on our customers.
We also had to fire customers. If you believe my statement that certain customers in the future are going to need more equity or less leverage—the idea of structured finance where borrowers did not have as much equity to put into deals—maybe that customer is not a good use of [our] time in 2008 or 2009. We are shrinking our customer base to do more for less people, we are trying to add more products and services by an integrated delivery system to deliver to these people and get better at it.
CMF NEWSLINK: Earlier this decade—following 9/11—you once said that good sales are good sales people and that they are going to make those deals happen even during bad times. Is this credit crisis too difficult of an environment going against them?
COHEN: Yes, but I’ll give you the advanced course. I still stand by the statement, but I think I’ve learned something over this period of time. Maybe when I made that statement that we as good salespeople are actually selling. What if the best people don’t sell but they help their customers buy.
The reason the auction mentality is no longer good is that I can’t help a customer buy unless I have a relationship with that customer and I know what [the borrower] needs and have them buy what they need as opposed to selling.
There are a ton of things in the way—no question about it—and, yes, this is a different world, and it is not going to be enough to just be a good salesperson. You have to be more than that, like a knowledgeable, skilled professional who migrates his or her own skill set and helps customers buy.
The test of time is how people do in bad times, and these are bad times…and it’s going to last for awhile…
CMF NEWSLINK: This period must be really unprecedented compared to anything in recent times, isn’t it?
COHEN: It is. There is an element of this that strikes me of 1986-1987, but this is 1930 unprecedented. This isn’t 1980s, 1990s or 2000 unprecedented.
The reason I go back to 1986-1987 is because we changed the tax laws. People had this thick book on their desk that said Tax Act of 1986 and post-tax law change buyers would call up pre-tax law change sellers [with disagreement on value]. It took a couple of years for expectation management to change and the selling community to get over the fact that they missed the market.
What if I told you right now that the changes that started one-and-a-half years ago, and will continue through 2009 make the 1986 Tax Act changes look like a walk in the park? And, that’s not in writing. If the same psychology of pre- and post-rule change is not in writing, it will take years for the selling or borrowing community to accept the new rules, and they will not want to drive on the road until they know what the new rules are.
We have been through tough times. That is true. We will all survive this, but this one is different than anything we have seen since the crash of 1929.
CMF NEWSLINK: Let’s finish with the fundamentals. With consumer confidence down, massive layoffs and less travel during the holidays—not to mention shadow rental properties—what properties are going to fare best and worse during the upcoming year, and is commercial real estate heading for a bottoming out process in prices much like residential is going through now?
COHEN: You not only come prepared, but you actually get the joke. I mean, you answered the question. Retail and office scare me. I like apartment and industrial better and, yes, they are going to be bottoming out.
The good news is we do not have excess supply, but the bad news is 'pricing.' What is the property worth? What someone is willing to pay for it? If there is fast, cheap, loose, easy money, people are willing to pay more. As soon as you take that away, values have to fall.
Consider that we will go back to the future and like in decades ago, we will have a situation where, essentially, value is created at NOI and not in the capital structure.
Vacancies, what people will pay for property because of the vacancies, risk of tenants going broke, demographic shifts—all of that affect hotels, retail and office before industrial and apartment.
In spite of the fact that apartments almost unilaterally are overleveraged, Fannie [Mae] and Freddie [Mac] are still in business and the government is supporting this housing issue.
We are going to have to stabilize the housing business but, until we do, I think apartments are great places for people to live.
(Back To Top)
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
Senior Staff Writer: Vijay Palaparty 202/557/2904 VPalaparty@mortgagebankers.org
Advertising Opportunities: Bill Farmakis 203/834-8832 bill@jlfarmakis.com
Any reprints or other use of these articles in whole or in substantial part, in any medium, requires advance written permission from the Mortgage Bankers Association. For reprint information on stories in MBA Commercial/Multifamily Newslink, please contact Stefanie Lauff at (800) 394-5157 Ext. 26.
MBA Commercial/Multifamily NewsLink, a weekly electronic
publication, is a member benefit free to employees of MBA member
companies, and available by paid subscription to non-members. For membership information, visit MBA's website
at http://www.mortgagebankers.org/AboutMBA/membership
(Back
To Top )
|
Copyright © 2007 Mortgage Bankers Association. All rights reserved.
1331 L ST, NW Washington, DC 20005
(202) 557-2700, All Rights Reserved.
http://www.mortgagebankers.org/
MBA Newslink Legal Information
If this email has been forwarded to you, please visit http://www.mortgagebankers.org/NewsandMedia/MBACommercialMultifamilyNewslink/CommercialNewslinkSubscribe.htm to subscribe.
If you have difficulties reading this HTML email, please go to http://www.mortgagebankers.org/cmnewslink/issues/2008/11/20.asp.
|
|
