BLOOMBERG REAL ESTATE BRIEFING REPORT
November 8, 2010
BLOOMBERG REAL ESTATE BRIEFING REPORT – Commercial Real Estate Markets Start to Move with $88 billion of Anticipated Total Transaction Volume vs. $54 billion in 2009
Dear Clients and Colleagues,
As discussed, I was a panelist on the BLOOMBERG REAL ESTATE BRIEFING EVENT on November 4th, which included many industry notables, including Sam Zell, Barry Sternlicht, Dan Neidich, Bruce Mosler, Steven Roth and many other distinguished real estate figures. The panel was spirited with a generally optimistic view and a “proceed with caution” message.
Outlined below, please find some general remarks and commentary that target and highlight certain of the economic factors which characterize the current real estate market.
It is clear that we have come a long way from the impending doom that characterized and plagued the real estate industry just a year ago. Commercial banks, insurance companies, pension funds, and overseas investors are virtually all open for business and looking to make loans and investments in the United States.
Major CBD locations like New York, San Francisco, and Washington, D.C. are some of the strongest markets in the country, and assets in these markets are trading fairly close to pre-Credit Crunch highs. Florida and Las Vegas continue to languish, and there is a general consensus that there is New York (and perhaps Washington, D.C.) and then “everything else.”
As indicated above, total transaction volume may be close to double that of 2009, but there is $560 billion in maturing debt that is coming due in the next four years that will continue to trouble the market place and also present buying opportunities.
Financing for stabilized assets is plentiful and capital for non-cash-flowing and transitional assets continues to be problematic.
In any event, I hope you find the below comments useful, and we look forward to working with you to help you solve and arrange any debt and/or equity capital needs that you require.
Summary of relevant statistics hereby follows:
Over the next 4 years, over 40% (or $558 billion) of current outstanding commercial mortgage debt will mature. Refinancing these older, maturing loans will be challenging given the deterioration of debt service coverage and values brought about by aggressive initial underwriting, deteriorating local economies, and property/market fundamentals.
On the positive side, we are finally seeing demand for new CMBS transactions with AAA tranches pricing at tighter spreads than were available one year ago. Portfolio lenders (insurance companies and banks) are providing mortgage capital again as well, albeit with more conservative LTV and DSCR margins.
In the equity markets, investor interest has increased dramatically over the last year, as demonstrated by 2010 third-quarter $ sales volume that has already significantly surpassed last year. Q3 $66B vs. Q2 $54B – 2010 $88B vs. 2009 $54B
On the negative side, many commercial mortgage loans underwritten before 2009 will continue to experience term defaults and would be difficult to refinance today (see below).
Commercial Mortgage Maturities
The amount of outstanding commercial mortgages is about $1.3 trillion. The amount scheduled to mature in the coming years is as follows:
| 2011 = $130B |
| 2012 = $164B |
| 2013 = $112B |
| 2014 = $152B |
CRE Transaction Figures
Total transaction volume through Q3 2010 of $66.3 billion is already well above total volume in 2009 of $54.4 billion. Total transaction volume is expected to be around $88 billion for all of 2010 compared to $54.4 billion in 2009.
Prices are tightening — Capitalization rates continue to lower on a quarterly basis in 2010, with the overall average cap rate dropping 40 bps this year to 7.3%. Average cap rates by property type are: Multi-Fam 6.6%, Hotel 6.4%, Industrial 8.5%, Office 7.4%, Retail 7.7%.
Current Mortgage Delinquencies
30 days + is $111B or 8.5% of total commercial mortgages outstanding.
60 days + (includes 90 days, in foreclosure and REO) is $98B or 7.5% of total outstanding.
Summary: Based on current information from research and servicers, over 40% or $560B of outstanding commercial mortgages are in some sort of trouble.
Recent CMBS Figures Indicate Market Improvement yet still Fragile
CMBS issuance is expected to approach $15B this year and expected to reach $35B in 2011, after tumbling to $11B in 2008 from a record $234 billion in 2007. Spreads reached more than 15 percentage points in November 2008.
Defaults increasing — Late payments on commercial mortgages tied to bonds are at a record 8%, compared with less than 4% a year ago. About $335 billion of the securities come due through 2015.
Macroeconomic Figures Indicate Double-Dip Fears Waning but Economy Sluggish
Commerce Department figures show the U.S. economy grew at a 2 percent annual rate in the third quarter as consumer spending climbed the most in almost four years. Though the recovery began in summer 2009, growth since then has been tepid. The Q3 reading was only a slight improvement over the 1.7% pace in Q2.
Adjustment strategies: There is no “ideal” path. The objective is to reduce the share of debt capital in the real estate market, e.g. via stock market listed equity vehicles. The revival of the securitization market would be desirable but requires confidence-building measures.
Recent Signs of Life: Three CMBS deals are being marketed in what is the most active week since the downturn. Issuances by Wells Fargo ($736 million), JP Morgan ($2 billion loan secured by Extended Stay America) and Goldman Sachs ($2.7 billion backing debt from Hilton Hotels) are currently being shopped with good initial response from investors. The Wells Fargo CMBS is seeing price talk slightly tighter on the benchmark AAA tranche than similar bonds on the $856 million deal from Deutsche Bank completed two weeks ago. The price talk is swaps plus 135 basis points, 5bp less than the Deutsche Bank deal. The WF securitization is more diverse than other recent transactions, with retail making up 1/3 of the pool versus 43% in the DB issuance and 2/3 in the JPM deal. The GS deal is unlike any that long-term investors have seen. It isn’t rated and GS is marketing only the most senior portion of the $8+ billion mortgage on Hilton Hotels. Pricing is LIBOR + 175 bp for the Sr. tranche.
Finally, the effect on the real estate lending industry of the Fed “buy-back” program, where the Fed will buy $600 million of treasury securities through June of 2011, is unclear and simply needs to be watched. Fed policymakers were far from unanimous on the possible effects of this move. If the result is inflation and continued high level of unemployment, that will not be good for the economy generally, and real estate specifically. But, how much lower can mortgage yields go? I suspect not much lower without the implementation of rate “floors” by portfolio lenders. We are already at historically low levels of yields and spreads.
If you would like to discuss the foregoing further, please feel free to contact me. I look forward to hearing from you.
Thank you,
Howard L. Michaels
Chairman – Carlton Advisory Group
212-545-1000
