June 28th, 2011
Shrinking Fannie Mae and Freddie Mac?
Always awash in politics and not immune to economic conditions, Fannie Mae and Freddie Mac have shrunk considerably over the past couple years, but in no way have they become small players in the real estate market. Today, they still control a portfolio of property valued at well over $300 billion. According to “Commercial Real Estate: Shrinking Fannie Mae and Freddie Mac?,” the latest podcast produced by John B. Levy & Company (available online at www.jblevyco.com), Fannie and Freddie currently hold 50 percent of the multifamily market, a significant drop from the 80 percent share it owned at the height of the liquidity market.
“It’s a fact: Fannie Mae and Freddie Mac are shrinking,” says John Levy, founder of John B. Levy & Company. “The result of this is that the third-party, the independent, the private market is reclaiming part of the multifamily section . . . and that’s how it should be. Cutting the housing part of Fannie and Freddie right now isn’t a great idea right now because that market is so weak. But it makes sense politically for these two players to be smaller, even in the housing market. The only exception,” Levy adds, “is the low-income market. It’s very hard to get the private market to effectively price and buy into low-income housing.”
The market for investing in commercial real estate continues to improve, according to Levy. Once limited to five or six core cities such as New York, Boston, and Chicago, robust investment activity has extended into second- and third-tier markets. Today, commercial real estate investors are finding significant opportunities in markets that did not exist a year ago.
“With the investment market, it’s as if you’re throwing a rock into a pond,” says Levy. “First, there’s the big splash, and those are the five or six markets you could buy into last year – the Bostons and Washingtons and New Yorks. Now, we’re seeing concentric circles just like in the pond, and those represent an additional twenty to twenty-five markets that capital is going into because the big markets are priced too thin for investors to get the yield they need. We’ve had success raising equity and preferred equity in many of these second- and third-tier markets,” says Levy, “even including those in the Rust Belt.”
As the strength of the commercial real estate market continues to broaden, CMBS is running on all cylinders and expects to have a strong year. Generating only $10 billion in 2010, CMBS should fall somewhere in the range of $40 to $50 billion in 2011. Insurance companies and pension funds are literally in a sprint to bring money into the market, and insurance companies, in particular, are pricing their capital in an effort to secure cream-of-the-crop deals.
“Money is definitely on sale right now,” says Levy. “This is one of those times when you ought to back up the truck and take all you can get. Whether you’re looking at ten- or seven-year money, or even fixed-rate money, it’s going at 4.5 to 5 percent. Could it go lower? Who knows? But this isn’t one of those times to wait for 4.5 percent to edge down to 4.375 percent,” says Levy. “We’re in the middle of a screaming buy right now, so take what you can get. In a year or two, you’ll be glad you borrowed as much as you could.”
Firm Background
John B. Levy & Company, Inc. is a real estate investment-banking firm headquartered in Richmond, Virginia. Since John Levy founded the company in 1995, the firm has structured over $3.5 billion in financing for developers and owners of commercial and multi-family projects nationwide, often investing its own proprietary funds into transactions with its clients.
Mr. Levy is an expert on commercial real estate financing and the effects of interest rates on commercial real estate markets. He is the originator and author of the Barron’s/John B. Levy & Company National Mortgage Survey, which Barron’s published for 23 years, and co-creator of The Giliberto-Levy Commercial Mortgage Performance Index (sm), the first and pre-eminent index to measure and analyze the performance of investments in the commercial mortgage industry. Additionally, he is a member of the Board of Directors of Anthracite Capital Inc. (NYSE: AHR), a New York Stock Exchange REIT managed by BlackRock, Inc. and a former director of Value Property Trust.
A seasoned speaker, Mr. Levy has presented nationwide to major real estate associations and key industry groups, including the Mortgage Bankers Association and the Urban Land Institute. He has also appeared on Bloomberg and CNBC. Most recently, Mr. Levy appeared as a guest commentator on FoxBusiness.com and FoxNews.com.
For more information about John B. Levy & Company, please visit our website at www.jblevyco.com or call Andrew Little at 804-644-2000, extension 260. You can also follow us on Twitter at www.twitter.com/jblevyco and become a fan on Facebook.
March 22nd, 2011
Real estate banker says market draws more capital, but remains uneven
March 14, 2011 9:53 PM
By Paula C. Squires, Virginia Business
Va. banker: Fannie, Freddie to play reduced roles in apartments
NORFOLK
Plans to restructure Fannie Mae and Freddie Mac have sent shivers through the nation’s home-building and home-finance industries.
Owners and developers of apartment complexes also will feel the impact of any overhaul of the two government-owned lenders, a veteran mortgage banker said Monday.
After playing a significant role in financing multifamily projects for decades, Fannie and Freddie will be shrinking, said John B. Levy, a Richmond-based mortgage banker for commercial and multifamily real estate.
During the financial crisis three years ago, Fannie and Freddie accounted for 70 to 80 percent of the financing for multifamily housing, he said during a luncheon gathering of real estate developers and lawyers at the Norfolk law firm Willcox & Savage.
The two congressionally chartered companies were hobbled by troubled home loans and seized by the Treasury Department in 2008. The bailout provoked demands from some politicians to scale back the roles Fannie and Freddie play in purchasing and guaranteeing mortgage loans.
His firm – John B. Levy & Co. – recently lined up funding for two apartment-complex transactions in Hampton Roads from life insurance companies rather than from Fannie or Freddie, said Levy, its president. The two mortgage finance companies, he said, will continue to be key sources of funds for low-income housing.
The environment for financing commercial real estate, Levy said, has changed dramatically from near-paralysis three years ago. “Is there new money available? Absolutely.”
Life insurers, pension funds, large banks and the commercial mortgage-backed securities market have re-emerged, he told about two-dozen listeners. In addition, some lenders have become more willing to renegotiate the terms of existing commercial real estate loans. Borrowers, however, must be prepared to sacrifice something, Levy cautioned.
“You’ve got to put in something: It could be cash, additional collateral, or it could be a personal guarantee,” he said.
While the nation’s largest banks have returned to commercial real estate finance, community banks are still wrestling with heavy concentrations of commercial real estate loans on their books and have less of an appetite for new loans, Levy said.
January 26th, 2011
Commercial Real Estate: Out of Intensive Care, but Still in Recovery
After spending the better part of two years in ICU, enduring one setback after another, the commercial real estate market finally appears to be on the road to recovery. According to “Out of Intensive Care, but Still in Recovery,” the latest podcast produced by John B. Levy & Company (available online at www.jblevyco.com), investment sales in commercial real estate have doubled from 2009 to 2010, and the future of CMBS looks promising. Yet despite these and other positive signs from investors and analysts, the healing market is not yet out of the woods.
“Is the market better? Yes,” says John Levy, founder of John B. Levy & Company. “Has it recovered? No. While investment sales have doubled in the past year, they’re still only 23 percent where they were in 2007. And while we expect CMBS to increase from about $11 billion in 2010 to as much as $35 billion in 2011, that figure is nowhere close to where it was in 2006, 2007 when it exceeded $200 billion. So, yes, the market is better, but it’s not cured.”
The condition of select markets perfectly illustrates the tentative health of commercial real estate. For Washington, DC, New York City, and San Francisco – three of the top six markets in the United States – the recovery has been robust. But for most of the country, the recovery has been anemic. This is the case for both property sales and the flow of capital. Investors are infusing capital into markets such as Washington, DC, but not in second-tier markets such as Nashville, Denver, and Dallas.
“Mortgage rates are rising,” Levy says, “and that sends another mixed signal that commercial real estate is not quite out of the woods. This all began with Bernanke’s qualitative easing 2.0. Instead of holding down rates, the move spooked the market into thinking inflation was just around the corner. Rates shot up 80 or 90 basis points. Theoretically, higher rates mean the economy is improving. And inflation is typically good medicine for hard assets like commercial real estate. The downside of this is that expenses go up but rents don’t. In the housing market, higher rates mean people have to pay more for a loan, and that makes it much harder to qualify for a new home. That’s not good.”
Looking ahead to 2011, Levy sees a continuation of the restructuring and recapitalizing of commercial real estate loans that began in 2010. Grossly overleveraged, the market holds $900 billion of commercial real estate loans in which the amount of the loan exceeds property value. Restructuring activity promises to pick up in the coming year because investors are holding a substantial amount of capital, and they are ready to infuse the market with it.
“But we still have more than 900 troubled banks out there, and the number is growing,” says Levy. “That makes for a lethargic recovery. It’s not the big banks at this point. It’s the smaller banks, community banks that are often the only source of liquidity in their markets. As long as we have a troubled banking system, the recovery will be touch-and-go.”
Firm Background
John B. Levy & Company, Inc. is a real estate investment-banking firm headquartered in Richmond, Virginia. The firm has worked with both buyers and sellers of notes to assist each in achieving their goals. The firm has structured over $3.5 billion in financing for developers and owners of commercial and multi-family projects nationwide, often investing its own proprietary funds into transactions with its clients.
Mr. Levy is an expert on commercial real estate financing and the effects of interest rates on commercial real estate markets. He is the originator and author of the Barron’s/John B. Levy & Company National Mortgage Survey, which Barron’s published for 23 years, and co-creator of The Giliberto-Levy Commercial Mortgage Performance Index (sm), the first and pre-eminent index to measure and analyze the performance of investments in the commercial mortgage industry. Additionally, he is a former member of the Board of Directors of Anthracite Capital Inc. (NYSE: AHR), a New York Stock Exchange REIT managed by BlackRock, Inc. and a former director of Value Property Trust.
A seasoned speaker, Mr. Levy has presented nationwide to major real estate associations and key industry groups, including the Mortgage Bankers Association and the Urban Land Institute. He has also appeared on Bloomberg and CNBC. Most recently, Mr. Levy appeared as a guest commentator on FoxBusiness.com and FoxNews.com.
For more information about John B. Levy & Company, please visit our website at www.jblevyco.com or call Julia Grant at 804-644-2000, extension 258. You can also follow us on Twitter at www.twitter.com/jblevyco and become a fan on Facebook.
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October 18th, 2010
VCU Conference Thoughts
The VCU Real Estate Conference had a good group for a round table discussion including higher leverage debt, equity, life-insurance company and agency representation. A few interesting points were brought up by the group while answering questions about liquidity in the market. Liquidity has clearly returned to the prime markets and prime assets are trading. The point was made that in times of uncertainty, there is a premium paid for the main and main location (for certainty). That is why we are seeing so much activity at dizzying prices for prime assets – someone even described the frenzy for assets in DC as another “bubble”. The other area of activity is with really illiquid assets like land and unanchored retail where lenders (who are able) are dumping these assets at huge discounts. Assets that are not either prime or dramatically discounted, which is to say the vast majority of assets out there, are expecting to see liquidity again once money gets more comfortable that the economy is headed in the right direction.
Another interesting point was made that in times like this where there is uncertainty in the market, institutions don’t generally win much business. There are too many questions to answer inside an institution to get a deal approved and that makes the likely winner on deals to be the entrepreneurial players with equity. So if you are an entrepreneur looking to make a fortune in this downturn, you should avoid the liquidity of the prime assets and look for areas that have no liquidity at the moment, but should at some point down the road…easier said than done!
Andrew R. Little
August 12th, 2010
FoxBusiness.com LIVE interview – August 18th at 12:10 pm EST
Please tune in to http://live.foxbusiness.com/fblive on Wednesday, August 18th at 12:10 pm EST to hear John Levy discuss the current commercial real estate market.
The show is hosted by Tracy Byrnes and Chris Cotter and streams live on FOXBusiness.com and FOXNews.com every weekday from 12-1pm ET.
August 12th, 2010
Location key to commercial real estate prices
Richmond Times Dispatch, 8-9-10:
The good news is that commercial real estate lenders are voraciously competing for loans.
The bad news is competition, like sales activity, is confined to about five cities in the country.
Perhaps the LeBron James in this commercial real estate all-star game is Washington.
As one lender put it, “the closer you are to the printing press, the better chance you’ll have of getting some business.”
Another lender unfortunately described just how exclusive the area is that is attracting capital: “We are focused on Washington, D.C., but only inside the Beltway.”
A recent sale of the Evening Star Building at 1101 Pennsylvania Ave. in Washington fetched a mind-boggling $790 a square foot, and there is talk that other buildings currently on the market will surpass $900 a square foot.
These numbers indicate a strong desire for investors to put their money into real estate again. But if “frenzied” describes Washington and four other markets, “frail” is more apt for virtually everywhere else.
The antithesis of Washington might be the south Memphis, Tenn. apartment market, where a recent sale had heads spinning for a different reason.
The 912-unit New Horizon apartment complex recently sold for $2.1 million after costs, an awful price amounting to less than $2,500 per unit considering that the average in the country in 2009 was $72,306 per unit.
Not surprisingly, the sale caused an issue for the lender, which took a hit of $35.2 million.
In addition to spending $7 million to get the property ready for sale, the complex already had a $30.3 million mortgage on it originated by SunTrust in 2006, according to Commercial Mortgage Alert. SunTrust sold the loan into a securitization where it became a part of a pool of loans sold as commercial mortgage-backed securities.
So the final tally that the lender had in the complex was $37.3 million.
While losing all of a first mortgage plus an additional 16 percent is a hard way to make a living, selling properties and loans at market-clearing levels is a positive sign for lenders and the real estate market.
Other lenders such as BB&T and PNC Financial Services Group are taking bold steps to sell nonperforming loans and real estate.
This strategy sometimes causes additional write-offs, but ultimately it will lead to a quicker healing process for banks and the real estate market.
With fiveand 10-year Treasury yields pushing all-time lows, low commercial mortgage rates continue to be the norm for the best quality deals. The rates range in price from 4.75 percent for a 5-year rate to 5.75 percent for a 10-year rate, according to the John B. Levy & Co. National Mortgage Survey. The rates for community banks might be slightly higher.
Rates for properties in the central business district of Washington are going to be lower.
Geographically, Richmond is a little closer to the U.S. Treasury’s printing press than south Memphis, which perhaps explains the recent activity in the Richmond region’s commercial real estate market.
After a long period of no significant investment sales activity, several recent transactions have shown that the market has a surprisingly strong pulse.
Two vacant office buildings in the Innsbrook Corporate Center in western Henrico County sold to Capital One for more than $17 million, according to several area brokers. The Innsbrook Center I and Innsbrook Center II have a total of 192,187 square feet of space.
The sale price of $90 a square foot is a testament to the location of the buildings and long-term strength of that sector of the market.
Another transaction involving Bell Creek Commons, a Best Buy-anchored retail center in Hanover County, is making its way to the closing table as well.
The 46,743-square-foot center was listed for $11.25 million on LoopNet, a commercial real estate national listing service by Jones Lang LaSalle. According to area brokers, the sale price likely will be about the listing price, which indicates very solid value.
Andrew Little is an investment banker with John B. Levy & Co. He can be reached at alittle@jblevyco.com.
June 3rd, 2010
Strategy of Last Resort: To Default or Not To Default?
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As the volume and number of underperforming commercial real estate loans mounts, so has the number of owners who have or have considered turning to loan defaults as a strategy for forcing a refinancing or to get out from a loan that is underwater altogether. However, experts say this is a high-risk strategy for managing troubled debt at a time when access to money has become tight and as regulators pressure lender away from workouts.
John B. Levy & Co. drew attention to the issue this past week in a podcast called “To Default or Not Default? That Is the Question.”
“What we’re seeing is that some borrowers are being advised to stop paying on their loans if they want to get a discount . . . to default,” said Andrew Little, principal at John B. Levy & Co. “And that is really bad advice. Borrowers who are experiencing problems with their debt need to take a more measured approach when working with lenders.”
Even as some borrowers are facing the prospect of default, lenders are holding onto a substantial amount of capital. In fact, Little suggested that there is more capital available these days than there are good deals to fund. The total disarray of the global market over the past couple weeks has resulted in a run on hard assets, and investors are vigorously pursuing real estate in the U.S.
“What we’re seeing is a ‘Tale of Two Cities’ scenario,” Little said. “There’s a lot of capital available in gateway cities, and then there’s everyone else – the secondary and tertiary markets. And as for the lending world, investors are ready to make loans on the premium properties, but they’re turning away from properties that aren’t at the top of the A-list.”
CoStar Group put the question of whether a loan default should be considered a viable strategy to a number of other industry professionals. Their answers, for the most part, suggest the strategy can be viable, but only after other options have been exhausted and all that is left is bankruptcy, a short sale or a deed-in-lieu.
“I would not advise clients to walk away. I don’t think it’s worth ruining a professional lending relationship that may have taken years to develop,” said Charles G. Argianas, president of Argianas & Associates in Downers Grove, IL. “Unless the borrower absolutely cannot make debt service, I would not advise clients to walk away from their responsibilities, I just wouldn’t.”
“We have seen CMBS borrowers defaulting on loans prematurely as a tool in order to get more attention from their lenders and special servicers,” said David Goldfisher, principal of The Henley Group Inc. in Natick, MA. “Typically, well thought out and detailed plans for resolving a troubled loan in advance of a default is a much more effective way of communicating with your lender and will provide them the right incentive to negotiate in good faith.”
“Default is always an option for owners and always has been, but it should be the last strategy after previous attempts to contact the lender or special servicer,” said Mark J. Chapman, senior vice president of PM Realty Group in Hudson, MA. “It may be an effective strategy if the lender/special servicer is too busy to focus on a particular owner’s issue. However, it is only effective if a borrower/owner has several viable options to put in front of the lender that address both property issues and the lender’s regulatory constraints.”
But while the consensus recommendation may be to avoid defaults, the reality is: it is happening, and happening successfully in some cases.
“We recently sold a multifamily asset in Mesquite, TX, in which the owner defaulted and was 60-days delinquent,” said William C. Jarnagin, an associate with Marcus & Millichap in Dallas. “During the process of closing, we stepped in to assist the borrower with negotiations with the lender and the lender actually reduced the interest payments on the loan by half for one year and gave a conditional agreement to extend for another year. We are working several assets where the borrower has considered this currently.”
“This is only an effective strategy for distressed debt that will undoubtedly need a significant write down to clear the market if the lender does end up owning the asset,” Jarnagin added. “There has to be a significant level of distress. Physical deficiencies and code issues are likely to weaken the lenders desire to take possession of the asset. Properties that are nearly covering debt service and do not need significant capital injections are not likely candidates.”
Todd A. Carlson, a senior associate with Marcus & Millichap in Houston said the strategy has been used more successfully with CMBS-type debt because of the ability for special servicers to modify loans that are in default or non-payment status.
“I think it is used in situations where the debt is non-recourse so the lender/special servicer must just rely on the asset to recoup any losses,” Carlson said. “If a borrower can prove that they weren’t the reason for the default, and they are a quality owner/operator, the lender might consider them the best option with the fewest costs and liabilities.”
Dan Colton, principal of Colton Commercial in Tempe, AZ, said the strategy of pursuing a loan default is also sometimes used in cases in which there are multiple loans on the property.
“The borrower defaults on loans in second and third position while keeping the first current. Drawing the secondary lender(s) to the table appears to be a viable option that is starting to occur in the market place,” Colton said. “Other conditions to obtaining potential discounts are strengths associated with loan guarantees, if the lender can absorb the discount or if the notes have been sold.”
Marty Busekrus, an investment sales associate with NAI Rauch Weaver Norfleet Kurtz & Co. in Fort Lauderdale, FL, sees this used as a strategy more commonly on the CMBS side where the special servicers are not inclined to deal with the sponsor until the borrower has defaulted.
“Once the loan goes in to the 30 days past due case, the bankers are all over it and that’s when the special asset managers and attorneys get involved,” Busekrus said. “That could go either way for a borrower. It’s true, you will get the attention of the bank, but probably not the good kind of attention. Depending on who the special assets manager is, they may be very experienced and been around the block a few times, in which case the strategic default may not work out in the borrowers favor.”