(Richmond, VA – September 16, 2009) – With the pulse of the market for commercial real estate equity and debt somewhere between faint and flat line, loan servicers have found religion, handling most maturity defaults with short-term extensions in order to avoid foreclosure. This approach – “Delay and Pray” – reflects the current climate of the broader CMBS market, according to the latest podcast produced by John B. Levy & Company. Available online at http://www.jblevyco.com/podcasts/23741/extend-and-pretend-or-delay-and-pray.html, this new podcast provides clients and analysts alike with a clear understanding of what to expect in today’s commercial mortgage environment.
Archive for October, 2009
Commercial Real Estate: Forget Extend and Pretend. It’s Delay and Pray.
Friday, October 16th, 2009John Levy’s recent LIVE interview on Fox Business News.
Friday, October 16th, 2009Commercial real estate market still troubled
Friday, October 16th, 2009
Richmond Times-Dispatch
By Carol Hazard
Published: October 14, 2009
Housing prices have stabilized and sales are rising, but the commercial real estate market is still deteriorating locally and nationally, experts said yesterday at Virginia Commonwealth University’s 19th annual Real Estate Trends Conference.
Commercial real estate values nationally have dropped nearly 40 percent since peaking in October 2007 — and that figure could reach 50 percent, said Sally Gordon, managing director of BlackRock Inc., a New York-based money-management and risk-advisory firm.
“Total returns and values have fallen further and faster than in any previous downturn, and it’s not over yet,” Gordon told about 800 people at this year’s event at the Greater Richmond Convention Center.
The good news is that financial markets are more stable than they were a year ago, when the entire system came close to failing, she said. Also, “the job market is less bad, and it has to be less bad before it gets good.”
A good job market is critical to the health of commercial and residential sectors, speakers said.
Commercial real estate professionals here said Gordon’s assessment of the national market is reflective of the situation in the Richmond area.
However, few, if any, office sales have taken place here this year.
“It seems true, but we don’t have the data points to support it,” Steve Gentil, chairman of Grubb & Ellis/Harrison & Bates brokerage, said after Gordon’s presentation.
Eric Robison, vice president of Thalhimer/Cushman & Wakefield brokerage, concurred.
Some properties, such as three buildings at the Boulders business park in Chesterfield County, were for sale early this year but were taken off the market when no acceptable offers materialized, he said. Offers were so low that they weren’t negotiated, he said, declining to elaborate.
Gordon said the high prices that commercial properties fetched in 2007 were phantom values, and they will not return in this business cycle. Property owners will be disappointed if they think they can just hold on for a year until values return, she said.
“The assets were never worth what we thought they were. What goes down does not necessarily go up,” she said.
Prices are about what they were in 2003, Gordon said, and it will take years, not months or quarters, before the commercial real estate market regains traction.
David Lereah, former chief economist for the National Association of Realtors and now president of Reecon Advisors, said the residential market will take time to heal as well. The sector hit bottom in January, he said.
Housing sales are rising, and the supply of homes for sale is falling — signs that the worst is over. Still, more than 2 million homes remain vacant in the country, he said. In Fort Myers, Fla., for example, it is not unusual to see a neighborhood with 500 homes and 80 percent are vacant.
“The financial crisis is almost over, but we still have significant problems,” Lereah said of the residential market.
Sales of previously owned houses nationally are down 31 percent from their peak in 2007. Home sales in the Richmond area were down 47 percent at the end of the second quarter from a peak in the third quarter of 2005.
Prices are 21.5 percent lower, according to the National Association of Realtors. In the Richmond area, median home prices dropped 12.6 percent to $206,904 in the second quarter from the year-earlier period, according to the Virginia Association of Realtors.
Housing construction nationally has fallen 70 percent from its peak in 2005, and mortgage delinquencies continue to rise.
Still, mortgage interest rates hover near historic lows, Lereah said. And home values are beginning to reverse and head higher.
“The economy is providing wobbly support for the housing sector,” he said.
Contact Carol Hazard at (804) 775-8023 or chazard@timesdispatch.com .
Commercial Mortgages for Oct. 12
Friday, October 16th, 2009ANDREW LITTLE TIMES-DISPATCH COLUMNIST
Published: October 12, 2009
Bob Seger in “Against the Wind” and, more recently, Toby Keith sang “I wish I didn’t know now what I didn’t know then,” expressing a desire to erase cumbersome knowledge and move on.
Many lenders are now stuck with that feeling as they want to originate new loans, but knowledge of the past 12 months just won’t let them.
Flow of Funds data recently released by the Federal Reserve support what most borrowers are experiencing.
Total outstanding debt on commercial and multifamily real estate in the U.S. as of June 30 was down by $9.8 billion from the prior quarter to $3.5 trillion.
Multifamily debt actually grew by $6.4 billion during that period, which means that debt on commercial properties shrunk by $16.2 billion.
Because the commercial real estate business lives and dies on debt, the predictable result is that many borrowers are starving for cash.
What’s emerged is a two-tiered lending system in which a property of high quality with a low loan-to-value ratio can get financed at a more aggressive interest rate than last month or even last year.
Rates for five-and 10-year mortgages are in the 5.75 percent to 7 percent range for these top-tier assets, according to the John B. Levy & Co.’s national mortgage survey.
Those properties that are not the best location or don’t have quality sponsors and tenants are shut out of the debt markets.
Quality of sponsorship, tenancy and location is important to the lender, but leverage is more valuable to the borrower’s heart. Regardless of quality, many properties are over-leveraged.
So what are lenders doing to address the issue?
Many are pretending that the property has not lost value and are simply extending loans. The idea is that if you delay the time when the loan gets sold or refinanced through another lender, there is a prayer that no loss will have to be recognized — which explains the phrases “delay and pray” and “a rolling loan gathers no loss.”
An over-leveraged building in the Richmond area will likely experience the strategy soon. The FBI office building at 1970 E. Parham Road in Henrico County is encumbered by a $17 million loan that matures in November, according to data from Trepp LLC, the New York-based provider of commercial mortgage information.
The loan, part of a securitization, has been on the servicer’s watch list since last month because of the impending maturity.
The 96,607-square-foot building was developed and financed by an affiliate of Penrose Corp. based in La Jolla, Calif. At $176 per square foot, the loan balance on the building is daunting given the underlying lease terms.
Since the structure is a single-tenant building, the sole source of the building’s success or failure at this loan level is vested in the tenant and its lease. The lease is to the U.S. government, but the lease matures in January 2011.
Until the FBI decides what it is going to do with the renewal, the building and the current cash flow are under the lender’s control.
If the tenant leaves, the value of the building is far less than $100 per square foot, according to market sources, but as long as the tenant is there, the lender won’t let it go for anything less than the current loan balance.
Thus, it becomes a likely candidate for extending the maturity and pretending the value and loan are still viable.
The story of Communities at Southwood, a 1,286-unit apartment complex off Hull Street in South Richmond, has finally turned positive — at least for the new buyers and hopefully for the tenants.
The project was over-leveraged in August 2005 with a $50 million loan from Capmark, which was securitized and sold off as a commercial mortgage-backed security.
The property recently sold to a local buyer for $24 million, closing a few weeks ago using money from Fannie Mae, said Wink Ewing, a senior associate at CB Richard Ellis, a commercial real estate firm in Richmond.
The Southwood transaction is a good sign for the area’s apartment market. Although the price translates to a $26 million loss for the lender, the asset can best be described as “fair” in quality.
Earlier in the year, the transaction probably could not have closed at this price.
“There is a lot of activity on the market,” Ewing said.
Andrew Little is an investment banker with John B. Levy & Co. He can be reached at alittle@jblevyco.com
Local commercial real estate steady
Friday, October 16th, 2009dailypress.com
By Veronica Chufo
10:59 PM EDT, October 15, 2009
Just as residential real estate is in the midst of a wrenching adjustment, so is commercial real estate.
Values have plummeted between 25 percent and 45 percent. Sales dropped 95 percent since 2007, John B. Levy said Thursday during a meeting of the Hampton Roads Association for Commercial Real Estate.
“This really isn’t going to be over in a year,” said Levy, president of Richmond-based real estate investment banking firm John B. Levy & Co. “We won’t measure this in quarters. It’ll be years.”
But financing is hard to come by.
Commercial mortgage-backed securities have funded about a third of all commercial loans over the past 10 years, and loans worth about $1.5 trillion are coming due within the next three years, said Peter Eckert, HRACRE president. Those loans will need to be renewed, extended or refinanced — at a time when values have fallen.
That also poses a challenge for new projects seeking financing. The $230 billion commercial mortgage-backed security industry in 2007 dried up to about $560 million in 2009, Levy said.
“It’s a killer to us,” he said.
The Hampton Roads commercial real estate market — which includes retail, industrial, offices and apartments — is holding up better than many markets across the country, said Sandy Cohen, chief operating officer of Divaris Real Estate. Other areas of the country were subject to residential overbuilding and the accompanying commercial overbuilding.
“Hampton Roads didn’t have the same dramatic growth,” he said. “Yes, we do have an uptick in vacancy in the market, but it’s not as pronounced as in other markets. The foreclosures haven’t been as pronounced either. I don’t foresee that happening for some time. The lenders are working with borrowers and doing their best to work out of a difficult situation in many instances.”
The problems in the commercial real estate market are playing out in new retail developments on the Peninsula, he said.
“We have a lot of retail projects coming online at a time when demand for space is weak, so we have a lot of projects fighting for the same tenant base,” Cohen said. “It’s making for a very competitive market.”
On the bright side, it’s good news for a local business owner looking for space or a better deal on a lease.
“This is probably the best time in a long time to get a great rate on a lease,” he said. “Landlords are making concessions and lowering lease rates to points that we haven’t seen in years.”
It’s also a good time to buy into commercial real estate, but sellers are having a hard time coming to grips with how far the market has fallen.
“There’s still a divide there, a discrepancy between what sellers are willing to sell at and buyers are willing to buy,” Cohen said. “Until that narrows, it’s going to be a very slow market.”
Copyright © 2009, Newport News, Va., Daily Press