The 2010 Market Outlook from John B. Levy & Company Explains How Commercial Real Estate Investors Can Get Their Share of Stimulus Pie

(Richmond, VA – January 18, 2010) – Following a year that saw the near meltdown of the banking system and the sweeping impact of a global recession, 2010 could shape up to be a better year for investors, though perhaps not as robust as some would wish. According to “Ordering Your Slice of the Stimulus Pie,” the latest podcast produced by John B. Levy & Company (available online at www.jblevyco.com), the new year has ushered in an uptick in market activity for commercial real estate investors, putting some in a position to secure stimulus bailout dollars.

“2009 started out with what I’d call the Armageddon trade,” says John Levy, founder of John B. Levy & Company, “with people predicting the collapse of not just individual banks, but the entire banking system. That mood has changed, and 2010 feels a lot better. The second half of the year promises to be better than the first. However, that doesn’t mean we’re through with the bank failure business,” Levy adds. “I see problems in areas from Arizona to Florida and California to Michigan, and the reasons can vary from cars to condos.”

Undergirding Levy’s muted optimism is what he sees as the rebirth of the market for commercial mortgage-backed securities (CMBS). While Levy believes the government definitely needed to step in last year with its TALF program, he predicts that improvements in the CMBS market will occur because of activity in third-party and public markets, not because of assistance from the government.

“The rebirth of the CMBS market is absolutely going to happen this year,” Levy says. “Last year, we had three CMBS deals, and that was three more than anyone predicted. The CMBS market in 2010 won’t resemble the one we knew and loved in 2007, but we will see a rebirth with reasonable and rational underwriting. I even think we’ll see the first multi-borrower CMBS deal this year.”

Levy is decidedly guarded about whether commercial real estate values will rebound in 2010. While some investors are optimistic about a resurgence in property values in 2010, Levy doesn’t share their sentiment. Rather, he believes the road to recovery for commercial real estate values will be protracted.  

“Consider commercial real estate from the perspective of NASDAQ,” Levy explains. “As you recall, that index hit 5,000 in 2000. Here we are ten years later, and NASDAQ is still under 3,000. So will there be a resurgence in commercial real estate values? Yes, most likely in 2011. But returning to the levels we saw in 2007 will take time.”

In light of the huge bank bailouts we saw in 2009, there is one question on the minds of real estate developers and investors: “How can I get a piece of the stimulus pie?”

“When it comes to getting a slice of stimulus pie, some developers and investors have a place at the table,” Levy says.  “Some don’t. If you own or invest in apartments, you’re in luck. When you get a real estate loan on your multifamily apartment from Freddie Mac or Fannie Mae, rates are one-half to one percent less than if you borrow from an insurance company. So if you happen to invest in multifamily housing, you get a direct bailout. That’s enough to make anyone’s 2010 look promising.”

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 the firm’s 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.

ANDREW LITTLE TIMES-DISPATCH COLUMNIST
Published: January 11, 2010

As the “aught” decade comes to a close, for the real estate industry it can best be described as a wonderful love affair that came to a fiery ending.

Developers experienced a glowing, bubbly kind of relationship with lenders and in vestors in the early part of the decade.

But the past year saw an unwinding of that love. More specifically, many developers probably think of “I Hate Everything About You,” a song by Canadian metal band Three Days Grace, when they reflect on 2009.

Long-term banking relationships were thrown out the window as lenders cut off credit to struggling borrowers as both battled for existence.

And pressure from investors, lenders and tenants made developments come to a screeching halt across the country and in our backyard.

Now, perhaps worst of all, 2010 brings no real clarity on where things are headed or how the market is going to climb out of the mess it is in.

Commercial real estate values peaked in October 2007 and have since fallen 43.7 percent in aggregate through October 2009, according to the most recent Moody’s/REAL Commercial Property Price Indices report.

Interestingly, the most dramatic part of that drop occurred in the past year, as values are down 36.4 percent since October 2008.

The report hinted at good news by mentioning that the pace of decline has slowed and transaction volume has started to pick up. Unfortunately, such massive declines in value are hard to manage effectively.

The difficulty in managing the fallout is best depicted by current delinquencies in loans that were originated, bundled together and sold as CMBS (commercial mortgage-backed securities).

According to Realpoint LLC, a Horsham, Pa.-based credit-rating agency, delinquent balances of loans sold as CMBS grew to $37.93 billion in November 2009, a 440 percent increase from November 2008 when only $7.03 billion in balances were delinquent.

By Realpoint’s estimation, 4.71 percent of all loans that were originated and sold as CMBS are now delinquent, and that percentage could grow to as high as 9 percent in 2010, according to the report.

So while the calendar turned the corner on 2009 and moved into 2010, problems remain in commercial real estate.

Despite the clouds, real estate investment is expected to pick up in 2010, both in purchases and in loans. Many permanent lenders (life insurance companies and pension funds) are heading into the new year with larger appetites than last year and more aggressive underwriting guidelines to attract borrowers.

Although U.S. Treasury yields ended the year at the high end of the trading range for 2009, according to the John B. Levy & Company National Mortgage Survey, rates have remained somewhat steady.

Today, permanent lenders are providing new loans that price from 5.65 percent to 6.65 percent for five-and 10-year mortgages. Cheaper, floating rates are available from community banks, and loans for multifamily properties also price lower.

Beyond the fallout of 2009 and veiled optimism for 2010, a number of localities are struggling with the dramatic shift in outlook for projects and budgets that were planned in an entirely different environment.

While Dubai and Las Vegas deal with massive projects that are half-filled and half-completed, communities across the U.S. are dealing with smaller-scale versions of the slowdown.

The Richmond area has a number of high-profile projects limping toward reaching their potential. It is likely that scaled-down versions of planned developments will emerge when the dust settles.

For example, homes at West Broad Village and Magnolia Green will most certainly fall short on scale and value from the original plans.

Chesterfield and Henrico counties are already struggling with declining assessments related to residential development. They now will be hard-pressed to maintain assessments on commercial development.

Both counties had small adjustments to commercial assessments in 2009 despite property values dropping some 43.7 percent across the country.

Chesterfield has a smaller problem than Henrico as commercial assessments account for 13.7 percent of the total real estate assessment base versus 31.1 percent in Henrico.

An example of how far assessments can be off on commercial properties is the former Qimonda facility in eastern Henrico.

Henrico assesses the property at $95,536,700, down from $155,934,100 when the property was occupied. The 210-acre property is being sold and will likely fetch less than $25 million in sales proceeds.

It is clear that Chesterfield and Henrico will need to draw up battle plans for fighting reassessments in 2010.
Andrew Little is an investment banker with John B. Levy & Co. He can be reached at alittle@jblevyco.com or 804-644-2000, ext. 260.