An uncertain economy and jobs market continue to make it difficult for investors to deploy capital with conviction, but a new kind of normalcy is creeping its way into the market.
Normalcy is far from normal, but, like kids adjusting to the wacky new rules of a temporary parent in ABC’s “Wife Swap,” a degree of order is making the marketplace more active than it has been in almost two years.
In this environment, normalcy means spending time looking at distressed assets to purchase or negotiating with a lender to discount a loan.
These activities have taken the place of buying from a willing seller or negotiating with a lender to get acquisition financing. Nonetheless, certain patterns are emerging that make the market seem orderly.
Distressed assets are hitting the selling block from a variety of sources. In addition to the FDIC, which continues to sell portfolios of performing and nonperforming loans and real estate owned assets, several healthy banks are also marketing loan portfolios.
In a departure from the nuanced world of price discovery through passive “reverse inquiries,” Bank of America is marketing several loan portfolios directly to investors.
Marketing a loan for sale forces a bank to write the asset’s carrying value down to market. A more common strategy, known as reverse inquiry, allows a bank to leave the carrying value of a loan on the books without adjustment even if an offer comes in well below that level. Under a reverse inquiry, the bank’s role is passive versus active, which affects the accounting treatment.
According to a recent study by Commercial Mortgage Alert, banks wrote down less commercial real estate loan value in the fourth quarter than in the prior quarter.
Interestingly, Bank of America had the largest writedowns, which amounted to $837 million. Combined with the strategy to dispose of loan portfolios through direct investor sales, this is perhaps a sign that Bank of America is able to recognize and deal with its problem loans more aggressively than other large banks.
While it is too early to measure the overall impact, it could mean that things are loosening a bit in the distressed market.
Most industry participants believe the only way back to normal is through more liquidity in the capital markets and a return to a vibrant commercial mortgage backed securities (CMBS) market.
In fact, that was the government’s objective in February 2009 when it added CMBS to the TALF (term asset lending facility) program.
TALF provided bond investors a lending facility so they could leverage their capital and buy more securities. Approximately $12 billion in bonds were purchased under the program.
The idea was that a healthy market would eventually return and the government could stop its support, which is what happened March 31. The problem is that CMBS is not healthy yet, so the market is unsure of the program’s success.
In a promising signal for CMBS, however, RBS Greenwich (Royal Bank of Scotland) is coming to market this week with the first multi-borrower CMBS deal in several years. It is said to amount to less than $500 million and is made up of six borrowers with competitive loan pricing.
Although little capital is available for transitional properties or new development, loan pricing is good for stabilized properties that seek low-leverage loans.
Despite uncooperative U.S. Treasury yields, which are pushing pricing higher, five-and 10-year mortgages range from 5.75 percent to 6.50 percent, according to the John B. Levy & Company National Mortgage Survey.
Another example of the new normalcy is the sale of the 1.3 million-square-foot former Qimonda facility in eastern Henrico County to an affiliate of QTS out of Overland Park, Kan.
QTS manages data-center facilities throughout the country, and this facility could double the square footage in its portfolio.
Although the purchase price of $12 million is nowhere close to the former assessed value of $155 million, the facility now is in a position to become functional again. In this environment, functional is the new normal.