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.

ANDREW LITTLE GUEST COLUMNIST

Richmond Times-Dispatch
Published: December 14, 2009

Commercial real estate is starving for credit Smart money continues to pile up on the sidelines, anxious to take advantage of bargain-basement pricing for broken commercial real estate loans.

Government policy, however, seems geared toward preventing breaks by letting bad loans go unrecognized on banks’ books in hopes that they will become good loans.

And despite Treasury extending the Troubled Asset Relief Program (TARP) for a year, the program is now focused on other areas of the economy.

The gyrations have credit-starved commercial real estate participants screaming, “What’s going on!?”

Markets are no longer in a free-fall, so optimism can be seen in some quarters. But 2009 is ending with as many or more questions as when it started.

Credit to commercial real estate is still virtually nonexistent, and there is no clear path defining from where more will come.

Bank examiners have guidelines to follow when they review banks’ books, but none of the guidelines forces banks to ultimately resolve problem loans.

Through a combination of low interest rates and forbearance on problem loans, policy seems designed to allow banks to continue earning money so that they can write down problem loans over many quarters, and, perhaps, years.

The alternative, the argument goes, would be to put many of them out of business.

This policy may prolong life for many banks and their borrowers, but the larger impact is that potential problem areas of the economy, such as commercial real estate, are starving for credit.

The latest Federal Reserve data regarding commercial banks in the United States show total assets (of all commercial banks in the U.S.) of approximately $11.8 trillion at the end of October 2009 compared with $11.96 trillion at the end of October 2008 — a shrinking of $160 billion in one year.

Commercial real estate loans accounted for $60 billion of the shrinkage during that time span, while consumer loans represented $6 billion.

The original intent of TARP money was to allow banks to continue lending, but the data show outstanding loans have decreased.

This has put most commercial real estate players on the sidelines. Credit for deals is as tight now as it was earlier in the year.

TALF (Term Asset-Backed Securities Loan Facility), another major government program intended to bring back the securitization market, has been ineffective.

The rebirth of the CMBS (commercial mortgage-backed securities) market is starting, but TALF has little to do with it.

JP Morgan’s recent underwriting of the Inland Western deal is a template for future deals.

It provided a 75 percent LTV (loan-to-value) loan versus the 50 percent offerings from Fortress and Developers Diversified Realty, which was the only new offering that was TALF eligible.

The problem for the majority of commercial real estate borrowers is that they are not the size of Inland Western, and JP Morgan and the other banks have little appetite for small transactions or those in secondary or tertiary markets.

As large loan portfolios begin to make their way through the securitization process, many smaller borrowers wonder when the money will trickle down to them.

In the meantime, according to the John B. Levy & Company National Mortgage Survey, rates for 5-and 10-year fixed-rate mortgages range from 5.75 percent to 7 percent for low leverage loans secured by real estate with good tenants and operated by solid borrowers.

John B. Levy & Company Warns Commercial Real Estate Investors Against Making Decisions in Today’s Market Based on the Recession of the Early 1990s

(Richmond, VA – November 25, 2009) – As embattled industries seek ways to regain their equilibrium in today’s struggling economy, more than a few investors in the commercial real estate sector have turned their attention to the recession of the early 1990s, thinking that today’s market is a repeat of what happened nearly two decades ago.  According to “Fighting the Last War,” the latest podcast produced by John B. Levy & Company (available online at www.jblevyco.com), the market of 2009 is dramatically different from the foreclose-and-dispose days of 1990, 1991, and 1992.  Because of this, commercial real estate investors who make decisions today based on the last war are pursuing a dangerous strategy.

“A lot of people in the commercial real estate industry believe we’re seeing a repetition of the early ‘90s,” says John Levy, founder of John B. Levy & Company.  “They’re waiting for the proverbial blood in the streets . . . a return to the days when the RTC bought, foreclosed on, and sold assets by the pound.  I hate to say it, but that’s not where we are today.”

For Levy, the difference between then and now is dramatic.  While the collapse of one sector of the banking system (the savings and loan industry) in the early 1990s left investors in a state of shock and awe, today’s recession has been marked by the near meltdown of the entire banking system.  Over the past couple years, investors have seen AIG, a triple-A rated company, on the brink of bankruptcy; they watched the rescue of Fannie Mae and Freddie Mac; they witnessed the fall of Lehman Brothers and Bear Stearns.  Today’s recession is global and severe, and it has touched not only commercial real estate, but investments and companies across the board. 

“Some people point to real estate and say ‘that’s what caused today’s recession,’” says Levy, “but that’s not completely true.  Single family real estate?  Yes, but not commercial.  We’re somewhat like a snake going through a dip.  The economy may be heading up, but commercial real estate is at the tail of this recession, and it’s quite possible for it to still be going down before heading up.”

With leverage down and promising to stay that way indefinitely, the market clearly needs more equity. But where that comes from is a crucial concern.  Levy thinks institutions will eventually provide equity once they recognize that the pricing they are now getting has reached the bottom or is trending up.  In the meantime, equity will likely come from high net worth individuals and family offices, even endowments, because these sources have a longer-term view of real estate.

The economy in general and commercial real estate in particular will also reflect the impact of a new policy statement from the FDIC.  Whether that impact is positive or negative depends on one’s perspective.  On the positive side, banks will not have to establish extreme reserves for bad loans.  But on the negative side, investors will not see real estate priced as it was in the RTC days of the early 1990s because there is no pressure to liquidate assets.

“With no pressure to liquidate assets, it might take a long time to get back to equilibrium pricing,” says Levy.  “Is this good news?  Probably, because a collapse in real estate equity values won’t benefit anyone.  But if you’re waiting for blood-in-the-street pricing, it could be bad news.”

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.

Richmond, VA, September 15, 2009  — Richmond-based John B. Levy & Company, Inc. is pleased to announce the completion of financing for the University Heights Apartments located in Charlottesville, Virginia.  The property is a 419-unit apartment complex located in Charlottesville, Virginia.  The apartments are spread out over more than 15 acres in 37 different buildings.  The City of Charlottesville is one of the few in the state with a triple-A Bond rating from both Moody’s and Standard & Poors national reporting agencies. In 2008, the City was ranked one of the top cities in the country to do business, higher than any other city in Virginia.

The transaction — a $22,905,000 permanent loan with a 10-year fixed-rate term — amortizes over 30 years.    

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, a monthly survey of more than 30 of the country’s largest institutional investors, as well as buyers and sellers of commercial mortgage-backed securities, which Barron’s published for over 23 years.  Mr. Levy is also 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. 

For more information about John B. Levy & Company, please visit the firm’s website at www.jblevyco.com or call John Levy at 804-644-2000, extension 237.  You may also follow us on Twitter at http://twitter.com/jblevyco and join us on Facebook!

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$6,500,000 MILLION FINANCING SECURED FOR MIXED-USE CONSTRUCTION PROJECT IN DOWNTOWN RICHMOND, VIRGINIA

Richmond, VA, October 15, 2009  — Richmond-based John B. Levy & Company, Inc. is pleased to announce the completion of financing for the Haxall Building located in downtown Richmond, Virginia.  The property is located just a short walk from the James River and the eastern continuation of the canal walk.  The three buildings that comprise Haxall View were originally a cafeteria and part of the cigar manufacturing department of the Edgeworth Tobacco warehouse complex. Haxall is a 40,000+ square foot mixed-use project with loft apartments above retail shops. The retail space allows outdoor seating in a private courtyard, with parking on the lower level.

The transaction is a $6,500,000 loan which has a 2-year interest-only period followed by a 3-year term amortizing over 20 years.  This will allow the developer time to stabilize leasing on the building.  The loan’s proceeds were used to payoff the existing loan at a discount as well as fund reserves for future carry and lease-up.      

“The former lender in the transaction was not in a position to see the building through to stabilization.  Our firm was able to negotiate a discounted payoff which ultimately was favorable to the former lender as well as the borrower,” according to John Levy. 

“Development along the canal in Richmond has flourished in part due to the creative use of historic tax credits,” said Levy.  “This region has a higher rate of utilization of historic tax credits than other urban areas,” said Levy. Many firms shy away from using them due to onerous administrative burden, but here they become a “but for” incentive.

Located at 2101 East Main Street, Haxall is a short walk from the river and the eastern continuation of the canal walk. The Great Shiplock Park, where a historic lock connects the Haxall canal with the James River, is also around the corner. Loft residents are able to take advantage of the amenities of the area without the need of a car. These amenities include a grocery store, drug store, retail shops and many of the city’s finest restaurants. Restaurant and retail tenants serve an existing customer base of young urban professionals supplemented by visitors to the Canal Walk, Shockoe Slip, Rockett’s Landing, Great Shiplock Park and the Farmer’s Market.

John B. Levy & Company is based in Richmond and has structured financing for many of the projects in the historic district including The Turning Basin Building, the Canal Crossing “Tower” and “Annex”, and the Lady Byrd Hat Building and is familiar both with the market and the nuances associated with historic tax credits.

(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.

http://video.foxbusiness.com/#/9664608/commercial-real-estate-the-next-bubble/?category_id=66a5467c2a3e8419020c0e75647cd4379543f11d

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.