As published in Scotsman Guide's Commercial Edition, July 2011.
What We're Reading: July 7
Multifamily properties continue a strong recovery as average effective rents rose 2.4 percent and vacancies fell to 6 percent this past second quarter, according to The Wall Street Journal [subscription required].
“The average effective rent, the amount paid after discounting, was $997 in the second quarter of the year, up from $974 a year earlier, according to a report scheduled for release Thursday by Reis Inc., which tracks leasing data for 82 markets. Second-quarter rents rose in all but two markets.
“Rent levels rose fastest in San Jose, Calif., to $1,501 in the second quarter. The average effective rent in San Francisco was $1,806; Wichita, Kan., $495, and New York, $2,826.
“Vacancies, meanwhile, fell in 72 of the 82 markets during the second-quarter vacancy rate to 6%, the lowest since 2008 and compared with 7.8% a year earlier, according to Reis. Vacancies declined fastest in Charleston, W.Va., Greensboro/Winston-Salem, N.C., and Richmond, Va.
"‘Rising rents and falling vacancies are the perfect situation for landlords,’ said Rich Anderson, an analyst for BMO Capital Markets. ‘It's like drinking without the hangover.’”
There were, however, some signs that the recovery could be slowing down:
“But there were some cautious signs in the data. Landlords filled a net 33,000 units in the second quarter, a slowdown from the 45,000 units they filled in the first quarter. That was somewhat surprising because typically, the net "absorption" rate falls faster during the summer as college graduates leave campus and descend on cities in search of jobs. Some analysts said the slower absorption rate could be linked to slower job growth, although it is too soon to know for sure. The peak apartment renting season runs from May to September.”
-- Dan Yeh
Lenders Turn Cautious Again
In our June 30 post, we saw that lender reply rates on Scotsman Guide Loan Post had pulled back for most categories of commercial lending. In this post, we take a different look at lenders’ interest levels based on differences in posts with and without replies. The chart below shows average debt-service-coverage ratios (DSCRs) for posts with no replies and posts with at least one reply for the past 17 quarters on Scotsman Guide Loan Post. The quarterly results of the Moody’s/REAL National Commercial Property Price Index (CPPI) also are displayed on the graph.
As we discussed in our Dec. 30 post, in a normal market, average DSCRs for posts with at least one reply are typically higher than posts with no replies, given that lenders generally display greater interest in properties with higher DSCRs. In the fourth quarter of 2009, just after the Moody’s/REAL CPPI bottomed, average DSCRs for posts with at least one reply fell below those of posts with no replies, indicating that lenders turned cautious and started avoiding deals of all types, including those with solid DSCRs.
In this past first quarter, average DSCRs for posts with at least one reply fell back below those of posts with no replies, indicating that lenders are, once again, cautious. And on June 22, the MIT Center for Real Estate
reported that the Moody’s/REAL CPPI hit a new low in April, declining 3.7 percent from the previous month. We wonder whether this is just a short-term blip on a slow road to recovery — or perhaps it is signaling the beginning of another down leg for commercial real estate.
-- Dan Yeh
What We're Reading: July 6
The recovery in office properties appears to have slowed down with flat vacancy rates and over 20 markets still seeing decreasing rents in the second quarter of this year, according to Reuters. That may explain why office property owners were rushing to sell their properties earlier this year....
“The U.S. office vacancy rate stood at 17.5 percent at the end of the second quarter, according to Reis. The rate was the same as the first quarter, when vacancies posted the first decline in nearly four years.
“Washington D.C. was the tightest market, with a vacancy rate of 9 percent, while New York was second with 10.7 percent, according to Reis. Detroit had the highest vacancy rate at 26.7 percent, followed closely by Phoenix at 26.5 percent.
“The average asking rent rose 0.2 percent to $27.72 per square foot, according to Reis. Factoring in months of free rent and other concessions landlords offer to attract tenants, the so-called effective rent also rose 0.2 percent in the second quarter, to $22.25 per square feet.
“Effective rents in San Francisco grew the most of markets Reis covers, up 1.3 percent to an average $31.23 per square foot. But New York, where effective rent grew 0.6 percent, remained the most expensive at an average of $46.22 per square foot.
“During the quarter, 22 out of 79 markets Reis tracks showed effective rents decreasing, down from 34 and indicating the improvement is spreading, [Reis economist Ryan Severino] said.”
-- Dan Yeh
Welcome new lenders
We would like to welcome the following new commercial lenders to Scotsman Guide for our July online update [brackets denote which matrix(es) you can find the advertiser’s programs in]:
-- Dan Yeh
What We're Reading: July 1
Small-balance commercial real estate sales (i.e., sales under $5 million) rose 12.4 percent in the first four months of 2011 over the same period last year, while price declines have slowed down, according to SmallBalance.com.
“Despite weak fundamentals and economic uncertainty, small-cap CRE sales under $5 million have risen 12.4% in the first four months of 2011 compared with the same period last year. With financing increasingly available and at attractively low rates, private investors are seeking property acquisitions among all asset classes in solid locations nationwide.
“Nationally, small-cap sales prices hit a cyclical low, as the SCPI-100 for 103 metro areas eased 0.4% on a preliminary basis. Even so, the national index is proving resilient with minimal losses of only 0.1% over the last three months and 1.8% over the last 12.”
-- Dan Yeh
What We're Reading: June 30
As the hotel industry continues its recovery, MSD Capital, Michael Dell’s personal investment fund, has been shoring up its investments in the sector by paying off delinquent mortgages and repairing or rehabbing its hotels in Hawaii and California, according to The Wall Street Journal [subscription required].
“MSD Capital LP, which oversees some $12 billion in assets for Mr. Dell, has brought its payments up to date on its $425 million mortgage on the Four Seasons Maui resort, likely signaling a restructuring of the loan. MSD had been delinquent for roughly 16 months on the debt after the investment manager quit covering the property's debt-payment shortfalls early last year.
“Meantime, MSD has been dealing with the aftermath of the March tsunami that damaged its Four Seasons Resort Hualalai hotel and its adjacent Kona Village Resort on the Big Island. And MSD is launching an overhaul of its 84-year-old Fairmont Miramar Hotel & Bungalows in Santa Monica, Calif., partly to ward off competition.
“Mr. Dell's labors in the hotel industry underscore how, at a time when U.S. hotel values are rapidly recovering from a historic downturn, the industry still faces onerous debt maturities and other obstacles best tackled with deep pockets and perseverance.”
-- Dan Yeh
Reply Rates Pull Back
In our June 23 post, we noted that the majority of the commercial real estate market is continuing to struggle, with Moody’s/REAL Commercial Property Price Index down 49 percent from its peak. With that in mind, we decided to gauge lenders’ interest in deals by measuring lender reply rates on Scotsman Guide Loan Post. The chart below shows lender reply rates by category for the past 17 quarters.
Reply rates peaked in early 2010 and have come down a bit over the past few quarters. The multifamily category lead the decline with a drop of 12 percentage points to an average reply rate of 78 percent from the fourth quarter of 2010 to the first quarter of 2011. On a year-over-year basis, the hard money category has shown the biggest decline with a 16 percentage point decline to 79 percent. Based on several conversations with lenders, this could be more a reflection of a constrained capacity to lend rather than a lower interest level in commercial deals, however.
Based on these numbers, it looks like lenders are still interested in funding deals, but perhaps are a bit more cautious than they were a few quarters ago. Perhaps the deterioration of underwriting standards in the commercial mortgage-backed securities market has had something to do with that.
-- Dan Yeh
What We're Reading: June 29
Another article cautions on the recent deterioration in commercial mortgage-backed security (CMBS) underwriting standards, this time from Investment News.
“Following the recession, only the best properties are getting loans, so buyers are looking to the CMBS market to provide the debt for less-than-perfect real estate.
“Competition is already stiff, which is forcing CMBS lenders to loosen the tougher post-crisis requirements they adopted.
“Underwriting on the underlying mortgages in the CMBS loan pools once again is of the ‘pro-forma’ variety, and, in some instances, ‘valuations are questionable,’ especially within larger loans for highly prized properties, according to recent reports issued by Standard & Poor's and Trepp LLC, a provider of commercial-mortgage-backed-securities and commercial-mortgage data and analytics. This trend adds liquidity but also adds risk to the deals, as well as potential problems for the real estate market, industry insiders said.”
According to Joe Smith, founding partner of real estate investment firm Glenmont Capital Management, the flaws from before the financial crisis still have not been resolved:
“CMBS documents haven't changed from the peak of the market. … Most investors complained about flaws and issues with CMBS, and most of those flaws and issues have not been resolved. It's fairly amazing; the mechanism is still in place even though it led to issues in the marketplace.”
-- Dan Yeh
What We're Reading: June 28
Real estate investment trusts (REITs) raised large amounts of capital this past first quarter, making them active acquirers of commercial real estate properties and portfolios, according to Pensions and Investments.
“In the first quarter alone, REITs raised $16.9 billion through secondary offerings, dwarfing the $3.5 billion raised by private equity-style real estate investment funds in the same period, according to data from the National Association of Real Estate Investment Trusts, a Washington-based trade group, and Preqin, a London-based research firm.
“And what are REITs doing with that money? They're investing some of the cash, buying up properties and portfolios.
“Just this month, apartment REIT Camden Property Trust entered into a deal to buy 11 apartments from Verde Apartment Communities for $321 million.
“Over the last 12 months, there have been three REIT mergers with a combined value of about $29 billion. Two were announced this year: Industrial REIT AMB Property Corp merged with a larger rival, Prologis; and health-care REIT Ventas Inc. is merging with another health-care REIT, Nationwide Health Properties Inc.”
-- Dan Yeh
What We're Reading: June 27
The recent recovery in strip shopping centers may be faltering because of higher vacancies relative to shopping malls and lingering problems from the recession, according to The Wall Street Journal [subscription required].
“But strip centers are still hobbled by recession-related problems that other commercial-property sectors resolved faster. For one, strip centers attract lower-income shoppers, making tenants vulnerable to high unemployment and weak consumer sentiment. And smaller stores within strip centers are often occupied by mom-and-pop tenants. Many such businesses are struggling to borrow because regional banks remain cautious. Indeed, Mr. LaChance says small spaces within strip centers are 82% occupied, compared with 92% for malls.
“And the proliferation of Web shopping also is likely to hurt strip centers. Online stores continue to take market share in categories from electronics to books to office products. Many of those products were traditionally sold at large national chains that helped draw traffic to shopping centers. If such stores close or consumers shop elsewhere, all tenants suffer.
“Another sign of the weak market: Recent shopping-center rental deals have been priced at or slightly below the level set by the expiring lease, according to Jonathan Habermann of Goldman Sachs. Given the large amount of vacancies, particularly for smaller spaces, landlords may simply be giving up on sharper rent reductions because tenants aren't responding. This is the case even though new construction of strip centers has ground to a virtual halt.
“The upshot is that low interest rates, rather than current operating fundamentals, are probably supporting valuations for shopping-center REITs such as Kimco Realty and Developers Diversified Realty. That makes a steadier economic recovery critical. Even then, a pickup in inflation could send rates higher and offset the benefits. The worst scenario would be higher rates without a stronger economy. If that happens, investors should take their money and run.”
-- Dan Yeh
What We're Reading: June 24
New construction starts dropped 6 percent from this past April to May, led by declines in hotel, office and store construction and partially offset by an increase in warehouse construction, according to McGraw-Hill Construction.
“At a seasonally adjusted annual rate of $376.1 billion, new construction starts in May dropped 6% from the previous month, it was reported by McGraw-Hill Construction, a division of The McGraw-Hill Companies. Nonresidential building pulled back after its improved level in March and April, while residential building stayed weak. The nonbuilding construction sector showed moderate growth in May, as a strong gain for electric utilities offset a loss of momentum for public works. During the first five months of 2011, total construction starts on an unadjusted basis came in at $155.2 billion, down 9% from the same period a year ago.
“On the commercial side, hotel construction fell 64% in May, compared to April which included groundbreaking for two hotels valued at $127 million and $108 million, respectively. The largest hotel to reach groundbreaking in April was a $30 million Indian tribe casino hotel in Kinder LA. Office construction in May fell 8%, continuing to retreat after its elevated pace in March. The largest office project that reached groundbreaking in May was a $130 million FBI office building in Salt Lake City UT. Store construction in May also fell by 8%, as this structure type continues to languish. The warehouse category in May was able to jump 39%, helped by the start of two large warehouses for discount retail chains, located in Indiana ($58 million) and Alabama ($48 million). The manufacturing building category in May advanced 35%, helped by the start of a $190 million biofuel plant in Columbus MS, a $98 million manufacturer-owned distribution facility in University Park IL, and a $75 million battery manufacturing plant in Middletown, DE.”
-- Dan Yeh
What We're Reading: June 23
Commercial real estate prices fell for the fifth month in a row, declining 3.7 percent from this past March to April. Bifurcation remains the key theme as trophy properties continue to recover and distressed properties continue to drag prices down, according to Bloomberg.
“The Moody’s/REAL Commercial Property Price Index dropped 3.7 percent from March and 13 percent from a year earlier. It’s now 49 percent below the peak of October 2007 and at its lowest point in data going back to December 2000, the company said in a report today.
“The index, which measures broad national price trends, has fallen for five straight months as sales of distressed properties undermined real estate values. Investor demand is strongest for well-leased buildings in major markets such as New York and Washington, which are viewed as less risky in a sluggish economy.
“‘In a case of the strong getting stronger and the weak getting weaker, major asset/major market prices have recovered more than half of their post-peak losses, while prices for distressed transactions continue to bounce around the bottom,’ Moody’s said in the report.
“Almost 30 percent of transactions in April involved distressed properties, which Moody’s defines as assets in which a default, foreclosure proceeding or bankruptcy of the owner has occurred. It was the 17th consecutive month in which the share of distressed deals was at least 20 percent.”
-- Dan Yeh
Less Equity Contributed to Larger Loan Deals
In our June 9 post, we noted that equity levels were dropping for the four major property types. This post takes a different look at where equity levels are falling on Scotsman Guide Loan Post. The chart below shows average loan-to-value (LTV) amounts by loan size for the past 17 quarters.
This past first quarter, average LTVs for loans $5 million and more jumped 6 percentage points over the previous quarter to end at 63.6. In contrast, average LTVs for loans $1 million or less hovered near their all-time low, ending at 58.2. In other words, borrowers were bringing less equity to larger loan deals in the most recent quarter.
Last month, we noted that trophy properties and certain markets continue to lead the recovery while the majority of the commercial real estate market continues to struggle. Given that we may be starting to see some deterioration in underwriting standards for those trophy properties/markets, commercial mortgage originators may want to start focusing on some of the Class-B properties that are beginning to hit the market.
-- Dan Yeh
What We're Reading: June 22
Constrained supply of new properties and low interest rates will keep the commercial real estate recovery going even if the economy slows down, according to a PricewaterhouseCoopers report highlighted on Bloomberg.
“Commercial real estate investors are optimistic that a U.S. industry recovery will continue even as the economy shows signs of slowing, according to a report today from PricewaterhouseCoopers LLP.
“A lack of new supply and low interest rates are helping to drive investor interest in commercial properties, PwC’s New York-based unit said in its quarterly report. Capitalization rates, which decline when real estate prices increase, fell in 27 of 31 markets surveyed.
“Buyers are pursuing deals as the market improves, and concern that that the economic recovery will falter has deterred ‘very few’ investors from acquiring assets, PwC said. The Standard & Poor’s 500 Index has fallen 5 percent from this year’s high on April 29 after signs of slower U.S. growth, including data showing that employers in May added the fewest jobs in eight months.”
-- Dan Yeh
What We're Reading: June 21
Eighty-one of the top 100 buyers of commercial real estate have returned to the market and purchased properties since the start of 2010, according to Real Capital Analytics (RCA). RCA Managing Director Dan Fasulo said:
“The fact that many of these players are buying again displays how quickly capital has returned to the commercial real estate space. … The fact that many of these players — even the ones stuck with distress on their balance sheets — have been able to raise new capital for new acquisitions is a healthy sign, especially at this early part of the recovery.”
-- Dan Yeh
What We're Reading: June 20
In our June 9 post, we noted that equity levels were dropping for new commercial deals and wondered if commercial mortgage credit conditions were getting frothy again. According to The Wall Street Journal [subscription required], commercial mortgage-backed securities [CMBS] underwriting standards are deteriorating once again via the use of pro forma projections, which could lead to another round of delinquencies and bad loans.
“The theme resounded at an industry conference at New York's Waldorf-Astoria this week, where some money managers and rating companies said they are bracing for a decline in underwriting standards to those seen in 2007, when easy money fueled a record $234 billion in CMBS volume.
“A rise in underwriting based on assumptions about future, rather than on present, revenue has alarmed investors who worry the market is being made vulnerable to new woes just as it begins to recover from past excesses and the credit crunch. Indeed, the CMBS delinquency rate is hovering around its high-water mark of 9%, a reminder of the consequences of aggressive underwriting.
“So far, there are few examples of such underwriting in a market where 2011 volume has reached just $14 billion and the cases are mild compared with practices that sank high-profile deals such as the $5.4 billion sale of the Stuyvesant Town and Peter Cooper Village apartment complexes in New York City in 2006, said investors. On the Peter Cooper loan, the lender projected revenue from planned rent increases, which never happened.
“But with a road map drawn and the same lenders back in business, old practices may not be far around the corner, said Tad Philipp, director of commercial real-estate research at Moody's Investors Service.
“Forward-looking underwriting includes cases where actual occupancy was lower than what was underwritten, such as the $235 million loan on Cincinnati's Kenwood Towne Center in a Deutsche Bank AG-UBS AG issue in February, according to a Barclays Capital report.
“In J.P. Morgan Chase's JPMCC 2011-C3 deal, some tenants cited in loan underwriting weren't actually in place but a lease was signed or a letter of intent delivered, Barclays said.”
-- Dan Yeh
What We're Reading: June 17
Capital markets for real estate investment trusts (REITs) have made significant improvements over the past year, and trophy properties continue to outperform the market, although a number of “B” properties are now beginning to hit the market, according to an interview with Moody’s VP Merrie Frankel at REIT.com.
“Frankel said that every quarter, REIT metrics and balance sheets continue to show improvement, and that has led Moody's and other agencies to give some companies upgrades and positive outlooks.
“Within the market, Frankel said there continues to be a bifurcation among quality of assets and, in fact, it seems to be getting more pronounced among the A properties and the B and C assets. She said there have been recent announcements from companies that they were planning to sell some Class-B, or non-core assets, and it will be interesting to see who buys them.”
-- Dan Yeh
Midwest Shows Strength in the First Quarter
In our June 15 post, we noted that a number of trophy office properties were hitting the Chicago market as commercial real estate prices rebound. With that in mind, we thought it would be a good time to look at different regions on Scotsman Guide Loan Post. The chart below shows average debt-service-coverage ratios (DSCRs) for the four regions over the past 17 quarters.
The Midwest was the strongest performing region for this past first quarter with average DSCRs increasing 17 percent to 1.62 from the fourth quarter 2010. The Northeast followed close behind with average DSCRs increasing 8 percent to 1.55. The South was the only region to show a loss, with average DSCRs declining 10 percent to 1.38.
Compared to the first quarter of 2010, the Midwest was still the best performing region with a 9 percent increase in average DSCR, and the West was the second-best performer with an increase of 8 percent. No regions showed a decline on a year-over-year basis. Perhaps that’s why the latest Federal Reserve Beige Book report
showed a “general sense of optimism about the outlook for the second half of 2011” for commercial real estate.
-- Dan Yeh
What We're Reading: June 15
A number of trophy office properties are hitting the Chicago market, including the Willis Tower and the Chicago Board of Trade Building, according to the Chicago Tribune.
“Monday's announcement that the Chicago Board of Trade Building is joining at least 15 other high-end and landmark buildings for sale in downtown Chicago indicates their owners are finally feeling confident that deals will close this year.
“Only two weeks ago, Willis Tower, the most imposing building in the Chicago skyline, was put on the market.
“Sales of downtown office buildings are poised to break last year's $2.1 billion mark, less than half the total sales recorded in 2006 before the recession. But some momentum seems to be building after sales slowly started moving out of their two-year slump at the end of last year.”
Chicago joins New York and Washington, D.C., as major markets that appear to be leading the recovery:
“The uptick in sales was fueled by investors looking for high-end properties outside the New York and Washington markets, where a single building could drive up to 35 bids. The push behind them is a perfect scenario of low interest rates, a volatile market, and lack of new construction.”
-- Dan Yeh
What We're Reading: June 14
Weeks after restructuring one of its hotel portfolios, Goldman Sachs' Whitehall fund takes a large loss on a trophy office building in New York, according to The Wall Street Journal [subscription required].
"One of Goldman Sachs Group Inc.'s Whitehall real-estate funds has suffered a large loss on a trophy Manhattan office building that the fund helped purchase at the market's peak.
"A venture of the fund and Monday Properties purchased the 34-story building at 230 Park Ave. in 2007 for $1.15 billion. Monday Properties said Friday that it is recapitalizing the property and bringing in Dallas-based Invesco Real Estate as a new partner. As part of that deal, Goldman is exiting the building, according to Brian Robin, a vice president at Monday Properties.
"Specifics of the transaction weren't announced. But at the end of 2010, Whitehall estimated the property's value was about $300 million less than what it invested, although the Manhattan market has improved some in the past six months. A Goldman spokeswoman declined to specify the firm's loss.
"For Goldman, the deal is one of many lingering troubled investments held by its Whitehall group of funds, which invested heavily in 2006 and 2007, only to see values fall significantly during the recession and real-estate slump."
-- Dan Yeh
What We're Reading: June 13
Walton Street Capital has taken a 50 percent stake in Strategic Hotels & Resorts’ Fairmont Scottsdale Princess hotel, saving the property from impending foreclosure, according to The Wall Street Journal [subscription required].
“Strategic Hotels & Resorts Inc. Chief Executive Laurence Geller made a deft save by recapitalizing the Fairmont Scottsdale Princess hotel with a partner after much of the market had assumed the property would be forfeited to its lenders.
“Mr. Geller’s Strategic disclosed Friday that it brought in private-equity firm Walton Street Capital to take a 50% stake in the 649-room hotel in Scottsdale, Ariz. The partners will contribute $35.5 million to $36.5 million each to eliminate $47 million of the hotel’s debt and to build 50,000 square feet of additional meeting space at the hotel by late next year.
“The moves will reduce the Fairmont’s debt to $133 million from $180 million by paying off $40 million of mezzanine debt and paring the remaining mortgage by $7 million. That remaining mortgage, which is securitized, has been extended to 2013 with an option for another two-year extension with the interest rate remaining constant.”
-- Dan Yeh
What We're Reading: June 10
Self storage was the best performing property class among real estate investment trusts (REITs) for the first five months of the year, according to CNBC’s Realty Check.
“Forget the run on multi-family in the new rental age, forget the trophy office properties in the big metro markets, it's those giant, brightly colored, enormous metal container communities just out beyond the mall that are reaping REITs rewards.
“It's simple, and it's about housing. As fewer people choose to buy, and more people lose their homes, that's where all their stuff goes. It's also a product of overall downsizing. I realize that's not a very highbrow explanation, but it just so happens to be the case, and it's behind an 18.4% sector gain in the first five months of the year. In the last 12 months, self storage REITs returned 29 percent.”
-- Dan Yeh
What We're Reading: June 9
The latest Federal Reserve Beige Book release shows general optimism about commercial real estate for the second half of 2011 as most markets remained steady.
“Commercial and industrial real estate markets have generally been steady since the last report, though there have been scattered signs of a pickup. Commercial leasing markets showed modest signs of improvement in the Richmond and San Francisco Districts. Boston and Dallas noted some firming in property sales markets, but Kansas City reported declines in prices for office buildings. Non-residential construction, though widely reported to be at very low levels, rose modestly in the Boston, Chicago, Minneapolis, and Dallas Districts, though Chicago noted that public sector projects are becoming smaller. Cleveland observed a pickup in industrial and high-end commercial development but a pullback in healthcare-related projects. Richmond reported some pockets of strength in the retail market. More broadly, contacts in a number of Districts expressed a general sense of optimism about the outlook for the second half of 2011.”
-- Dan Yeh
Equity Levels Dropping for New Deals
In our June 8 post, we noted that office building owners were rushing to sell their properties ahead of another potential economic downturn. With that thought in mind, we decided to take a look at equity levels for the four major property types on Scotsman Guide Loan Post. The chart below shows average loan-to-value (LTV) amounts for the four property types for the past 17 quarters.
Average LTVs for all four property types rose from the fourth quarter of 2010 to this past first quarter. Office properties had the largest increase in that time frame and jumped 6.1 percentage points from an average LTV of 62.3 to 68.4. Office properties also had the highest average LTV of the four core property types this past first quarter.
All four property types’ average LTV amounts bottomed at various times in late 2009 and 2010 and have increased since then, indicating that buyers are bringing less equity to new deals. Office LTVs have increased the most, gaining 11.9 percentage points since bottoming in the first quarter of 2010. Is this a sign that conditions are getting frothy in the commercial real estate markets again? Probably not, but if LTVs for new deals continue to rise and credit metrics start to deteriorate, then it could be time to worry.
-- Dan Yeh
What We're Reading: June 8
Office building owners, worried about the slowing U.S. economy, are rushing to cash out on the recent commercial real estate recovery, according to The Wall Street Journal [subscription required].
“In recent weeks, owners of the Willis Tower in Chicago, Constitution Center in Washington, the Seagram Building in New York and numerous other large properties have put all or portions of them on the block. They are hoping to cash in on the near-boom-era prices being paid by yield-hungry investors discouraged by the volatility of stocks and low interest rates in the bond market.
“The surge comes as the U.S. economy shows new signs of weakness, raising questions about the direction of office rents and vacancy rates.
“‘Who knows what the market will be like in a year or so?’ says Tim Jaroch, one of the general partners who own the 1.4 million-square-foot Constitution Center.
“In April, the total value of new sales listings of U.S. office buildings was $8.7 billion, according to real-estate research firm Real Capital Analytics. That was the highest level since 2008. Preliminary data for May show $10 billion in new listings, which would be the highest monthly total since late 2007.
“Until recently, post-recession sales activity in the office market has been slow. Lenders have held onto distressed assets rather than sell them, frustrating many investors who hoped to take advantage of the pain of others. Even as values rise, many owners continue to resist selling because they don't like their options for investing the proceeds.
“The sharp rise in values has come over the past year, a relatively short time frame in the real-estate market. Recent deals include the sale of 750 Seventh Ave. in New York's Times Square by Hines Interests for a surprisingly high $485 million and Beacon Capital Partners' sale of Market Square in Washington for a record $905 a square foot.”
-- Dan Yeh
What We're Reading: June 7
Lone Star Funds has raised a $5.5 billion commercial-property fund, which exceeded their target of $4 billion, according to Bloomberg.
“Lone Star Funds, the investment firm run by John Grayken, raised $5.5 billion for a fund to buy commercial-property assets as real estate values recover, according to a person with knowledge of the situation.
“Lone Star Real Estate Fund II exceeded its target of $4 billion after attracting investors in recent months, said the person, who asked not to be named because the fund’s closing hasn’t been made public.
“Commercial-property values climbed 3 percent in May from the previous month, according to Green Street Advisors Inc., a research firm in Newport Beach, California. Investors with Lone Star included New Jersey’s state pension, which last month agreed to put in $400 million.”
-- Dan Yeh
What We're Reading: June 6
Despite Friday’s dismal job report, job growth in 2011 so far has been better than 2010 because of construction (surprisingly), according to Calculated Risk.
“For the first time since 2005, residential construction employment will probably be positive in 2011. Just eliminating the drag will help. Also residential investment will probably make a positive contribution to GDP growth for the first time since 2005 - mostly because of an increase in multi-family construction and home improvement. So this is a little bit of good news ... even though most of the recent economic news has been disappointing.”
-- Dan Yeh
What We're Reading: June 3
Unemployment numbers turned ugly in May as nonfarm payrolls increased by 54,000 against expectations of 125,000. The unemployment rate also increased to 9.1 percent, according to MarketWatch.
“Nonfarm payrolls rose by a seasonally adjusted 54,000 in May. This is the smallest gain since September and a fraction of the 125,000 jobs expected by economists polled by MarketWatch.
“That forecast had been cut in recent days as economists grew pessimistic after a string of disappointing data this week. Just a few days ago, economists were expecting jobs growth of 175,000 jobs in the month.
“The official unemployment rate increased to 9.1% in May from 9.0% in April. This is the highest unemployment rate since December. Economists were expected a slight drop in the jobless rate to 8.9%.”
-- Dan Yeh
What We're Reading: June 2
Blackstone is in the process of refinancing debt on 21 office properties and obtaining fresh capital of up to $1.35 billion, indicating that lenders are still willing to commit new money to deals, according to Bloomberg.
“Blackstone Group LP is close to borrowing as much as $1.35 billion from lenders including MetLife Inc. to replace debt coming due on 21 office properties, according to three people with knowledge of the refinancing.
“MetLife, the largest U.S. life insurer, and New York Life Insurance Co. plan to underwrite a two-year senior mortgage of about $850 million, with three one-year extensions, said the people, who asked not to be named because the talks are private. Government of Singapore Investment Corp. would provide a mezzanine loan of $450 million to $500 million. The refinancing is scheduled to be completed in July, one of the people said.
“The office buildings, mostly in California, came mainly from New York-based Blackstone’s 2006 acquisition of CarrAmerica Realty Corp. and a joint venture’s purchase that year of Trizec Properties Inc. Some of the existing loans on the properties were bundled into commercial mortgage-backed securities sold in 2006 and 2007, near the real estate market’s peak.
“The refinancing shows institutions’ increased willingness to make and hold loans as U.S. office occupancy improves. Life insurers account for about one-tenth of commercial-property financings and have been “very active” in lending to high- quality buildings during the past year, said Richard Parkus, head of commercial real estate debt research at Morgan Stanley in New York. The companies typically can lend at lower interest rates than banks because they are investing their own money as opposed to loaning out borrowed funds.”
-- Dan Yeh
Midwest Leads Regions for Larger Loans
In our May 26 post, we noted that larger loans and trophy properties in certain markets were continuing to outperform the bulk of the commercial real estate market. In this post, we take a look at what regions are doing well for particular loan sizes. The chart below shows average debt-service-coverage ratios (DSCRs) segmented by loan size and region for this past first quarter.
The Midwest was the strongest of the four regions and had the highest average DSCRs for commercial loans in the “$1M to $5M” and “$5M and more” range. The Northeast region followed close behind, with the highest average DSCR for loans in the “$1M or less” category and the second-highest average DSCR for loans in the “$5M and more” range.
The West appears to be the laggard of the four regions with the lowest average DSCRs for loans in both the “$1M to $5M” and “$5M and more” ranges. In fact, according to CoStar’s latest report, commercial property prices in the West remain the furthest from their peak levels.
“Overall, pricing for commercial real estate in the Northeast remains 15% lower than its pre-recession pricing levels. The West, Midwest and Southeast regions remain down 38%, 37% and 35% respectively.”
-- Dan Yeh
Welcome new lenders
We would like to welcome the following new commercial lenders to Scotsman Guide for our June online update. [Brackets denote which matrix(es) you can find the advertiser’s programs in.]
-- Dan Yeh
What We're Reading: May 31
A large land parcel in Arizona has been sold to private equity fund Arcus Property for $32.5 million, representing a 92 percent loss for investors, according to Bloomberg.
"A 10,200-acre (4,100-hectare) desert site in Arizona sold for $32.5 million this week, five years after a group with investors including the California Public Employees' Retirement System paid $400 million for the land.
"Arcus Property Solutions LLC, a private-equity fund with about $100 million under management, paid cash for the property in Goodyear, about 60 miles (97 kilometers) southwest of Phoenix, said Kent Kleinman, a spokesman for the Gilbert, Arizona-based company. The site, now called Amaranth Land LLC, had been planned for a 42,000-home community by the Calpers- financed group when it was purchased in 2006.
"The deal shows how property investors are taking advantage of a plunge in values after the real estate bubble burst in Arizona. A group of lenders, led by Goldman Sachs Group Inc., seized control of the Amaranth site in 2009 after the bust halted development, said Jeff Garrett, owner of Garrett Development Corp., the land's manager after the foreclosure."
-- Dan Yeh
What We're Reading: May 27
The Wall Street Journal [subscription required] reports Whitehall Real Estate Funds, owned by investment bank Goldman Sachs, recently completed a $1.42 billion debt restructuring on one of its hotel portfolios, indicating lenders and property-owners are reaching agreements on working out distressed loans.
"Goldman Sachs Group Inc.'s Whitehall Real Estate Funds restructured $1.42 billion of debt coming due on one of its largest hotel portfolios, the latest indication that property owners are working through some of their most troubled assets.
"Under terms of the deal, the Abu Dhabi Investment Authority, the investment arm of the United Arab Emirates capital city, will inject $475 million into the portfolio, people familiar with the matter said. In exchange, the sovereign wealth fund is receiving a preferred equity stake. Meanwhile, Deutsche Bank AG is refinancing the debt with a $975 million loan, these people said. The extra $30 million went to covering closing costs and other expenses.
"The refinancing, completed Wednesday, eliminates impending due dates for debt on the so-called Tharaldson portfolio of 138 hotels that Whitehall bought from North Dakota hotelier Gary Tharaldson in 2006. It also covers 30 midscale hotels bought by Whitehall in 2007 from the former CNL Hotels & Resorts Inc."
-- Dan Yeh
What We're Reading: May 26
First quarter gross domestic product (GDP) increased by an annual rate of 1.8 percent from the fourth quarter of 2010 to this past first quarter. Previous estimates had placed growth at 2.2 percent, according to the Bureau of Economic Analysis.
“Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.8 percent in the first quarter of 2011, (that is, from the fourth quarter to the first quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 3.1 percent.
“The deceleration in real GDP in the first quarter primarily reflected a sharp upturn in imports, a deceleration in PCE, a larger decrease in federal government spending, and a deceleration in nonresidential fixed investment that were partly offset by a sharp upturn in private inventory investment.
“Real nonresidential fixed investment increased 3.4 percent in the first quarter, compared with an increase of 7.7 percent in the fourth. Nonresidential structures decreased 16.8 percent, in contrast to an increase of 7.6 percent. Equipment and software increased 11.6 percent, compared with an increase of 7.7 percent. Real residential fixed investment decreased 3.3 percent, in contrast to an increase of 3.3 percent.”
-- Dan Yeh
Large Loans Continue to Outperform
In our May 23 post, we noted that the Moody’s/REAL commercial property price index hit a new low this past March. Although the bulk of the commercial real estate market is still struggling, trophy properties in some major markets appeared to be insulated from the price declines. Bloomberg reports:
“So-called trophy properties in New York, Washington, Boston, Chicago, Los Angeles and San Francisco are helping those markets avoid the drag caused by distressed asset sales nationwide, Moody’s reported. Prices of properties of $10 million or more have risen 23 percent since their July 2009 low, according to a separate report issued today.”
With that in mind, we decided to update our look at commercial mortgages segmented by loan amounts on Scotsman Guide Loan Post. The chart below shows the average debt-service-coverage ratios (DSCRs) by loan amount category for the past 17 quarters.
Properties with loans of $5 million and more have indeed outperformed in the past two quarters, increasing from an average DSCR of 1.24 in the third quarter of 2010 to an all-time high of 1.52 in this past first quarter. Properties with loans in the $1 million to $5 million range were the best performers in this past first quarter, with average DSCRs increasing 0.09 to 1.48 from the fourth quarter of 2010 to first quarter of 2011. In this still uncertain market, investors are apparently finding security in larger properties.
-- Dan Yeh
What We're Reading: May 25
Durable goods orders declined by 3.6 percent from this past March to April, compared to a forecast of a 2.5 percent decline, according to Bloomberg.
“Orders for U.S. durable goods dropped more than forecast in April, reflecting a slump in aircraft demand and disruptions in supplies of auto parts stemming from the earthquake in Japan.
“The 3.6 percent decrease in bookings for goods meant to last at least three years was the biggest since October and followed a 4.4 percent surge in March that was larger than previously estimated, a Commerce Department report showed today in Washington. Economists projected a 2.5 percent April decline, according to the median forecast in a Bloomberg News survey.”
-- Dan Yeh
What We're Reading: May 24
The hospitality industry continues to rebound. KSL Capital is purchasing the Montelucia resort in Scottsdale, Ariz., for $115 million, compared to the $125 million mortgage still owed to banks, according to The Wall Street Journal [subscription required].
“KSL paid roughly $115 million for the 293-room resort, or about 90% of what five banks led by German lender Eurohypo AG were owed by the Montelucia's developer.
“The Montelucia opened in Scottsdale, Ariz., in November 2008, costing $270 million to build. Of that money, $150 million came from the banks and $30 million came from a Lehman Brothers mezzanine loan. Developer Crown Realty & Development Corp. and unidentified Mexican investors put in $90 million in equity. The banks' mortgage was paid down to $125 million with proceeds from sales of 19 multimillion-dollar condominiums at the resort.
“The Montelucia ran into difficulty from the start. The project went over budget, fell behind schedule and debuted during the worst downturn in decades.”
-- Dan Yeh
What We're Reading: May 23
Commercial property prices, as measured by the Moody’s/REAL Commercial Property Price Index, continued to fall in March as the proportion of distressed property sales hit an all-time high. The index dropped 4.2 percent in March from this past February, and is now sitting 47 percent below the October 2007 peak, according to Bloomberg.
“The Moody’s/REAL Commercial Property Price Index dropped 4.2 percent from February and is now 47 percent below the peak of October 2007, Moody’s said in a statement today.
“The national index has fallen for four straight months as sales of distressed properties hurt real estate values. Investor demand is strongest for well-leased buildings in such major markets as New York and Washington as vacancy rates decline and the economy grows.
“So-called trophy properties in New York, Washington, Boston, Chicago, Los Angeles and San Francisco are helping those markets avoid the drag caused by distressed asset sales nationwide, Moody’s reported. Prices of properties of $10 million or more have risen 23 percent since their July 2009 low, according to a separate report issued today.
“Almost a third of all March transactions measured by Moody’s were considered distressed, meaning the properties’ owners faced foreclosure, had difficulty covering their mortgage payments or experienced other financial problems. It was the largest proportion of distressed property sales in the history of the index, Moody’s said.”
-- Dan Yeh
What We're Reading: May 20
Investors are reviving interest in commercial property collateralized debt obligations (CDOs) despite higher delinquency rates last month. The last new issuance of a commercial property CDO was in 2007, according to Bloomberg.
“As sales of commercial-mortgage backed securities revive, inquiries about new CDOs composed of real estate debt are emerging, Fitch said in a report today. CDOs pool assets and slice them into securities of varying risk.
“Sales of CDOs linked to commercial real estate debt climbed to $35 billion in 2006 from $16.1 billion in 2005, according to Credit Suisse Group AG data. Another $35 billion was sold in 2007, the data show. Offerings plummeted after the financial crisis. There have been no newly issued CDOs linked to commercial property loans since 2007, according to Credit Suisse.
“Late payments on commercial property loans packaged in CDOs climbed 0.7 basis points to 14.8 percent last month, Fitch said in a May 13 report.”
-- Dan Yeh
Shorter-term Fixed-Rate Loans in Demand
In our May 12 post, we noted that demand for bridge loans, which are typically used for short-term specialized funding purposes, had eased up a bit this past first quarter. We decided to see if that general trend holds for product types on Scotsman Guide Loan Post. The graph below shows the percent share for four different commercial loan products — fixed-rate (broken out between “10-year or greater” and “less than 10-year”), adjustable-rate and interest-only mortgages — on Loan Post for the past 17 quarters.
In this past first quarter, interest-only loans had the largest decline, dropping from 15 percent in fourth-quarter 2010 to 11 percent. Fixed-rate loans with terms of less than 10 years and adjustable-rate mortgages (ARMs), however, each increased 1 percent to 16 percent and 11 percent, respectively. Fixed-rate loans with less than 10-year terms hit a high of 18 percent in third-quarter 2010 and remained the most sought after product on Loan Post during the most recent quarter. Overall, the drop in demand for bridge loans and interest-only loans, combined with the increase in more traditional fixed-rate products, suggests that property owners have had less of a need for short-term emergency funding and affordability products — and that implies that the commercial real estate markets could be stabilizing.
-- Dan Yeh
What We're Reading: May 18
Despite a large inflow of good news recently, the commercial real estate deterioration likely is not over yet as delinquencies on mortgages packaged into commercial mortgage-backed securities (CMBS) hit a record high 10.15 percent this past April, according to Bloomberg.
“Delinquencies on commercial mortgages packaged and sold as bonds surpassed 10 percent for the first time last month, according to Morgan Stanley.
“Payments more than 30 days late jumped 26 basis points to 10.15 percent in April, Morgan Stanley analysts said in a report yesterday. While the pace of increase has slowed since the middle of last year, that’s partly because delinquencies are being offset as troubled loans are resolved. The rate of borrowers missing payments for the first time has been constant for the past four months, the analysts wrote.
“‘The bottom line is that loan performance is not yet exhibiting significant improvement,’ according to the analysts led by Richard Parkus in New York. ‘Many market participants have come to believe that credit deterioration is more or less over, and were caught off guard by April’s rise.’”
-- Dan Yeh
What We're Reading: May 17
The ghost of Lehman Brothers is still an active player in the commercial real estate market, according to The Wall Street Journal [subscription required]. It is looking to sell off some properties while investing additional money into other projects.
“The estate of Lehman Brothers Holdings Inc. is looking to sell its stake in the former International Toy Center building, seeking an exit from a property that has ridden the rocky ups and downs of the Manhattan real-estate market in the past four years.
“The bank and partner L&L Holding Co. paid $480 million in May 2007 for the mostly vacant 800,000-square-foot building at 200 Fifth Ave. It subsequently saw its value plummet with the market through 2009 to the point where it was viewed to be worth less than its mortgage of approximately $390 million.
“But the Manhattan office market has improved significantly since, and the owners signed multiple new tenants last year. Now the failed investment bank believes its equity stake—roughly 90%, according to people familiar with the matter—has significant value above the debt once again. L&L, led by David Levinson, intends to stay in the property.”
The additional investments include:
“In March, for example, Lehman asked for court permission to invest an additional $25 million in 25 Broad Street, an incomplete condominium conversion project, and 45 Broad Street, a development site. The bank was the lender on the two adjacent properties in Lower Manhattan, and has filed to foreclose on both properties.
“Lehman now points to 200 Fifth, which used to primarily house toy firms, manufacturers and showrooms, as a vindication of its approach.”
-- Dan Yeh
What We're Reading: May 16
Commercial mortgage-backed securities (CMBS) issuance is poised to surpass 2010’s volume of $11.5 billion in the near future, according to Bloomberg. JP Morgan Chase is lining up a $2.9 billion CMBS offering, and Wells Fargo and Royal Bank of Scotland have a $1.45 billion offering in the pipeline.
“JPMorgan Chase & Co. is leading banks marketing $2.9 billion of bonds backed by commercial mortgages as relative yields narrow amid investor demand for debt tied to skyscrapers, offices and shopping centers.
“The JPMorgan deal consists of 42 loans on 84 properties, said a person with knowledge of the transaction who declined to be identified because terms aren’t public. Wells Fargo & Co. and Royal Bank of Scotland Group Plc are also selling $1.45 billion of bonds linked to office, mall and hotel loans.
“The securities, which may be sold as soon as next week, are being offered as issuance in the $700 billion market accelerates. Banks have arranged $8.6 billion of commercial- mortgage bonds this year, compared with $11.5 billion in all of 2010, according to data compiled by Bloomberg. Sales may reach $45 billion in 2011, according to JPMorgan, as investors seek out higher-yielding assets with the Federal Reserve holding its benchmark interest rate at record lows.”
-- Dan Yeh
What We're Reading: May 12
Calculated Risk reports that vacancy rates are falling and rents are rising for apartments and offices, but malls are still struggling, according to Reis’ quarterly briefing.
“Reis reported that malls are seeing an echo effect from the loss of anchor tenants earlier in the cycle as smaller tenants leave malls with no anchor tenant (either by contract or when their lease expires).”
-- Dan Yeh
A Rush to Refinance, Revisited
In our May 6 post, we noted that about $1 trillion in commercial mortgages were set to be refinanced in the intermediate future. With that in mind, we decided to take a look at loan purposes on Scotsman Guide Loan Post. The chart below shows the top six loan purposes and their respective shares on Loan Post for the past 17 quarters.
Acquisition and development loans led gains this past first quarter, increasing 2 percentage points to 8 percent of all Loan Posts. Meanwhile, share for cash-out refinances and bridge loans each decreased 2 percentage points to 19 percent and 6 percent, respectively. This seems to indicate that commercial property owners are still looking to expand and short-term funding needs have eased a bit.
From the first quarter of 2010 to this past first quarter, purchases and bridge loans increased 2 percentage points to 18 percent and 6 percent, respectively. In that same time period, construction loans decreased 3 percentage points to 7 percent of total Loan Posts. Although a second rush to refinance may be imminent this year, we haven’t seen any evidence that it is occurring yet.
-- Dan Yeh
What We're Reading: May 11
The restaurant recovery is stalling due to high gasoline and food prices, according to CNBC.com.
“The economy was improving, and families started to eat out more often, which is usually an early sign of the industry's turnaround. After several years of tightening belts, it appeared consumers would start eating out more frequently.
“But a double-whammy of high gasoline prices and rising food costs polarized consumers.
“Recent research from NPD Group suggests consumers are of two different mindsets when it comes to spending—those who cannot spend freely and those who can—and the dichotomy between these two attitudes are going to have far-reaching implications for the restaurant industry for the next few years.
“The vast majority of Americans, some 76 percent, fall into the more cautious camp, and as a result they are controlling their spending. Although this group cuts across all income levels, as you might imagine it is heavily skewed to the unemployed, less affluent and retirees.
“Right now, these consumers are eating out less often, trading down to less expensive restaurants and ordering fewer items while they are there. They expect they will be less restrictive with their restaurant visits when the economy recovers, but they don't expect that to happen anytime soon.”
-- Dan Yeh
What We're Reading: May 10
The lodging sector has rebounded significantly in the past two years. Construction lending is still tight, however, and developers are better off refinancing or acquiring existing properties rather than building hotels, according to HotelNewsNow.com.
“Construction financing is scarce, and debt for refinance and acquisitions rules the day in the world of hotel finance.
“More than 80% of commercial real-estate loan closings this year have been for the refinancing or acquisition of a property. Most industry analysts don’t expect debt for development to return in earnest for another two to three years. What hotel owners, operators and developers need to understand is why financing for new development is not more available and why now is the time to refinance or buy.
“Borrowers are talking about demand one or two years out while banks want to look at the numbers today. This is why it is often difficult for the two sides to have a meaningful conversation in a down market.”
-- Dan Yeh
What We're Reading: May 9
Is a commercial real estate double-dip beginning? Bloomberg reports that Gramercy Capital may lose 195 commercial properties to foreclosure as it has defaulted on $790 million in mortgage loans.
“Gramercy Capital Corp. failed to repay $790 million in mortgage and mezzanine loans, which may lead to foreclosure on about 195 properties that are collateral for the debt, the New York-based company said in a statement.
“The lenders -- Goldman Sachs Mortgage Co., Citicorp North America Inc., SL Green Realty Corp. and KBS Debt Holdings LLC – ‘may immediately seek to exercise available remedies, which will likely include attempting to foreclose on all or substantially all the collateral,’ Gramercy said.
“Gramercy, a real estate investment trust that deals in loans secured by commercial and multifamily properties, delayed the release of its annual report as it sought to modify or refinance the loans, which were originally due in March 2010. The loans are secured by mortgages on properties held by the company’s Gramercy Realty division, according to Gramercy Capital’s third-quarter earnings report.”
-- Dan Yeh
What We're Reading: May 6
Commercial property prices could be entering a corrective phase in the next 12 months as property owners attempt to roll over $1 trillion in mortgages, according to a story from Bloomberg.
“U.S. commercial property prices may fall within a year as building owners attempt to refinance $1 trillion in mortgages, according to Joseph Azrack, head of real estate for Apollo Global Management LLC.
“Rents in some cities don’t justify the rising prices being paid and may force owners to give up properties when their loans mature, Azrack said during a panel discussion yesterday at the Milken Institute Global Conference in Beverly Hills, California.
“The market is ‘due for a correction’ in the next 12 months as the first stage of the financial crisis’s aftermath, including loan extensions, comes to a close, he said.
“‘Supply and demand fundamentals have stabilized and U.S. banks at least have enough reserves/capital to take their losses,’ Azrack said today in an e-mail. ‘So the market clearing process can begin, which is a prerequisite to longer- term recovery in property cash flow and values.’
“Commercial values rose 4 percent in March from the previous month and 22 percent from a year earlier, while remaining 14 percent below the August 2007 peak, according to research firm Green Street Advisors Inc. in Newport Beach, California.”
-- Dan Yeh
Dan Yeh is attending the Mortgage Bankers Association's National Secondary Market Conference & Expo. Follow his live tweets from the conference on Twitter: @ScotsmanGuideMM. His daily posts will resume on Thursday, May 5.
-- Ivanna C. Sukkar, editor
Dec. 2009-Jan. 2010