Distressed Real Estate
Open the Wednesday real estate section of The Wall Street Journal or an email communication from one of the major real estate business journals and you can’t miss seeing that dozens of commercial real estate auctions occurring weekly throughout the United States. More >
Loan sales represent a large volume of the distressed asset transactions that have been closing so far in 2010. Lenders and special servicers’ decisions to hold or sell specific loans are generally based on a net present value (NPV) analysis of each asset. This critical analysis accounts for the respective costs to the lender if the loan is held or acquired as REO; the capital required to then stabilize and manage the asset; and the time required to foreclose (in some states, this can be longer than a year). With certain markets and asset values of some property types continuing to deteriorate, the conclusion is often that a loan sale makes more sense to the lender than a hold. More >
Since 2007, commercial mortgage delinquencies have increased tenfold with one in nine CMBS mortgages now being handled by workout professionals. In fact, the delinquency level of 8% is the highest in the history of the CMBS industry, and unfortunately for many current borrowers, that wave is still building. Fitch projects that by 2012 as much as 20% of the $700 billion in outstanding CMBS could fall into delinquent status. While CMBS only represents about 20% of the overall commercial real estate debt market, these figures nonetheless are very significant, and the prospect of additional delinquencies in bank portfolios will exacerbate the situation.
However, there is good news on the horizon. According to the Wall Street Journal, banks, including J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. are expected to launch two offerings of CMBS totaling $1.4 billion in the coming weeks.
Goldman and Citigroup are leading a $750 million CMBS issue that includes a $100 million loan Citigroup is making to Flagship Partners LLC. The landlord is using the loan to refinance debt on the portion of 660 Madison Ave. in Manhattan that houses the Barney’s New York retail department store.
These transactions, along with four CMBS issues sold earlier this year, represent further evidence that some big banks are coming off the sidelines, partly because property values have started to stabilize after plunging more than 40% from the peak in August 2007. But the CMBS market is returning on a small scale, enabling only the strongest owners to get stronger by taking advantage of distressed prices.
Will CMBS issuances increase in the short run? Will job losses continue to drag down consumer confidence and the stock market? Stay tuned.
NAI Global is very active in helping banks sell distressed assets. Most observers would agree in the last 20 years United States banks have become more complex. Lines of business have grown; transactions have become increasingly complex with multiple borrowers with divergent interests; multi-tiered loan structures became common and crafty lawyer inspired special provisions are sprinkled in here and there. During the same time period, however, commercial real estate transactions have also become far more complex. The complexity of transactions is a significant management problem in and of itself. Information overload often forces bright, hard working bank employees to make mistakes just because the time or experience is not available to fully understand the details of a transaction. More >
As the market continues to evolve, it appears the only remaining business activity is restructurings. Some things are starting to thaw in the leasing and occupancy rates across the country. Rental rates in multifamily retail are starting to creep up while office rates are stabilizing in different markets nationwide. More >