- Commercial real estate in the United States delivered its first positive quarterly return in 18 months during the first quarter, said Investment Property Databank, London.
IPD's U.S. Quarterly Property Index showed a 1.2 percent total return of negative 0.5 percent capital growth and 1.7 percent income return. The valuation-based quarterly index was based on 1,863 properties from 16 core funds worth $76 billion at the end of March.
The office sector showed most improvement in capital value growth, to negative 0.7 percent compared to negative 3.7 percent the previous quarter. Office closely followed the residential sector with capital growth of 0.4 percent compared to negative 2.4 percent in the fourth quarter of 2009. Some analysts, however, say office fundamentals may be last to deteriorate based on tenants with long-term leases.
“While most indications are that the worst of the write-downs are behind investors, uncertainties persist on the medium term health of the broader economy,” said Simon Fairchild, managing director of IPD North America. “Preliminary data from the Bureau of Economic Analysis indicated that Q1 GDP [gross domestic product] increased at an annual rate of 3.2 percent, although if economists’ predictions of a sluggish recovery are accurate then so too will be the pace of capital appreciation.”
The index showed “steady quarterly improvement” in U.S. real estate since bottoming out in the first quarter of 2009. Cap rates remained above their long-term average across the sectors, but improved sentiment boosted capital coming back to the market, Fairchild said. Returning investors started to compete on pricing more aggressively than during the past two years because of limited prime-stock supply, and beneath the headline, total return figures slowed market value depreciation and resilient income returns.
Market Snapshot—Monday’s closes (5-17-10) are in parentheses
Treasury Yields Key Indicators Other Key Indicators
2-yr 0.75% (0.78%) DJIA: 10193 (10620) Prime Rate: 3.25%
5-yr 2.00% (2.15%) NASDAQ: 2229 (2347) Fed Reserve Target Rate: 0.25%
10-yr 3.21% (3.46%) S&P 500: 1088 (1135) U.S. Unemployment Rate: 9.90%
30-yr 4.08% (4.34%) S&P 100: 494 (516)
LIBOR NYSE Comp: 6775 (7078)
1- Mo. LIBOR: .34% (.34%) Crude Oil: $71 ($72)
3-Mo. LIBOR: .48 (.44%) Gold: $1177 ($1232)
Brad Cox, CCIM, CPM
Office: (941) 552-9731
Email: bcox@tdwood.com
Monday, May 24, 2010
Monday, May 17, 2010
Another fine example of quality workmanship......
Thank you to Brad Cox of Thomas D. Wood for his exemplary work in the area of "Pursuit of Greatness". His weekly commentary, found here, is made available weekly to hundreds of property owners around the country. I am glad to have his as my friend and colleague, with such a rich understanding and dedication to his craft.
Thanks Brad.
WEEKLY MARKET COMMENTARY - AS OF MAY 17, 2010
FOR CRE DEBT, IT'S BOTTOM'S UP - With billions of dollars in commercial real estate debt coming due, the industry refuses to panic, sensing that the cycle's bottom is near, said DLA Piper's 2010 State of the Market Survey.
Responding to this bottoming out process, the U.S. commercial real estate industry outlook remains largely bearish; however, DLA Piper said bullish sentiment is improving and has started to gain momentum.
The survey, measuring attitudes and perspectives of 308 top executives within the U.S. commercial real estate market, reveals that 60 percent described themselves as bearish, down from a record 90 percent in September 2008 when DLA Piper previously surveyed the market just days after the collapse of Lehman Brothers and the sale of Merrill Lynch to Bank of America.
Bullish responses, consequently, quadrupled from 10 percent to 40 percent.
Meanwhile, 60 percent said real estate markets will reach bottom in 2010. Looking ahead, respondents expect that workouts and loan extensions will be the two most prominent strategies used to navigate this recovery as waves of commercial real estate debt come due between now and 2014, DLA Piper said.
"After the most grueling downturn the industry has ever seen, there is a genuine sense of stability beginning to return to the marketplace," said Jay Epstien, chair of DLA Piper’s U.S. Real Estate practice.
"From this point, the recovery will hinge in large part on workouts and loan extensions, but the real wild card is job growth that would drive renewed real estate demand in virtually every asset class."
Other survey findings:
Two of three respondents believed that the federal government’s Troubled Asset Relief Program and Troubled Asset-Backed Securities Loan Facility and other real estate-focused programs have done "enough" to stabilize the real estate marketplace.
Consistent with this view 70 percent do not expect any additional federal legislation focused on aiding the U.S. commercial real estate market.
Six out of 10 respondents do not expect the commercial mortgage-backed securities market to return in time to help refinance the more than $150 billion in CMBS loans coming due in the next two years.
Respondents do not expect workouts to yield deep discounts with lenders: 61 percent of respondents expect that the largest loan write-offs will range between 11 percent to 30 percent.
Armed with war chests of new capital, respondents expect private equity and hedge funds, 37 percent, and REITS, 29 percent, to be the most active investors during the next near.
Multifamily, 37 percent, ranks as the most attractive investment opportunity during the next 12 months, while hotels, 25 percent, rebounded from last place in 2008 to finish as the second most attractive investment opportunity.
Market Snapshot—Monday’s closes (5-10-10) are in parentheses
Treasury Yields Key Indicators Other Key Indicators
2-yr 0.78% (0.82%) DJIA: 10620 (10380) Prime Rate: 3.25%
5-yr 2.15% (2.16%) NASDAQ: 2347 (2266) Fed Reserve Target Rate: 0.25%
10-yr 3.46% (3.42%) S&P 500: 1135 (1111) U.S. Unemployment Rate: 9.90%
30-yr 4.34% (4.27%) S&P 100: 516 (507)
LIBOR NYSE Comp: 7078 (6916)
1- Mo. LIBOR: .34% (.30%) Crude Oil: $72 ($75)
3-Mo. LIBOR: .44 (.37%) Gold: $1232 ($1208)
OUR SERVICES - As a privately held mortgage banking firm Thomas D Wood and Company has been arranging and structuring commercial real estate loans for over 35 years. We arrange all types of debt for existing commercial real estate properties through our correspondent relationship with life insurance companies, community banks and private lenders. Single-tenant, owner-occupied, and multi tenant properties are all acceptable. For a list of recent closings visit our web site at www.tdwood.com.
Until next week -
Brad Cox, CCIM, CPM
Senior Vice President - Debt Placement
Thomas D Wood and Company
Email: bcox@tdwood.com
Thanks Brad.
WEEKLY MARKET COMMENTARY - AS OF MAY 17, 2010
FOR CRE DEBT, IT'S BOTTOM'S UP - With billions of dollars in commercial real estate debt coming due, the industry refuses to panic, sensing that the cycle's bottom is near, said DLA Piper's 2010 State of the Market Survey.
Responding to this bottoming out process, the U.S. commercial real estate industry outlook remains largely bearish; however, DLA Piper said bullish sentiment is improving and has started to gain momentum.
The survey, measuring attitudes and perspectives of 308 top executives within the U.S. commercial real estate market, reveals that 60 percent described themselves as bearish, down from a record 90 percent in September 2008 when DLA Piper previously surveyed the market just days after the collapse of Lehman Brothers and the sale of Merrill Lynch to Bank of America.
Bullish responses, consequently, quadrupled from 10 percent to 40 percent.
Meanwhile, 60 percent said real estate markets will reach bottom in 2010. Looking ahead, respondents expect that workouts and loan extensions will be the two most prominent strategies used to navigate this recovery as waves of commercial real estate debt come due between now and 2014, DLA Piper said.
"After the most grueling downturn the industry has ever seen, there is a genuine sense of stability beginning to return to the marketplace," said Jay Epstien, chair of DLA Piper’s U.S. Real Estate practice.
"From this point, the recovery will hinge in large part on workouts and loan extensions, but the real wild card is job growth that would drive renewed real estate demand in virtually every asset class."
Other survey findings:
Two of three respondents believed that the federal government’s Troubled Asset Relief Program and Troubled Asset-Backed Securities Loan Facility and other real estate-focused programs have done "enough" to stabilize the real estate marketplace.
Consistent with this view 70 percent do not expect any additional federal legislation focused on aiding the U.S. commercial real estate market.
Six out of 10 respondents do not expect the commercial mortgage-backed securities market to return in time to help refinance the more than $150 billion in CMBS loans coming due in the next two years.
Respondents do not expect workouts to yield deep discounts with lenders: 61 percent of respondents expect that the largest loan write-offs will range between 11 percent to 30 percent.
Armed with war chests of new capital, respondents expect private equity and hedge funds, 37 percent, and REITS, 29 percent, to be the most active investors during the next near.
Multifamily, 37 percent, ranks as the most attractive investment opportunity during the next 12 months, while hotels, 25 percent, rebounded from last place in 2008 to finish as the second most attractive investment opportunity.
Market Snapshot—Monday’s closes (5-10-10) are in parentheses
Treasury Yields Key Indicators Other Key Indicators
2-yr 0.78% (0.82%) DJIA: 10620 (10380) Prime Rate: 3.25%
5-yr 2.15% (2.16%) NASDAQ: 2347 (2266) Fed Reserve Target Rate: 0.25%
10-yr 3.46% (3.42%) S&P 500: 1135 (1111) U.S. Unemployment Rate: 9.90%
30-yr 4.34% (4.27%) S&P 100: 516 (507)
LIBOR NYSE Comp: 7078 (6916)
1- Mo. LIBOR: .34% (.30%) Crude Oil: $72 ($75)
3-Mo. LIBOR: .44 (.37%) Gold: $1232 ($1208)
OUR SERVICES - As a privately held mortgage banking firm Thomas D Wood and Company has been arranging and structuring commercial real estate loans for over 35 years. We arrange all types of debt for existing commercial real estate properties through our correspondent relationship with life insurance companies, community banks and private lenders. Single-tenant, owner-occupied, and multi tenant properties are all acceptable. For a list of recent closings visit our web site at www.tdwood.com.
Until next week -
Brad Cox, CCIM, CPM
Senior Vice President - Debt Placement
Thomas D Wood and Company
Email: bcox@tdwood.com
Thursday, May 13, 2010
Monday, May 10, 2010
A Summary of Current Market Trends or Reasons to Buy Now
From Tom Vincent, CCIM - Chicago, IL | We listened to Bob White of Real Capital Analytics discuss the current CRE market and trends. The good news is that the market is starting to slowly come back. Highlights include:
* Prices are starting to rise in the primary markets, driving down cap rates as there is more competition
* Secondary and tertiary markets are about 6 months behind this trend
* Many investors are sitting on the sidelines waiting to invest
* Debt financing has begun to return for good properties though underwriting guidelines have changed mostly with financial institutions requiring more equity – down payments of 35-40% are common
* Pricing may not increase linearly (in an increasing, straight line, but with “bumps in the road”)
* Properties that are trading are income-producing with current cash flows
* The market is two-tiered; value-added properties are lagging behind with biggest loss of value
* Single tenant cash flowing properties are showing biggest gains
Buyers have waited for the large influx of distressed properties to come to market. During the savings and loan crisis, financial institutions wanted the bad loans off their books and were selling at distressed prices of about 20-30 cents on the dollar. This is not happening now and likely will not!
* Banks are using the “extend and pretend” option
* FDIC has enough failed and failing financial institutions to contend with and are not anxious to add more
* Banks will sell distressed real estate at lower discounts in the 60-75 cent range
For the private investor, cash-flowing properties are selling in the $500,000 – $2,500,000 range. Financing is starting to be easier to find though lenders are imposing more stringent underwriting guidelines. BUT if you have extra cash earning 1% or less in a money market, now may be the time to leverage that money at the least 60% to buy an income-producing property. As an accountant, I also can’t resist adding this: Tax increases are coming, Bush’s tax cuts expire this year and Obama’s spending spree will add new taxes. Owning property can shield some income from taxation (depreciation, etc.). Now may be a good time to buy and of course, we are ready to assist you in finding the right property for you!! For further information on acquisitions, please read Tom’s White Paper HERE.
Question or comments about these trends and how your portfolio is positioned? Call us at (847) 963-1031 or email us!
* Prices are starting to rise in the primary markets, driving down cap rates as there is more competition
* Secondary and tertiary markets are about 6 months behind this trend
* Many investors are sitting on the sidelines waiting to invest
* Debt financing has begun to return for good properties though underwriting guidelines have changed mostly with financial institutions requiring more equity – down payments of 35-40% are common
* Pricing may not increase linearly (in an increasing, straight line, but with “bumps in the road”)
* Properties that are trading are income-producing with current cash flows
* The market is two-tiered; value-added properties are lagging behind with biggest loss of value
* Single tenant cash flowing properties are showing biggest gains
Buyers have waited for the large influx of distressed properties to come to market. During the savings and loan crisis, financial institutions wanted the bad loans off their books and were selling at distressed prices of about 20-30 cents on the dollar. This is not happening now and likely will not!
* Banks are using the “extend and pretend” option
* FDIC has enough failed and failing financial institutions to contend with and are not anxious to add more
* Banks will sell distressed real estate at lower discounts in the 60-75 cent range
For the private investor, cash-flowing properties are selling in the $500,000 – $2,500,000 range. Financing is starting to be easier to find though lenders are imposing more stringent underwriting guidelines. BUT if you have extra cash earning 1% or less in a money market, now may be the time to leverage that money at the least 60% to buy an income-producing property. As an accountant, I also can’t resist adding this: Tax increases are coming, Bush’s tax cuts expire this year and Obama’s spending spree will add new taxes. Owning property can shield some income from taxation (depreciation, etc.). Now may be a good time to buy and of course, we are ready to assist you in finding the right property for you!! For further information on acquisitions, please read Tom’s White Paper HERE.
Question or comments about these trends and how your portfolio is positioned? Call us at (847) 963-1031 or email us!
Friday, May 7, 2010
Where did the week go.....
The weather is awesome here in North Texas and there was not a minute to spare......because things are moving fast.
Bankers, lawyers, accountants, more lawyers........space planning, furniture selection, all before noon. Then it is deal, after deal, after deal. This week we saw activity in multi-family, a little retail and some student housing in three different states. Very exciting.
This lunch hour was dedicated to setting up more media, cleaning up the in-box and talking with bankers, lawyers and accountants.
More to come next week. Everyone have a great weekend and thank you to everyone involved in our efforts.
Core Ventures, LLC provides debt and equity to commercial real estate middle market entrepreneurs. If you are a Borrower/Sponsor or Lender that needs liquidity to get the show back on the road, please do not hesitate to contact us.
Bankers, lawyers, accountants, more lawyers........space planning, furniture selection, all before noon. Then it is deal, after deal, after deal. This week we saw activity in multi-family, a little retail and some student housing in three different states. Very exciting.
This lunch hour was dedicated to setting up more media, cleaning up the in-box and talking with bankers, lawyers and accountants.
More to come next week. Everyone have a great weekend and thank you to everyone involved in our efforts.
Core Ventures, LLC provides debt and equity to commercial real estate middle market entrepreneurs. If you are a Borrower/Sponsor or Lender that needs liquidity to get the show back on the road, please do not hesitate to contact us.
Monday, May 3, 2010
In CRE, everyone agrees that the sky is falling.....very, very, slowly.....for now.
Below is another fine commentary compiled by my friend Brad Cox. Brad, thanks again for your contribution.
AWAITING THE ONSLAUGHT OF FORECLOSED PROPERTIES - For some time now, commercial real estate professionals have been anticipating a wave of foreclosures. Hundreds of billions of dollars worth of commercial real estate loans either have matured or are expected to mature in the coming months, leaving borrowers unable to refinance or pay back what they owe.
However, with the exception of a small percentage of upside-down properties, most of these properties have not yet been foreclosed upon. So, why are commercial properties continuing to avoid foreclosure, and what needs to occur in order for these assets to be returned to the market?
First, commercial mortgage-backed securities (CMBS) can complicate matters. For institutional lenders that granted loans using a specific property or portfolio of properties as collateral, the foreclosure process is relatively straightforward. If a borrower can no longer service its debt, the property that was used as collateral can be foreclosed and returned to the lender.
But in the case of properties or portfolios that were used as collateral for CMBS, the process is much more complicated. Each defaulting property or portfolio is owned by the pool of investors that own the CMBS products that collectively financed these assets.
Consequently, no single lender can accept receivership of the defaulting property or properties. Instead, a special servicer must be appointed to oversee the foreclosure process and ensure that every investor's individual interests are met.
Many commercial properties have been undergoing foreclosure for quite some time as special servicers attempt to peel back the multi-layered financing that is characteristic of CMBS products.
Despite the large role that CMBS has played in the delay of commercial foreclosures, there have also been other forces at work. Even commercial properties that were financed by single institutional lenders have been slow to foreclose.
Most lenders are reluctant to take ownership of defaulting commercial properties and are actively delaying their foreclosure. Often facing limited market knowledge of commercial real estate submarkets, lenders are reluctant to burden themselves with the liability and challenge of managing these assets.
Instead, many lenders are choosing to renegotiate with borrowers in order to work through these tough times, particularly if the defaulting property is continuing to produce income, albeit at a much lower level than was projected at the time the loan was granted.
Foreclosure alternatives
For many commercial properties, renegotiating the loan is simply impossible, because borrowers cannot service debt, forcing lenders to assume control of these assets, typically via foreclosure.
As an alternative, some lenders have turned to loan sales, which allow distressed properties to change hands without lenders having to foreclose on the assets. A growing number of nonperforming commercial property loans are being sold by local, regional and foreign lenders to avoid the foreclosure process and the liabilities associated with the ownership on the chain of title.
Lenders are opting to sell loans at anywhere between 30% and 70% of their original value, depending on the asset type, physical condition and property submarket. The lender can write down its losses immediately and clear its balance sheets, rather than risk suffering a further fall in value.
Despite lower levels of commercial foreclosures than many real estate professionals have predicted, commercial foreclosures are, nonetheless, occurring in all commercial real estate markets and across all product types.
Foreclosure rates appear to be higher in the office market than the industrial market, with the retail market somewhere in between. Much of this difference can be attributed to the boom in development, which was more concentrated in the office market due to the higher returns initially offered by this property type. Consequently, office space was added to the market at much higher rates than other product types.
Despite having the highest rates of anticipated return, office product also requires the highest level of additional investment in order to fill the space because it requires expensive tenant improvements and leasing costs.
Conversely, tenant improvements and leasing costs for industrial properties are generally lower than most other commercial property types. During the development boom, less industrial product was added to the market because it offered less favorable returns.
Demand for industrial space has, therefore, remained more in balance with supply, and the space that is vacant requires the least additional capital in order to fill. As a result, office foreclosure rates seem to have been higher than industrial foreclosure rates.
More and more retail properties are entering the foreclosure process today because of the vast decline in consumer demand. The drop in U.S. consumer spending has forced a great number of retailers out of business, along with decreased revenue for existing retailers.
Furthermore, as anchor tenants have vacated centers, the remaining retailers whose lease agreements were tied to the presence of these anchor tenants have been able to break their leases, negotiate lower rates or move to more profitable centers. Retail-center owners have been forced to endure a double hit, which has resulted in an increasing rate of retail property foreclosures.
Resetting property values
Most commercial property loans were underwritten based on projected incomes that were much higher than the incomes they produce today. Under current conditions, many borrowers cannot service their debt.
Despite lenders' best efforts to wait on the sidelines in the hope that stimulus money will re-ignite the economy and return property values to their pre-downturn levels, many commercial properties still face an inevitable value reset.
Thus, the wave of foreclosures is set to break, as lenders are forced to accept reality and foreclose on these commercial properties in order to offload them. When, precisely, this wave will hit is impossible to predict, but as the Federal Deposit Insurance Corp. continues to take over additional banks, it is likely that the pressure on lenders to address these declining property values will result in more distressed sale transactions.
Even though commercial foreclosures will increase and loan sales will rise over the course of this year, this will only be the beginning. Many of the larger lenders that benefited from Troubled Asset Relief Program funds and have since been stockpiling cash will continue to hold on to their assets, hoping to wait out the market.
Thus, the inventory of distressed property will be slowed in its return to the market, delaying the basis reset of property values. Unfortunately, until property values are reset, most buyers will not be interested in making purchases. In conjunction with rising loan sales, additional foreclosures will result in downward pressure on property values.
When commercial property values finally do reset to a market level, in order for investment activity to rebound, liquidity and tenant demand will still need to return before buyers are motivated to take action.
Some buyers with cash are already active in the commercial real estate market, but their interest remains focused on the few properties that offer exceptional investment opportunities. Additionally, the majority of property sales and the majority of investors will not resume activity until commercial financing becomes more widely available.
In order for the debt markets to rebound and for lenders to start lending, commercial properties must be able to generate sufficient income for borrowers to service their debt. For this to happen, property values must be returned to a level that is proportional to today's market lease rates.
Increased foreclosures will result in lower property values, but this must happen alongside renewed tenant demand (likely fueled by job growth and increased consumer spending). When these market forces finally come into play, commercial real estate will once again attract the high volume of investment that characterized it in the past.
ATTENTION APARTMENT OWNERS – Fannie Mae and Freddie Mac continue to tighten their underwriting guidelines, cutting further into loan dollars and sidelining many potential deals. Most loans are maxing out at 65% or less and new rules seem to show up daily further affecting proceeds. Although the rate is attractive, providing insufficient proceeds forces many borrowers to look elsewhere. Alternatively, the Life Companies can provide more proceeds and be much more creative on how the loan is structured. The rate is higher, but so are the proceeds. If you have an apartment community that needs a new loan, call us to discuss what you’re looking for.
APARTMENT EQUITY AVAILABLE – Equity investor looking for borrowers with multifamily properties facing a 2010 or greater maturity where current available financing proceeds would be less than the balance of the maturing loan. The existing debt service payments must be current and the property in good physical condition.
Here’s how it would work: We would arrange a new long term loan (7 to 10 years) through Fannie Mae or one of the Life Companies we represent. The new equity would infuse capital into the borrowering entity. It will fund the gap between the new loan and the pay off of the existing loan. It would be co-terminus with the new first mortgage. Equity provider would determine selection and monitoring of the management company. Call for details.
MEZZ FOR RETAIL – One of the capital sources we represent provides mezzanine loans for retail properties. This structure can work well for borrowers that need the higher leverage in order to refinance out of an existing loan, or an investor buying a property with limited equity.
Example: Borrower wants to buy a $7,000,000 shopping center but the life company can only provide a 65% loan-to-value at 7% for 5-years ($4,550,000). The mezz loan can increase the leverage to 80% - 85% ($1,400,000 mezz loan). The rate on their money is in the 10% range. If you have a deal that is going to need the extra leverage to work then call for details.
***LIFE COMPANY’S HAVE CAPITAL TO MAKE LOANS TODAY***
Our firm is a correspondent for 14 life companies. They are more active this year than the past couple years and they are interested in financing stabilized commercial properties:
• Apartments
• Office
• Retail
• Industrial
• Mixed-Use
• Flex
• Self-Storage
• Owner-Occupied
• Single or Multi-Tenant
• $500K - $50MM
NEED A LOAN FAST? HAS YOUR TRADITIONAL LENDER TURNED YOU DOWN? HERE ARE THE TOP REASONS WHY BORROWERS APPLY FOR A PRIVATE MONEY LOAN:
• You received a loan quote from a Life Company, Conduit, or Bank and the LTV is too low. Our lenders can provide a mezzanine loan behind a newly originated first mortgage.
• Money for trapped equity
• Money for capital improvements and tenant improvements
• Money to acquire fractured condo units
• Paydown of existing loan so the lender will agree to extend the term
• Opportunistic purchases that need to close fast
• Refinancing of maturing commercial real estate loans
• A conventional commercial real estate loan closing falls apart in the 11th hour and new financing needs to get put in place quickly to meet the closing deadline
• Repositioning / Transitional Properties
• “Lease-Ups” (provides time to get property occupied)
• Rehabilitations
• Financing for properties exiting Bankruptcy
• Unusual borrower situation
• Cash-out financing
• Foreclosure purchases
• Commercial Real Estate Loans that don’t meet bank underwriting criteria
• Partner buyouts
Market Snapshot—Monday’s closes (4-26-10) are in parentheses
Treasury Yields Key Indicators Other Key Indicators
2-yr 0.95% (1.07%) DJIA: 11009 (11204) Prime Rate: 3.25%
5-yr 2.42% (2.59%) NASDAQ: 2461 (2530) Fed Reserve Target Rate: 0.25%
10-yr 3.66% (3.81%) S&P 500: 1187 (1217) U.S. Unemployment Rate: 9.70%
30-yr 4.52% (4.66%) S&P 100: 540 (552)
LIBOR NYSE Comp: 7474 (7702)
1- Mo. LIBOR: .28% (.26%) Crude Oil: $86 ($85)
3-Mo. LIBOR.34 (.32%) Gold: $1180 ($1158)
OUR SERVICES - As a privately held mortgage banking firm Thomas D Wood and Company has been arranging and structuring commercial real estate loans for over 35 years. We arrange all types of debt for existing commercial real estate properties through our correspondent relationship with life insurance companies, community banks and private lenders. Single-tenant, owner-occupied, and multi tenant properties are all acceptable. For a list of recent closings visit our web site at www.tdwood.com.
Until next week -
Brad Cox, CCIM, CPM
Senior Vice President - Debt Placement
Thomas D Wood and Company
7349 Professional Parkway East, Ste. B
Sarasota, FL 34240
Office: (941) 552-9731; Fax: (941) 761-5795
Cell: (813) 727-7709
Email: bcox@tdwood.com
AWAITING THE ONSLAUGHT OF FORECLOSED PROPERTIES - For some time now, commercial real estate professionals have been anticipating a wave of foreclosures. Hundreds of billions of dollars worth of commercial real estate loans either have matured or are expected to mature in the coming months, leaving borrowers unable to refinance or pay back what they owe.
However, with the exception of a small percentage of upside-down properties, most of these properties have not yet been foreclosed upon. So, why are commercial properties continuing to avoid foreclosure, and what needs to occur in order for these assets to be returned to the market?
First, commercial mortgage-backed securities (CMBS) can complicate matters. For institutional lenders that granted loans using a specific property or portfolio of properties as collateral, the foreclosure process is relatively straightforward. If a borrower can no longer service its debt, the property that was used as collateral can be foreclosed and returned to the lender.
But in the case of properties or portfolios that were used as collateral for CMBS, the process is much more complicated. Each defaulting property or portfolio is owned by the pool of investors that own the CMBS products that collectively financed these assets.
Consequently, no single lender can accept receivership of the defaulting property or properties. Instead, a special servicer must be appointed to oversee the foreclosure process and ensure that every investor's individual interests are met.
Many commercial properties have been undergoing foreclosure for quite some time as special servicers attempt to peel back the multi-layered financing that is characteristic of CMBS products.
Despite the large role that CMBS has played in the delay of commercial foreclosures, there have also been other forces at work. Even commercial properties that were financed by single institutional lenders have been slow to foreclose.
Most lenders are reluctant to take ownership of defaulting commercial properties and are actively delaying their foreclosure. Often facing limited market knowledge of commercial real estate submarkets, lenders are reluctant to burden themselves with the liability and challenge of managing these assets.
Instead, many lenders are choosing to renegotiate with borrowers in order to work through these tough times, particularly if the defaulting property is continuing to produce income, albeit at a much lower level than was projected at the time the loan was granted.
Foreclosure alternatives
For many commercial properties, renegotiating the loan is simply impossible, because borrowers cannot service debt, forcing lenders to assume control of these assets, typically via foreclosure.
As an alternative, some lenders have turned to loan sales, which allow distressed properties to change hands without lenders having to foreclose on the assets. A growing number of nonperforming commercial property loans are being sold by local, regional and foreign lenders to avoid the foreclosure process and the liabilities associated with the ownership on the chain of title.
Lenders are opting to sell loans at anywhere between 30% and 70% of their original value, depending on the asset type, physical condition and property submarket. The lender can write down its losses immediately and clear its balance sheets, rather than risk suffering a further fall in value.
Despite lower levels of commercial foreclosures than many real estate professionals have predicted, commercial foreclosures are, nonetheless, occurring in all commercial real estate markets and across all product types.
Foreclosure rates appear to be higher in the office market than the industrial market, with the retail market somewhere in between. Much of this difference can be attributed to the boom in development, which was more concentrated in the office market due to the higher returns initially offered by this property type. Consequently, office space was added to the market at much higher rates than other product types.
Despite having the highest rates of anticipated return, office product also requires the highest level of additional investment in order to fill the space because it requires expensive tenant improvements and leasing costs.
Conversely, tenant improvements and leasing costs for industrial properties are generally lower than most other commercial property types. During the development boom, less industrial product was added to the market because it offered less favorable returns.
Demand for industrial space has, therefore, remained more in balance with supply, and the space that is vacant requires the least additional capital in order to fill. As a result, office foreclosure rates seem to have been higher than industrial foreclosure rates.
More and more retail properties are entering the foreclosure process today because of the vast decline in consumer demand. The drop in U.S. consumer spending has forced a great number of retailers out of business, along with decreased revenue for existing retailers.
Furthermore, as anchor tenants have vacated centers, the remaining retailers whose lease agreements were tied to the presence of these anchor tenants have been able to break their leases, negotiate lower rates or move to more profitable centers. Retail-center owners have been forced to endure a double hit, which has resulted in an increasing rate of retail property foreclosures.
Resetting property values
Most commercial property loans were underwritten based on projected incomes that were much higher than the incomes they produce today. Under current conditions, many borrowers cannot service their debt.
Despite lenders' best efforts to wait on the sidelines in the hope that stimulus money will re-ignite the economy and return property values to their pre-downturn levels, many commercial properties still face an inevitable value reset.
Thus, the wave of foreclosures is set to break, as lenders are forced to accept reality and foreclose on these commercial properties in order to offload them. When, precisely, this wave will hit is impossible to predict, but as the Federal Deposit Insurance Corp. continues to take over additional banks, it is likely that the pressure on lenders to address these declining property values will result in more distressed sale transactions.
Even though commercial foreclosures will increase and loan sales will rise over the course of this year, this will only be the beginning. Many of the larger lenders that benefited from Troubled Asset Relief Program funds and have since been stockpiling cash will continue to hold on to their assets, hoping to wait out the market.
Thus, the inventory of distressed property will be slowed in its return to the market, delaying the basis reset of property values. Unfortunately, until property values are reset, most buyers will not be interested in making purchases. In conjunction with rising loan sales, additional foreclosures will result in downward pressure on property values.
When commercial property values finally do reset to a market level, in order for investment activity to rebound, liquidity and tenant demand will still need to return before buyers are motivated to take action.
Some buyers with cash are already active in the commercial real estate market, but their interest remains focused on the few properties that offer exceptional investment opportunities. Additionally, the majority of property sales and the majority of investors will not resume activity until commercial financing becomes more widely available.
In order for the debt markets to rebound and for lenders to start lending, commercial properties must be able to generate sufficient income for borrowers to service their debt. For this to happen, property values must be returned to a level that is proportional to today's market lease rates.
Increased foreclosures will result in lower property values, but this must happen alongside renewed tenant demand (likely fueled by job growth and increased consumer spending). When these market forces finally come into play, commercial real estate will once again attract the high volume of investment that characterized it in the past.
ATTENTION APARTMENT OWNERS – Fannie Mae and Freddie Mac continue to tighten their underwriting guidelines, cutting further into loan dollars and sidelining many potential deals. Most loans are maxing out at 65% or less and new rules seem to show up daily further affecting proceeds. Although the rate is attractive, providing insufficient proceeds forces many borrowers to look elsewhere. Alternatively, the Life Companies can provide more proceeds and be much more creative on how the loan is structured. The rate is higher, but so are the proceeds. If you have an apartment community that needs a new loan, call us to discuss what you’re looking for.
APARTMENT EQUITY AVAILABLE – Equity investor looking for borrowers with multifamily properties facing a 2010 or greater maturity where current available financing proceeds would be less than the balance of the maturing loan. The existing debt service payments must be current and the property in good physical condition.
Here’s how it would work: We would arrange a new long term loan (7 to 10 years) through Fannie Mae or one of the Life Companies we represent. The new equity would infuse capital into the borrowering entity. It will fund the gap between the new loan and the pay off of the existing loan. It would be co-terminus with the new first mortgage. Equity provider would determine selection and monitoring of the management company. Call for details.
MEZZ FOR RETAIL – One of the capital sources we represent provides mezzanine loans for retail properties. This structure can work well for borrowers that need the higher leverage in order to refinance out of an existing loan, or an investor buying a property with limited equity.
Example: Borrower wants to buy a $7,000,000 shopping center but the life company can only provide a 65% loan-to-value at 7% for 5-years ($4,550,000). The mezz loan can increase the leverage to 80% - 85% ($1,400,000 mezz loan). The rate on their money is in the 10% range. If you have a deal that is going to need the extra leverage to work then call for details.
***LIFE COMPANY’S HAVE CAPITAL TO MAKE LOANS TODAY***
Our firm is a correspondent for 14 life companies. They are more active this year than the past couple years and they are interested in financing stabilized commercial properties:
• Apartments
• Office
• Retail
• Industrial
• Mixed-Use
• Flex
• Self-Storage
• Owner-Occupied
• Single or Multi-Tenant
• $500K - $50MM
NEED A LOAN FAST? HAS YOUR TRADITIONAL LENDER TURNED YOU DOWN? HERE ARE THE TOP REASONS WHY BORROWERS APPLY FOR A PRIVATE MONEY LOAN:
• You received a loan quote from a Life Company, Conduit, or Bank and the LTV is too low. Our lenders can provide a mezzanine loan behind a newly originated first mortgage.
• Money for trapped equity
• Money for capital improvements and tenant improvements
• Money to acquire fractured condo units
• Paydown of existing loan so the lender will agree to extend the term
• Opportunistic purchases that need to close fast
• Refinancing of maturing commercial real estate loans
• A conventional commercial real estate loan closing falls apart in the 11th hour and new financing needs to get put in place quickly to meet the closing deadline
• Repositioning / Transitional Properties
• “Lease-Ups” (provides time to get property occupied)
• Rehabilitations
• Financing for properties exiting Bankruptcy
• Unusual borrower situation
• Cash-out financing
• Foreclosure purchases
• Commercial Real Estate Loans that don’t meet bank underwriting criteria
• Partner buyouts
Market Snapshot—Monday’s closes (4-26-10) are in parentheses
Treasury Yields Key Indicators Other Key Indicators
2-yr 0.95% (1.07%) DJIA: 11009 (11204) Prime Rate: 3.25%
5-yr 2.42% (2.59%) NASDAQ: 2461 (2530) Fed Reserve Target Rate: 0.25%
10-yr 3.66% (3.81%) S&P 500: 1187 (1217) U.S. Unemployment Rate: 9.70%
30-yr 4.52% (4.66%) S&P 100: 540 (552)
LIBOR NYSE Comp: 7474 (7702)
1- Mo. LIBOR: .28% (.26%) Crude Oil: $86 ($85)
3-Mo. LIBOR.34 (.32%) Gold: $1180 ($1158)
OUR SERVICES - As a privately held mortgage banking firm Thomas D Wood and Company has been arranging and structuring commercial real estate loans for over 35 years. We arrange all types of debt for existing commercial real estate properties through our correspondent relationship with life insurance companies, community banks and private lenders. Single-tenant, owner-occupied, and multi tenant properties are all acceptable. For a list of recent closings visit our web site at www.tdwood.com.
Until next week -
Brad Cox, CCIM, CPM
Senior Vice President - Debt Placement
Thomas D Wood and Company
7349 Professional Parkway East, Ste. B
Sarasota, FL 34240
Office: (941) 552-9731; Fax: (941) 761-5795
Cell: (813) 727-7709
Email: bcox@tdwood.com
Subscribe to:
Posts (Atom)
