this, from the wsj too, shows that profits at big, money center banks are going to be depressed for quite awhile. and, loan growth will be non existent. this means that alot of commercial r.e. developers will not be able to fund new projects, or get exiting ones financed or refinanced.
i have personally seen several downturns in commercial r.e., starting in the early 70s. this can come swiftly, and last for a very long (2-4 year) time. it is devastating to lenders. and to developers and employment, etc. work out specialists profit tremendously.
I was trying to be clever. I guess it didn't work.
I will concede that the type of folks that frequent this blog saw this coming months ago. However, it is only just now starting to dawn on people that the economy is deteriorating. The credit card deliquency story has gotten a lot of attention in the MSM, as has Target's lowered guidance. Since perception IS reality in economics (expectations of recession help bring on a recession, etc), this new focus on the spreading economic troubles will probably have a profound effect. Except here on Guam...because it is different here.
Its different everywhere. Saw this coming a mile away in Colorado Springs. Driving down a major road yesterday I saw 5 big commercial for lease signs simultanously twice. Driving five miles up this road saw 37 for lease signs.
Merry Christmas everyone!!
Everything I bought my 3 yo was either BOA broke on arrival or BSA broke soon after. China got trillions of worthless dollars and we got a boat load of worthless crap. Makes us even in my eyes.
GE Capital will buy Merrill Lynch Capital's corporate finance, equipment finance, franchise, energy and health-care finance units. Merrill Lynch Capital's commercial real estate finance unit is not part of the transaction.
Over at Naked Capitalism I questioned GE's purchase of Merrill's loan assets but it seems Jeff Immelt deserves the big bucks. He must read CR.
Yeah, not just see throughs, but also a lot of closed up stores in store, imo. Round Rock, Texas is a great example: in a few short years the retail space just exploded, like some kind of science fiction story, but actually even more over-the-top, like a satire.
It's an incredible alien landscape there now, unrecognizable. Store after store, mega-outdoor malls, endless, as if the area had at least 2 times the population.
Just as 100% house price increases in parts of Austin seemed outta sorts to me back in 2005, these overgrown retail landscapes in Round Rock seem impossible.
I doubt very much the future health of many of those new stores.
But....while many stores will close, overall consumption on the other hand is far less predictable.
oil is trading right at $95, at the highs for the session, and the products are moving in tandem. dont be surprised if they move this to $100 this week,or early next.
Its different everywhere. Saw this coming a mile away in Colorado Springs. 01/20/2009 end of an error | 12.25.07 - 10:39 pm |
Hey, I'm in Colo. Springs also. Lots of for sale signs in my neck of the woods...off of Vickers and Rangewood. Was at the north mall Friday...the mall was busy, but the individual stores were not. People just hanging out while it snowed outside.
All the real estate people I know in Phoenix recognize there's a slowdown. Seriously, when was the last time anybody bothered to have an open house in your neighborhood? Last time I saw a sign for one in Coronado was at least two months ago.
Most of the real estate folks at work aren't going to make their hours this year.
you want to hear a joke, a colleague of mine looks for a house close to our city, for cca 250k usd. the joke is, the house is small, smaller than his flat, lies 7 miles outside the city and the locations is 100km to ukrainian border, of course his DTI ratio would be 70%. but who am i to say anything i mean his wife is a mortgage analyst in a local bank se should know better at least he says so. but you know she wants a house because they just had a baby so shes on maternity leave, what would make the DTI currently something like 130%. and since they live close to paycheck to paycheck i dont see it good for their future but hey i got a great tip from that guy to invest in stocks and RE as if i am not already bleeding from owning RE as of now my cousin who rented my big 1 bedroom flat jumped on the buy now train and i am stick with the utility bill, luckily its not that big parents from both sides donated their life savings to put down 50% and are now close to be broke. but hey they bought. they own now a flat.
back to my colleague with mortgage analyst wife. when we talked about RE during a bussiness trip in Vienna, an Austrian collegues eyes have fallen out when he was told how much EURo that 5,6 milion slovakian krones house means (170k EUR). i guess i am not the only one with brain between ears
to commercial RE, when i travel through central and eastern europe i see a lot of empty CRE and RRE be it slovakia or austria, but people dont see it. they believe it goes up. even another colleague whose wife works in RE agency says so. when asked after the volume he says theres no volume, its just 1-2 closing per month. so see the market price is set by a politian, musician or a biznissman buying RE on mortgage based on their big salaries.
they dont call Eeastern europe Eldorado for western banks for nothing
well i personally can wait out the bubble even if it would be 10 years since should i marry and have kids i can comfortably live in my big flat as long the kids are small, in good location, good mass transport, hospital 100m from the building and a lot of small shops in close vicinity.
eah, not just see throughs, but also a lot of closed up stores in store, imo. Round Rock, Texas is a great example: in a few short years the retail space just exploded, like some kind of science fiction story, but actually even more over-the-top, like a satire.
I live about 1000 miles north as the goose flies (in spring - that is) and I think fly-over in general is going to get hit by the CRE bust waaaaay more than the coasts (where Res RE will take it the hardest).
The incomes out in the 'boonies' just can't support all that development - I'd love to see somebody compute the discretionary income per retail square foot for a reasonable radius around some of these mid-continent development hot spots - I bet the ratios have 'grown' as out of whack as income to housing price ratios grew in 2004-2006 out on the coasts.
I just did a couple of decent (if I do say so myself) posts on CRE in Sacramento:
sacrealstats.blogspot.com
Basically the same story here as everywhere; lots of see-throughs and empties, overbuilt in the extreme. We have a Bestbuy, Circuit City, Target, and Walmart within a 1 mike radius of each other.
Quietly, insiders are perusing an obscure paper by Fed staffers David Small and Jim Clouse. It explores what can be done under the Federal Reserve Act when all else fails.
Section 13 (3) allows the Fed to take emergency action when banks become "unwilling or very reluctant to provide credit". A vote by five governors can - in "exigent circumstances" - authorise the bank to lend money to anybody, and take upon itself the credit risk. This clause has not been evoked since the Slump.
snip
The Bank of England knows the risk. Markets director Paul Tucker says the crisis has moved beyond the collapse of mortgage securities, and is now eating into the bedrock of banking capital.
Some enhanced cash funds (almost money market funds) and many true MMFs are under extreme pressure. Here's one example:
Crane data reports:
"Janus Capital Removes Victoria Finance SIVs From Money Market Funds. Janus Capital said in a Dec. 21 SEC filing that it has "purchased at amortized cost plus accrued interest approximately $109 million of securities" from Janus Institutional Money Market Fund, Janus Institutional Cash Management Fund and Janus Money Market Fund."
snip
"Janus becomes the ninth advisor to purchase securities from its money market funds in order to shield investors from possible losses on troubled structured investment vehicles." Also, see Bloomberg's story.
The key comment here is from Gilberto (who is very sharp, the Gilberto-Levy is one of the more widely respected and used indicies in the commercial space). We are totally in a fog from the capital markets side. That is what has ground loan production to a halt especially for the CMBS exit. Typical CMBS loans are 10 year balloon and up until recently were 30 year am though it had gotten to be either partial IO or full IO on many loans. Unlike residential loans, most commercial loans slated for a securitization exit have onerous prepayment restrictions.
Since spreads on CMBS liablitites are completely unknown at this point any quote a CMBS lender is doing is extremely wide. This is leading borrowers to sit on their hands as they don't want to lock in at historically wide spreads for the next 10 years. There will come a day when they can't wait any longer or when we get out of the fog and spreads become more based on what it will cost to fund and less based on funding cost plus some huge fudge factor. When that happens the commercial loan market will pick up.
Also Macklowe put down more than $50MM for the EOP-NY portfolio, he also pledged his mezz interest in the GM building which I believe was something in the area of 250MM at the time of contribution. Not saying this mitigates totally but it gets it to a more respectable 95% leverage package
Just do give a different view....Everything still seems good here on the oil and gas producing gulf coast of east texas and louisiana. Maybe a little slower but still going strong.
My observation in Phila. suburbs...TONS of new office space built in the past 2 years, and one park specifically has to be at least 50% empty - most of it brand new.
I couldn't believe my eyes watching the new offices getting built while there were "FOR LEASE/SALE" signs everywhere. There's more space available than could be filled for years. Some great deals are coming...
"By 2050, according to the Alzheimers Association, 11 million to 16 million Americans will have the disease. Sixteen million is a future we cant countenance, said William H. Thies, the associations vice president for medical and scientific relations. It will bankrupt our health care system.
Look for who is trying to address these issues and you will find opportunities.
"As a result, Rodriguez's prognosis for the economy in 2008 is grim. In his September 2007 letter to FPA Capital shareholders, he wrote that the odds of a recession were 50% or greater. But in a conversation with Morningstar, he noted that as recently as a month ago, he would have placed the odds at 70%. Now he says the odds are closer to 100%."
From Paper Pusher's link: "Gilbert-based Re/Max 2000 sent an e-mail to its 350 agents and 20 salaried employees over the weekend informing them of the owners' decision to shut down because of financial troubles."
17.5 non-reportable job losses for every 1 reportable. Wow.
Bad stuff happening in CRE, to be sure. My niece's husband, who works for a very prominent commercial developer in Dallas, was one of only a handful of people who kept their jobs after a layoff a couple weeks ago. More than 3/4 of the company's staff was let go - and this was a company that had been doing extremely well in recent years. He's trying to convince himself that this is just a "correction after an extended period of economic growth." Between you, me, and the bedpost, I think he's whistling past the graveyard...
hey a slowdown is expected but it still wont be the death of economy too many people thought that real estate was the only good segment in our economy without volatility but when 2007 came in people had fears and appreciation went against their purchasing power. Guys i am here to provide hope the Dow is above 13,500 so usually when a market is slow something else is doing good check out my opinions at Lively Money
Speaking of CMBS, the first quarter pipeline looks very small. There is a significant 100% hotel issuance coming in late January/early February. This may cause short term spikes in pricing/required credit support/etc.
This same effect happened in November07 when there was a bond issuance followed by 3 weeks of no issuance. This bond had a lot of unusually bad real estate in it and investors punished it on pricing. CMBS spreads (reported by Markit CMBX, Lehman Live, Morgan Markets) all use new issuance (NOT secondary market) transactions and for several weeks there was an artificial spike in reported spreads.
I guess all I'm sayin is, be skeptical of any CMBS pricing charts you see in the coming months (like Markit.com).
I would like to add an off-topic comment from the retiring Merrill broker whom I talked with over Xmas.
He said there are rumors that fourth quarter losses could be double amounts previously discussed, up to $16 billion.
But he said a bigger damage may be loss of trust in Merrill running through the retail system. This system has always been about helping clients manage risk. Brokers and long-time clients can't understand how Merrill did such a terrible job managing the company's risk. It sets such a terrible risk management example that the retail system may be in danger of imploding. A lot of the brokers and long-time clients have taken big hits on Merrill stock. Merrill may have to sell or dismantle the system to get some value from it and separate it from the risk mgt. debacle.
Also, as far as Temask and Davis investments, both were 10% below current market price, and that has infuriated current stock holders because it increases dilution. But if Merrill stock drops from $50 into the 30s or lower, it will make both investors look stupid and could discourage other similar angel investors.
An institutional cash fund from BlackRock Inc. has been downgraded to "junk" status by Moody's Investors Service after the fund suspended certain daily fund redemptions -- one of the latest signs of an investment fund getting hit because of tight conditions in short-term debt markets.
The fund isn't a money-market fund, but instead is a similar type of product -- known as an "enhanced" cash fund -- that seeks to offer higher yield to investors through a variety of shorter-term investments.
RERisk, just to put it in perspective the first two months of 08 are expected to do $4bn of volume in conduit product while in 07 the average single deal was abour $4bn in size. Yikes!
There is certainly a bunch of single borrower hotel paper out there, notably the LaQuinta portfolio that took out Blackstone and there is a bunch of Extended Stays Hotel paper as well. The difference in these is that they are generally short term floating paper whereas standard conduit product is long term fixed rate. Most of the numbers you will see from Lehman Live, MSCI etc. are going to be conduit spreads.
CMBX is almost worthless as a proxy for risk in CMBS right now. It's an extremely technical bid and most guys shorting aren't doing the fundamental analysis. They saw a trade that worked in ABX and decided to run with it. Unless we have an extremely deep and prolonged recession those buying protection at current levels are going to get carted off. To put it in Resi terms, they are entering into positions that they are hoping will appreciate in a short time and have limited capacity to deal with the carry. To this point the trade has worked as spreads have widened because few counterparties are willing to take risk, but I am willing to bet that it snaps back in to something more reasonable (call it 500 area for the BBB series 3) in the next 4-6 months. If it does that see guys that own it at 850 over bleed to the tune of 20 points. We've already seen it tighten, it's just a matter of when it gets its feet completely underneath.
One last note on pricing, almost everything you have seen in CMBS for the past 5 months below the AAA bonds pricing has not been a clearing level but a dealer mark. That means that for most of the mezz classes (AA-BBB-) there have not been investors but rather the dealer has marked the bonds to market and taken them down in their position. This fact will dampen any technical support for tighter bids due to lower supply in the first quarter. This logjam just needs to clear before people get back to business.
Your analysis of the CMBX index as a bad proxy for CMBS risk (and by association CRE investment risk in general)seems spot on. A classic example of the tail (credit derivatives) wagging the dog (underlying CRE assets).
I have been struggling with the CRE deal logjam for the last 6 months and am curious to know what you think will cause it to break.
local lenders still offering 250 over the 5 year, 5 years fixed.
not the greatest as i love the 80-120 over the ten year deals we had last year but for a 5 year fixed rate in the 6's - life doesn't seem too bad does it?
DCR is not the issue in underwriting either its LTV based on blown out cap rates...
but with an entry cap rate two points higher than the financing, sounds like a winner to me...
Alex - yes from soup to nuts. Just one man's thoughts here but they are pretty simple.
Not to pound on the obvious but investors have to get over being gunshy. You don't have that you don't have anything. The first wave will have to be setting prices for all the bonds still sitting on issuer's balance sheets. That will happen quickly in the new year I think as dry powder arrives and dealers are more willing to take losses as they feel they can make it up over the next 3 quarters.
Most of the stuff that was underwritten on forward NOI projections or using 4% cap rates has flushed out or will get flushed out in the next 2 months. That will bring a broader group of investors back as they have more comfort in the collateral. The new product should price tight to the stale as it exhibits better fundamentals and higher subordination. Once people get their toes in at those levels originators will be able to quote competitively and we'll load up again. Depending on how quickly issuers want to pull the band-aid off I'm calling for origination levels between 80-110bn.
Another interesting thing about commercial loans that I don't think is present in resis is that they are assumable. This will be important not in the immediate future but likely in the next 4-5 years for volume as you won't see the refi and cash out of the 03-04 vintage that you saw with 06-07 loans. In fact properties with good performance 2-3 years from now originated in 06-07 could have a very valuable embedded option in mortgage assumption.
DC1000, to give you an insight into the psychology of a commercial real estate borrower, our production side was losing business on 1/2bps. during the salad days of swaps + 40 loans. There is not a shot on earth that any real estate borrower takes a fixed rate non-prepayable loan at 250 over unless they've got earnest money up in a purchase that they are about to lose. I can tell you that the seasoned portion of our portfolio where the 97-98 vintage stuff is maturing and borrowers are in maturity default they are telling us to pound sand and crank up the penalty interest. They know that we aren't going to slide a foreclosure by anybody as long as they keep current and the option is worth the cost at this point. People are going to wait this out.
Thanks for the follow-up. I am working on a core asset deal right now and we are getting verbal quotes from money-center banks at 100 bps over swaps for five years I/O. I wish the CMBS logjam would clear up before we have to close but don't think it will happen.
Interesting thoughts about embedded option in the assumability of 06-07 debt..
Dc1000 -- Life doesn't seem too bad if you are buying assets at an 8 cap. I wonder what kind of deals you are finding? Unfortunately most of the core or even value-added deals I am looking at have been in the 4-5's.
Got a nice multifamily deal at almost full occupancy where the builder still owns it and is starting to get realistic on price cause their note is due. Hopefully things will start loosening up in Q1!
Builder get realistic? Unlikely at best. I've found they only make decisions by having options removed for them. I think S+100 5 year I/O is something you'd see on a verbal basis. Ask them to app it with no MAC and see where you are. With AAA 5 year (fast pay) CMBS trading in the 90's I think a bank would have a hard time justifying deploying capital on that loan.
I agree that cap rates haven't moved out to where they should probably be yet. The problem is no one knows what the spread and leverage are ultimately going to settle at therefore making it difficult to figure out a price for an apropriate ROE. Also despite the doom and gloom CRE rents haven't contracted yet.
I think your borrower will find that his current lender has bigger fires closer to the gas tank and he should be able to ride the existing note at least for a while until he has to jump into something lousy. Again, not to be overly negative but I don't think S+100 gets done. Barring that, have you thought about Fannie/Hud loans for this? I don't know shit about that side of the business but I know our DUS shop is getting flooded with requests from multifamily borrowers. Just a thought.
thanks for the tidbits. i'm a commercial borrower myself but thats not where my expertise is. i'm a developer and a builder and a broker and general pitchman.
the 8 cap deal i speak of in specific is a value add play with land plus improvements parlays into noi and a 8 cap. pretty sweet.
unfortunately for me the gross dollar volume is only in the 2.5MM range so i dont have the whole world of commercial money available to me.
plus my tenants are AAA. jus solid local guys who are putting up their personal signatures on the leases.
i'm settling for five years fixed at 250-275 over treasuries because i have to. its a universal quote these days from anyone who will touch this deal: local banks who'll keep it on their balance sheet and a handful of small life companies. no CMBS for me at all.
unless of course you can point me in the direction of someone that can place this deal in that market at 200 or 180 over.
i'm in maturity default on one deal now, as you mentioned, just keeping it current and taking it forward til we get something better. bank has had zero interest in pushing a foreclosure at all. its been months.
so who do i call for a 2.5MM 80% LTV 8 cap deal with a 1.3DCR?? (even with a 25 year am and my 275 over!!)
Yeah, you're in a bit of a rough spot there. Just so we aren't talking past eachother, when you say value add you mean transitioning and existing set of improvements or ground up construction? In any event you are correct in your assessment that $2.5MM isn't going to get a lot of doors open for you, especially as it sounds like it may not be right down the plate. A year ago people were dealing with some brain damage to get smaller deals, now they aren't. I'll poke around and see if I can get some sources for you. just to firm up one other point, the spread you are talking about is treasury or swap spread?
Thanks for the advice about the FNMA multifamily loans. The S+100 quote I mentioned was actually for a large, Class A 100% leased NNN office building with major leases in place for a minimum of seven to ten years. Your basic "Core" AAA deal.
For the multifamily deal I mentioned we were looking at 3 years I/O at 3Y Swap + 205, with a floor of 6.30%.
The property is 95% leased, so I am hopeful that a FNMA loan like the kind you described will be a better deal. I will give some of the DUS shops a call in the new year.
If you are renovating and expanding existing improvements you are presumably doing this to increase occupancy/rents. This means that the current income statement probably doesn't support the acquisition cost + cost of improvements so you're leverage constrained. I think that the big issue on this is not so much the spread you would be paying but the fact that once you get the property stabilized you will be underlevered. Could you get something that is floating rate and locked out for like 18 months (or whatever time you reasonably estimate it will take you to stabilize the property). That way once you hit stabilization you take it out with a permanent loan and hope that the lending environment is better when you do?
There were a lot of transitional properties being done with 10 year fixed debt but this was late last year early this year when leverage was pretty crazy and spreads were tight.
deals on the table are mini perms with prime based stuff converting into the perm rates i quoted earlier or just coming out straight away with the 250 over for ten.
they're giving me 80% ltv on the new lease rates and occupancy (not starting renovations/construction until we have it fully leased).
does that change your mind?
but even not - what you said has made me revisit something i thought of before - why not (depending on my rate outlook) just take a 2-3 year fixed or floater and then once my leases have cranked up by 3% 2 or 3 times, then do the perm financing - this way i could do more of a cash out and get my money back working else where
the current yield on the equity will be greater than the pref so its the right time.
and with these mini perms and the normal perm stuff the prepayments are a bitch
If you are getting 80% LTV on your pro-forma income numbers then taking 250 over the 10 year for 10 years actually makes some sense. You never know when spreads are going to come back in and a lot can happen to treasuries in the mean time. You won't have too much equity tied up relative to what you'd have if you were borrowing on a stabilized property so I'd say go for it. Again my big initial concern was a lack of leverage but it seems like that's not a problem any more.
Also you are buying yourself some protection of your pro-forma doesn't prove out as quickly as you had planned. With 10 years before balloon you have a lot of room for error, not so much with a 3 year scenario.
Also, I wouldn't take anything that is Prime based (unless it's like Prime - 150 or something). Prime is no longer the rate for the bank's best customer (in fact the Prime to Libor basis is generally between 250 - 300 basis points).
See throughs are already populating parts of Phoenix, even as the realtors deny a slowdown.
Reality bites, and we are showing the results here first- coming soon to a mall near you- empty space!
Someday this war's gonna end...so far this recession is right on script.
Ouch.
What the hell...A shoe just fell out of the sky and hit me on the head.
Hey Nuke, this isn't exactly new news except to the mainstream- check out AHR- it shows the damage CMBS started dealing out three months ago:
Invalid Ticker Symbol - Yahoo! Finance
50% haircut since first of the year.
Someday this war's gonna end...
CR,
this, from the wsj too, shows that profits at big, money center banks are going to be depressed for quite awhile. and, loan growth will be non existent. this means that alot of commercial r.e. developers will not be able to fund new projects, or get exiting ones financed or refinanced.
Outlook Darkens for Big Banks - WSJ.com
i have personally seen several downturns in commercial r.e., starting in the early 70s. this can come swiftly, and last for a very long (2-4 year) time. it is devastating to lenders. and to developers and employment, etc. work out specialists profit tremendously.
houston- agree, but I would lengthen the long end of your range to 5 or possibly 6 years.
Allen-
no reason to single out one, the sector-
VNQ: Basic Chart for VANGUARD SF REIT ETF - Yahoo! Finance
I was trying to be clever. I guess it didn't work.
I will concede that the type of folks that frequent this blog saw this coming months ago. However, it is only just now starting to dawn on people that the economy is deteriorating. The credit card deliquency story has gotten a lot of attention in the MSM, as has Target's lowered guidance. Since perception IS reality in economics (expectations of recession help bring on a recession, etc), this new focus on the spreading economic troubles will probably have a profound effect. Except here on Guam...because it is different here.
Its different everywhere. Saw this coming a mile away in Colorado Springs. Driving down a major road yesterday I saw 5 big commercial for lease signs simultanously twice. Driving five miles up this road saw 37 for lease signs.
Merry Christmas everyone!!
Everything I bought my 3 yo was either BOA broke on arrival or BSA broke soon after. China got trillions of worthless dollars and we got a boat load of worthless crap. Makes us even in my eyes.
Houston, thanks!
"Bank investors expecting a big rebound in earnings growth after the debacle of 2007 will likely be disappointed."
No kidding. They are getting hit from all sides.
Nuke, it's been a few years since I've been to Guam. My dad was stationed there ... a long time ago!
Best to all.
"he only needed to put in $50 million of equity to secure $7.1 billion in debt, "
WOW, talk about leverage, that is less than 1%.
Barron's Critique of Rating Agencies Fails the Test....
Barron's Critique of Rating Agencies Fails the Test -- Seeking Alpha
From Reuters:
GE Capital will buy Merrill Lynch Capital's corporate finance, equipment finance, franchise, energy and health-care finance units. Merrill Lynch Capital's commercial real estate finance unit is not part of the transaction.
Over at Naked Capitalism I questioned GE's purchase of Merrill's loan assets but it seems Jeff Immelt deserves the big bucks. He must read CR.
Jim
Yeah, not just see throughs, but also a lot of closed up stores in store, imo. Round Rock, Texas is a great example: in a few short years the retail space just exploded, like some kind of science fiction story, but actually even more over-the-top, like a satire.
It's an incredible alien landscape there now, unrecognizable. Store after store, mega-outdoor malls, endless, as if the area had at least 2 times the population.
Just as 100% house price increases in parts of Austin seemed outta sorts to me back in 2005, these overgrown retail landscapes in Round Rock seem impossible.
I doubt very much the future health of many of those new stores.
But....while many stores will close, overall consumption on the other hand is far less predictable.
oil is trading right at $95, at the highs for the session, and the products are moving in tandem. dont be surprised if they move this to $100 this week,or early next.
See throughs are already populating parts of Phoenix, even as the realtors deny a slowdown.
I think the instant shutdown of ReMax 2000 in Phoenix will finally make Realtors see the light. 350 people across 13 offices will do that to you.
Shuttered Re/Max may have future
Its different everywhere. Saw this coming a mile away in Colorado Springs. 01/20/2009 end of an error | 12.25.07 - 10:39 pm |
Hey, I'm in Colo. Springs also. Lots of for sale signs in my neck of the woods...off of Vickers and Rangewood. Was at the north mall Friday...the mall was busy, but the individual stores were not. People just hanging out while it snowed outside.
Allen:
All the real estate people I know in Phoenix recognize there's a slowdown. Seriously, when was the last time anybody bothered to have an open house in your neighborhood? Last time I saw a sign for one in Coronado was at least two months ago.
Most of the real estate folks at work aren't going to make their hours this year.
Nuke,
Better get a steel umbrella, 'cuz it's going to be raining shoes next year!
you want to hear a joke, a colleague of mine looks for a house close to our city, for cca 250k usd. the joke is, the house is small, smaller than his flat, lies 7 miles outside the city and the locations is 100km to ukrainian border, of course his DTI ratio would be 70%. but who am i to say anything
i mean his wife is a mortgage analyst in a local bank se should know better 
at least he says so. but you know she wants a house because they just had a baby so shes on maternity leave, what would make the DTI currently something like 130%. and since they live close to paycheck to paycheck i dont see it good for their future but hey i got a great tip from that guy to invest in stocks and RE as if i am not already bleeding from owning RE as of now my cousin who rented my big 1 bedroom flat jumped on the buy now train and i am stick with the utility bill, luckily its not that big 
parents from both sides donated their life savings to put down 50% and are now close to be broke. but hey they bought. they own now a flat.
back to my colleague with mortgage analyst wife. when we talked about RE during a bussiness trip in Vienna, an Austrian collegues eyes have fallen out when he was told how much EURo that 5,6 milion slovakian krones house means (170k EUR). i guess i am not the only one with brain between ears
to commercial RE, when i travel through central and eastern europe i see a lot of empty CRE and RRE be it slovakia or austria, but people dont see it. they believe it goes up. even another colleague whose wife works in RE agency says so. when asked after the volume he says theres no volume, its just 1-2 closing per month. so see the market price is set by a politian, musician or a biznissman buying RE on mortgage based on their big salaries.
they dont call Eeastern europe Eldorado for western banks for nothing
well i personally can wait out the bubble even if it would be 10 years since should i marry and have kids i can comfortably live in my big flat as long the kids are small, in good location, good mass transport, hospital 100m from the building and a lot of small shops in close vicinity.
eah, not just see throughs, but also a lot of closed up stores in store, imo. Round Rock, Texas is a great example: in a few short years the retail space just exploded, like some kind of science fiction story, but actually even more over-the-top, like a satire.
I live about 1000 miles north as the goose flies (in spring - that is) and I think fly-over in general is going to get hit by the CRE bust waaaaay more than the coasts (where Res RE will take it the hardest).
The incomes out in the 'boonies' just can't support all that development - I'd love to see somebody compute the discretionary income per retail square foot for a reasonable radius around some of these mid-continent development hot spots - I bet the ratios have 'grown' as out of whack as income to housing price ratios grew in 2004-2006 out on the coasts.
NY Times Opinion
A One-Size-Fits-All Solution
Frozen Rates, Falling Prices
The Orignial Subprime Crisis
OP-ED CONTRIBUTORS; Mortgage Meltdown - NY Times
NY Times - Officials Falling Behind on Mortgage Fraud Cases (Let me act surprised)
Officials Say They Are Falling Behind on Mortgage Fraud Cases - NY Times
I just did a couple of decent (if I do say so myself) posts on CRE in Sacramento:
sacrealstats.blogspot.com
Basically the same story here as everywhere; lots of see-throughs and empties, overbuilt in the extreme. We have a Bestbuy, Circuit City, Target, and Walmart within a 1 mike radius of each other.
Sebastian and Robyn, please realize that what ever you believe the odds to be, either for... or against...the risk of systemic melt- down is real.
Crisis may make 1929 look a 'walk in the park' - Telegraph
"Crisis may make 1929 look a 'walk in the park'
snip
Quietly, insiders are perusing an obscure paper by Fed staffers David Small and Jim Clouse. It explores what can be done under the Federal Reserve Act when all else fails.
Section 13 (3) allows the Fed to take emergency action when banks become "unwilling or very reluctant to provide credit". A vote by five governors can - in "exigent circumstances" - authorise the bank to lend money to anybody, and take upon itself the credit risk. This clause has not been evoked since the Slump.
snip
The Bank of England knows the risk. Markets director Paul Tucker says the crisis has moved beyond the collapse of mortgage securities, and is now eating into the bedrock of banking capital.
last turtle left standing
Some enhanced cash funds (almost money market funds) and many true MMFs are under extreme pressure. Here's one example:
Crane data reports:
"Janus Capital Removes Victoria Finance SIVs From Money Market Funds. Janus Capital said in a Dec. 21 SEC filing that it has "purchased at amortized cost plus accrued interest approximately $109 million of securities" from Janus Institutional Money Market Fund, Janus Institutional Cash Management Fund and Janus Money Market Fund."
snip
"Janus becomes the ninth advisor to purchase securities from its money market funds in order to shield investors from possible losses on troubled structured investment vehicles." Also, see Bloomberg's story.
The key comment here is from Gilberto (who is very sharp, the Gilberto-Levy is one of the more widely respected and used indicies in the commercial space). We are totally in a fog from the capital markets side. That is what has ground loan production to a halt especially for the CMBS exit. Typical CMBS loans are 10 year balloon and up until recently were 30 year am though it had gotten to be either partial IO or full IO on many loans. Unlike residential loans, most commercial loans slated for a securitization exit have onerous prepayment restrictions.
Since spreads on CMBS liablitites are completely unknown at this point any quote a CMBS lender is doing is extremely wide. This is leading borrowers to sit on their hands as they don't want to lock in at historically wide spreads for the next 10 years. There will come a day when they can't wait any longer or when we get out of the fog and spreads become more based on what it will cost to fund and less based on funding cost plus some huge fudge factor. When that happens the commercial loan market will pick up.
Also Macklowe put down more than $50MM for the EOP-NY portfolio, he also pledged his mezz interest in the GM building which I believe was something in the area of 250MM at the time of contribution. Not saying this mitigates totally but it gets it to a more respectable 95% leverage package
Mock Turtle:
Do you have a point or what?
blackrock cash fund downgraded for limiting redemptions
BlackRock Cash Fund Is Downgraded For Suspending Certain Redemptions - WSJ.com
Just do give a different view....Everything still seems good here on the oil and gas producing gulf coast of east texas and louisiana. Maybe a little slower but still going strong.
Seeing raw land paved over to make room for more chain stores makes me all melancholy.
My observation in Phila. suburbs...TONS of new office space built in the past 2 years, and one park specifically has to be at least 50% empty - most of it brand new.
I couldn't believe my eyes watching the new offices getting built while there were "FOR LEASE/SALE" signs everywhere. There's more space available than could be filled for years. Some great deals are coming...
dd
...btw - RRP, good to see you back here posting.
Mortgages and credit in the long term will be just a blip. Risk is repricing and a new equilibrium will establish itself.
The real issue is population demographics SIX KILLERS: ALZHEIMER'S DISEASE; Finding Alzheimer's Before a Mind Fails - NY Times
"By 2050, according to the Alzheimers Association, 11 million to 16 million Americans will have the disease. Sixteen million is a future we cant countenance, said William H. Thies, the associations vice president for medical and scientific relations. It will bankrupt our health care system.
Look for who is trying to address these issues and you will find opportunities.
"As a result, Rodriguez's prognosis for the economy in 2008 is grim. In his September 2007 letter to FPA Capital shareholders, he wrote that the odds of a recession were 50% or greater. But in a conversation with Morningstar, he noted that as recently as a month ago, he would have placed the odds at 70%. Now he says the odds are closer to 100%."
Morningstar Free Smartpage | News
He seems to have trouble making up his mind...
From Paper Pusher's link: "Gilbert-based Re/Max 2000 sent an e-mail to its 350 agents and 20 salaried employees over the weekend informing them of the owners' decision to shut down because of financial troubles."
17.5 non-reportable job losses for every 1 reportable. Wow.
OT - Case Shiller index drops 6.7% in October, a record:
You're a rotter, Mr. Grinch
"OT - Case Shiller index drops 6.7% in October, a record:"
Strange way of recording a year to date figure
Bad stuff happening in CRE, to be sure. My niece's husband, who works for a very prominent commercial developer in Dallas, was one of only a handful of people who kept their jobs after a layoff a couple weeks ago. More than 3/4 of the company's staff was let go - and this was a company that had been doing extremely well in recent years. He's trying to convince himself that this is just a "correction after an extended period of economic growth." Between you, me, and the bedpost, I think he's whistling past the graveyard...
hey a slowdown is expected but it still wont be the death of economy too many people thought that real estate was the only good segment in our economy without volatility but when 2007 came in people had fears and appreciation went against their purchasing power. Guys i am here to provide hope the Dow is above 13,500 so usually when a market is slow something else is doing good check out my opinions at Lively Money
Speaking of CMBS, the first quarter pipeline looks very small. There is a significant 100% hotel issuance coming in late January/early February. This may cause short term spikes in pricing/required credit support/etc.
This same effect happened in November07 when there was a bond issuance followed by 3 weeks of no issuance. This bond had a lot of unusually bad real estate in it and investors punished it on pricing. CMBS spreads (reported by Markit CMBX, Lehman Live, Morgan Markets) all use new issuance (NOT secondary market) transactions and for several weeks there was an artificial spike in reported spreads.
I guess all I'm sayin is, be skeptical of any CMBS pricing charts you see in the coming months (like Markit.com).
I would like to add an off-topic comment from the retiring Merrill broker whom I talked with over Xmas.
He said there are rumors that fourth quarter losses could be double amounts previously discussed, up to $16 billion.
But he said a bigger damage may be loss of trust in Merrill running through the retail system. This system has always been about helping clients manage risk. Brokers and long-time clients can't understand how Merrill did such a terrible job managing the company's risk. It sets such a terrible risk management example that the retail system may be in danger of imploding. A lot of the brokers and long-time clients have taken big hits on Merrill stock. Merrill may have to sell or dismantle the system to get some value from it and separate it from the risk mgt. debacle.
Also, as far as Temask and Davis investments, both were 10% below current market price, and that has infuriated current stock holders because it increases dilution. But if Merrill stock drops from $50 into the 30s or lower, it will make both investors look stupid and could discourage other similar angel investors.
From Central Scrutinizers link:
"Miami was hit with a 12.4 percent decline in the month, the most of any area. Tampa fell 11.8 percent and Detroit, 11.2 percent."
How much does it suck to be Detroit? They didn't really go up in the boom and they're crashing like bubbleland now.
Credit markets locked up?
Do what Buffett does: pull out your big money-gun and blow the place apart.
Cash is still King.
From the Wall Street Journal:
An institutional cash fund from BlackRock Inc. has been downgraded to "junk" status by Moody's Investors Service after the fund suspended certain daily fund redemptions -- one of the latest signs of an investment fund getting hit because of tight conditions in short-term debt markets.
The fund isn't a money-market fund, but instead is a similar type of product -- known as an "enhanced" cash fund -- that seeks to offer higher yield to investors through a variety of shorter-term investments.
RERisk, just to put it in perspective the first two months of 08 are expected to do $4bn of volume in conduit product while in 07 the average single deal was abour $4bn in size. Yikes!
There is certainly a bunch of single borrower hotel paper out there, notably the LaQuinta portfolio that took out Blackstone and there is a bunch of Extended Stays Hotel paper as well. The difference in these is that they are generally short term floating paper whereas standard conduit product is long term fixed rate. Most of the numbers you will see from Lehman Live, MSCI etc. are going to be conduit spreads.
CMBX is almost worthless as a proxy for risk in CMBS right now. It's an extremely technical bid and most guys shorting aren't doing the fundamental analysis. They saw a trade that worked in ABX and decided to run with it. Unless we have an extremely deep and prolonged recession those buying protection at current levels are going to get carted off. To put it in Resi terms, they are entering into positions that they are hoping will appreciate in a short time and have limited capacity to deal with the carry. To this point the trade has worked as spreads have widened because few counterparties are willing to take risk, but I am willing to bet that it snaps back in to something more reasonable (call it 500 area for the BBB series 3) in the next 4-6 months. If it does that see guys that own it at 850 over bleed to the tune of 20 points. We've already seen it tighten, it's just a matter of when it gets its feet completely underneath.
One last note on pricing, almost everything you have seen in CMBS for the past 5 months below the AAA bonds pricing has not been a clearing level but a dealer mark. That means that for most of the mezz classes (AA-BBB-) there have not been investors but rather the dealer has marked the bonds to market and taken them down in their position. This fact will dampen any technical support for tighter bids due to lower supply in the first quarter. This logjam just needs to clear before people get back to business.
RRP--
Are you in the securitization biz?
Your analysis of the CMBX index as a bad proxy for CMBS risk (and by association CRE investment risk in general)seems spot on. A classic example of the tail (credit derivatives) wagging the dog (underlying CRE assets).
I have been struggling with the CRE deal logjam for the last 6 months and am curious to know what you think will cause it to break.
Best,
Alex
local lenders still offering 250 over the 5 year, 5 years fixed.
not the greatest as i love the 80-120 over the ten year deals we had last year but for a 5 year fixed rate in the 6's - life doesn't seem too bad does it?
DCR is not the issue in underwriting either its LTV based on blown out cap rates...
but with an entry cap rate two points higher than the financing, sounds like a winner to me...
Alex - yes from soup to nuts. Just one man's thoughts here but they are pretty simple.
Not to pound on the obvious but investors have to get over being gunshy. You don't have that you don't have anything. The first wave will have to be setting prices for all the bonds still sitting on issuer's balance sheets. That will happen quickly in the new year I think as dry powder arrives and dealers are more willing to take losses as they feel they can make it up over the next 3 quarters.
Most of the stuff that was underwritten on forward NOI projections or using 4% cap rates has flushed out or will get flushed out in the next 2 months. That will bring a broader group of investors back as they have more comfort in the collateral. The new product should price tight to the stale as it exhibits better fundamentals and higher subordination. Once people get their toes in at those levels originators will be able to quote competitively and we'll load up again. Depending on how quickly issuers want to pull the band-aid off I'm calling for origination levels between 80-110bn.
Another interesting thing about commercial loans that I don't think is present in resis is that they are assumable. This will be important not in the immediate future but likely in the next 4-5 years for volume as you won't see the refi and cash out of the 03-04 vintage that you saw with 06-07 loans. In fact properties with good performance 2-3 years from now originated in 06-07 could have a very valuable embedded option in mortgage assumption.
DC1000, to give you an insight into the psychology of a commercial real estate borrower, our production side was losing business on 1/2bps. during the salad days of swaps + 40 loans. There is not a shot on earth that any real estate borrower takes a fixed rate non-prepayable loan at 250 over unless they've got earnest money up in a purchase that they are about to lose. I can tell you that the seasoned portion of our portfolio where the 97-98 vintage stuff is maturing and borrowers are in maturity default they are telling us to pound sand and crank up the penalty interest. They know that we aren't going to slide a foreclosure by anybody as long as they keep current and the option is worth the cost at this point. People are going to wait this out.
RRP--
Thanks for the follow-up. I am working on a core asset deal right now and we are getting verbal quotes from money-center banks at 100 bps over swaps for five years I/O. I wish the CMBS logjam would clear up before we have to close but don't think it will happen.
Interesting thoughts about embedded option in the assumability of 06-07 debt..
Dc1000 -- Life doesn't seem too bad if you are buying assets at an 8 cap. I wonder what kind of deals you are finding? Unfortunately most of the core or even value-added deals I am looking at have been in the 4-5's.
Got a nice multifamily deal at almost full occupancy where the builder still owns it and is starting to get realistic on price cause their note is due. Hopefully things will start loosening up in Q1!
Builder get realistic? Unlikely at best. I've found they only make decisions by having options removed for them. I think S+100 5 year I/O is something you'd see on a verbal basis. Ask them to app it with no MAC and see where you are. With AAA 5 year (fast pay) CMBS trading in the 90's I think a bank would have a hard time justifying deploying capital on that loan.
I agree that cap rates haven't moved out to where they should probably be yet. The problem is no one knows what the spread and leverage are ultimately going to settle at therefore making it difficult to figure out a price for an apropriate ROE. Also despite the doom and gloom CRE rents haven't contracted yet.
I think your borrower will find that his current lender has bigger fires closer to the gas tank and he should be able to ride the existing note at least for a while until he has to jump into something lousy. Again, not to be overly negative but I don't think S+100 gets done. Barring that, have you thought about Fannie/Hud loans for this? I don't know shit about that side of the business but I know our DUS shop is getting flooded with requests from multifamily borrowers. Just a thought.
RRP (my fave from the good ole days of WWF BTW):
thanks for the tidbits. i'm a commercial borrower myself but thats not where my expertise is. i'm a developer and a builder and a broker and general pitchman.
the 8 cap deal i speak of in specific is a value add play with land plus improvements parlays into noi and a 8 cap. pretty sweet.
unfortunately for me the gross dollar volume is only in the 2.5MM range so i dont have the whole world of commercial money available to me.
plus my tenants are AAA. jus solid local guys who are putting up their personal signatures on the leases.
i'm settling for five years fixed at 250-275 over treasuries because i have to. its a universal quote these days from anyone who will touch this deal: local banks who'll keep it on their balance sheet and a handful of small life companies. no CMBS for me at all.
unless of course you can point me in the direction of someone that can place this deal in that market at 200 or 180 over.
i'm in maturity default on one deal now, as you mentioned, just keeping it current and taking it forward til we get something better. bank has had zero interest in pushing a foreclosure at all. its been months.
so who do i call for a 2.5MM 80% LTV 8 cap deal with a 1.3DCR?? (even with a 25 year am and my 275 over!!)
sorry should have said my tenants are NOT AAA but merely solid local operators (20+ years in their biz) willing to put up a PG as well
Yeah, you're in a bit of a rough spot there. Just so we aren't talking past eachother, when you say value add you mean transitioning and existing set of improvements or ground up construction? In any event you are correct in your assessment that $2.5MM isn't going to get a lot of doors open for you, especially as it sounds like it may not be right down the plate. A year ago people were dealing with some brain damage to get smaller deals, now they aren't. I'll poke around and see if I can get some sources for you. just to firm up one other point, the spread you are talking about is treasury or swap spread?
RRP--
Thanks for the advice about the FNMA multifamily loans. The S+100 quote I mentioned was actually for a large, Class A 100% leased NNN office building with major leases in place for a minimum of seven to ten years. Your basic "Core" AAA deal.
For the multifamily deal I mentioned we were looking at 3 years I/O at 3Y Swap + 205, with a floor of 6.30%.
The property is 95% leased, so I am hopeful that a FNMA loan like the kind you described will be a better deal. I will give some of the DUS shops a call in the new year.
As I said, I appreciate the advice regardless.
if you circle back to this post, i'd be amazed - but here goes anyways
value add i mean expanding, renovating and releasing the entire project.
and the 250 spread is over treasuries.
thanks a mil
I can circle with the best of them.
Here's my thoughts:
If you are renovating and expanding existing improvements you are presumably doing this to increase occupancy/rents. This means that the current income statement probably doesn't support the acquisition cost + cost of improvements so you're leverage constrained. I think that the big issue on this is not so much the spread you would be paying but the fact that once you get the property stabilized you will be underlevered. Could you get something that is floating rate and locked out for like 18 months (or whatever time you reasonably estimate it will take you to stabilize the property). That way once you hit stabilization you take it out with a permanent loan and hope that the lending environment is better when you do?
There were a lot of transitional properties being done with 10 year fixed debt but this was late last year early this year when leverage was pretty crazy and spreads were tight.
thanks for coming back.
deals on the table are mini perms with prime based stuff converting into the perm rates i quoted earlier or just coming out straight away with the 250 over for ten.
they're giving me 80% ltv on the new lease rates and occupancy (not starting renovations/construction until we have it fully leased).
does that change your mind?
but even not - what you said has made me revisit something i thought of before - why not (depending on my rate outlook) just take a 2-3 year fixed or floater and then once my leases have cranked up by 3% 2 or 3 times, then do the perm financing - this way i could do more of a cash out and get my money back working else where
the current yield on the equity will be greater than the pref so its the right time.
and with these mini perms and the normal perm stuff the prepayments are a bitch
If you are getting 80% LTV on your pro-forma income numbers then taking 250 over the 10 year for 10 years actually makes some sense. You never know when spreads are going to come back in and a lot can happen to treasuries in the mean time. You won't have too much equity tied up relative to what you'd have if you were borrowing on a stabilized property so I'd say go for it. Again my big initial concern was a lack of leverage but it seems like that's not a problem any more.
Also you are buying yourself some protection of your pro-forma doesn't prove out as quickly as you had planned. With 10 years before balloon you have a lot of room for error, not so much with a 3 year scenario.
Also, I wouldn't take anything that is Prime based (unless it's like Prime - 150 or something). Prime is no longer the rate for the bank's best customer (in fact the Prime to Libor basis is generally between 250 - 300 basis points).
RRP - you are gracious in coming back here to chat.
prime based is for the construction IO period. the 250 over is based on the 5 or 10 yr treasury.
thanks for the feedback.
can you drop me a line at jgoldman@3dgllc.com so i can blow you up with more questions?
BTW: all the pro forma numbers are based on executed leases, construction prices based on hard subcontractor pricing.
there is no SPEC in my vocab.