Capital Markets Update – July 2009

Investors continue to look for signs of a recovery. While the stock market has shown signs of life, real estate investors may be more skeptical. Low interest rates help the multifamily sector but other commercial properties may not be so lucky due to a shortage of capital. So just where is the market headed?

General Market Trends – It’s not just apts, but office and retail vacancies are also increasing. In a recessed economy, cash starved lenders are enabling opportunity funds to raise lots of cash. Many former bankers are now becoming advisors for banks with problem portfolios, providing sale advisory and workout management. Regardless of whether you are an investor or borrower, now is a great time to buy performing and non-performing debt at a discount - or if you prefer the equity side, short sales are becoming more common. Many life companies, which traditionally are fairly conservative lenders, have decided not to unload loan portfolios at firesale prices. Rather, they are taking ownership of properties and waiting for recovery.

Interest Rates – Low interest rates continue to keep the multifamily sector intact. Agency debt from Fannie and Freddie is still attractive in the low to high 5’s. FHA financing for refinance and acquisition loans are in the low 5’s and FHA construction loans are in the mid 6’s.

Notable Deals – A few weeks ago, the Durst Organization was able to secure $1.28B in financing from a consortium of lenders for their new office building located at One Bryant Park in Manhattan. Although the financing was also enhanced by $650M in Liberty Bonds, this was a very large loan to be completed in today’s economy.

Apartments - Vacancies Up / Rents Down - The vacancy rate for apartments hit a 22-year high in the second quarter at 7.5% (up from 6.1% a year earlier) as rising unemployment reduced demand during what is usually the peak leasing season.

CMBS Markets – In spite of a few re-remic deals going on, which is kind of like recycling your trash (<smile>), the CMBS markets are still pretty dead. Not helping things is that S&P introduced its new ratings methodology that may lead to a significant number of downgrades for current issuance. In fact, bonds on credit watch now include 735 AAA tranches totaling $240B. In retrospect, the rating changes really come as no surprise given the lender underwriting over the last few years - and of course the rating agency endorsement of the same. Most of the downgrades are from recent vintages from 2005-2007 when lender underwriting was at its weakest.

Does It Pay Not To Pay? - San Francisco based Millennium Partners last week acknowledged purposely defaulting on its two-year-old, $90-million CMBS loan for the 277-room Four Seasons San Francisco with hope of renegotiating the debt with the special servicer, LNR Property Corp., because the hotel, once valued at $135 million, is now worth less than is owed. The strategic move appears to be working for Millennium and others in California, which has industry experts expecting a lot more of this “default of convenience” strategy.

PPIP / TARP / TALF Programs – The lack of bank lending today is due in large part to banks holding non-liquid assets that have diminished in value since the start of the subprime debacle. To counteract this, the U.S. Treasury recently named BlackRock, Invesco and 7 other managers for its Public-Private Investment Program (PPIP) in an effort to remove as much as $40 billion in troubled assets from financial institutions.

Not sure if a $40B event will turn the entire economy around, but this basic structure (along with TALF and TARP funds) could be the start for something greater. Remember, it was the RTC securitizations of mortgage assets in the early 1990’s which helped the U.S. economy recovery from the last downcycle.

For further information on our multifamily lending programs, please feel free to contact us at [email protected].

Great article. Here is a question I am looking for deals 75-150 unit apartment buildings that are in financial trouble. The group of investors I work with have cash available to close numerous projects within 30-6- days. I need deals! Any ideas?
Deals client needs should be located in b or C neighborhoods, with stable or growing MSA markets.
Client does not want properties that require complete rehab but client has significant expertise with some rehab work.
Property should be in such markets as Omaha Lincoln Kansas City Des Moines St Louis or in between any of these locations. Investment group is located in KC.

Doug:

I hope you know something I don't regarding the PPIR/TARP/TALF programs. Have heard how these assets are going to the market as far as the price is concerned? As you know one monumental issue in the real estate market, including all securities related to real estate, is the valuation of these assets. We are still in a time where values are in flux at best. We need a bottom under real estate values before anything noticable can happen.

Recently, May 29, 2009, I was at an event where Randall S. Kroszner was speaking. If you do not recognized Dr. Kroszner's name, from the Spring of 2006 to January of 2009 he was a Fed Governor working under Ben Bernanke. I ask Dr. Kroszner, who was involved in developing and drafting the policy for the programs above, was there any thought to how these assets will be priced when they went to market. Dr. Kroszner's answer was of course "NO" but he hoped they had come up with an idea. I told Dr. Kroszner that with there are two things would happen:

a) The banks will put assets into these sales on an "absolute" basis which the end result of that could be the nationalization of the banking industry.

b) The banks can set their low bid which in this case there would be no bidders because the low bid is to high

Both of the outcomes above will leave us where we are today: A historic bid/ask price gap.

Remember the RTC was an agency which was allowed to hold on to these assets and start selling them as the market improved. As a result the prices the RTC received on these assets improved. Another big difference is that there was not as much debt in the market as there is today and back in the time period of the RTC some lenders were still lending and real estate values had data to determine the value, which is not the case today. I agree something like the RTC, such as allowing each individual bank to split into a good bank/bad bank would help provide some floor under values. If you want more detail of this let me know.