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CMBS Poised for a Comeback

Wednesday, February 19th, 2014

CMBS was a $230 billion industry prior to the recession. Today, we live in an era of lowered expectations where every victory needs celebrating as we get back into gear. Take Chicago, where lenders originated and sold off $2.48 billion in loans on Chicago-area properties last year, more than double the $1.20 billion in 2012, according to Trepp LLC, a New York-based research firm. Nationally, CMBS lending rose 85 percent last year, to $82.23 billion. So, we are 35% of the way back. A big part of this rebound is that lenders have eased rates and LTVs. Last year, the average U.S. CMBS loan equaled 63.6 percent of the property’s value, up from 59.8 percent in 2007, according to Trepp.

Another signal of the rebounding bond market is that troubled loans have been getting worked out and traded. First, CWCapital Asset Management LLC put properties with $2.57 billion of unpaid loan balances up for sale. Now, Blackstone Group LP (BX), Starwood Capital Group LLC and CIM Group are all following suit. About 700 bidders registered interest in the auction, which includes foreclosed loans, according to Morgan Stanley. What’s happening is that special servicers, seeing the surge in property values, are unwinding holdings from the real-estate collapse. According to Green Street Advisors Inc., commercial property prices have rallied 71 percent from their 2009 low, surpassing 2007 highs in some areas.

Looking ahead, many experts predict that U.S. CMBS lending will top $100 billion this year. The Chicago area could surpass $3 billion in 2014.

The US Defies the Rating Agencies

Tuesday, August 6th, 2013

Despite the S&P cutting the US credit rating from AAA to AA+, the country’s economy is outpacing the 12 nations that currently have the highest rating. Take a look at the indicators – the dollar is at its strongest since 2008, its GDP is growing faster than developed countries, and its deficit is the lowest since 2008. As a result, S&P has changed their read on the nation’s economy from negative to stable. The change effectively means there is less than a one-third chance of a downgrade in the next two years.  “The markets are telling us that we’re due for an acceleration over the next several quarters,” said Carl Riccadonna, a senior U.S. economist in New York at Deutsche Bank Securities Inc.

The S&P downgrade caused a flight of capital that erased about $6 trillion in value between July 26 and Aug. 12, 2011. Treasury 10-year yields hit the skids at 1.67 percent that September from 2.41 percent on the day of the downgrade.

So what did it? A host of factors, but one component is a reminder never to listen to Op-Ed writers and politicians running for office. When the budget sequestration was first raised – these are the $1.2 trillion in automatic spending cuts that took effect on March 1st– the punditocracy and the blogosphere acted as if the economy would nose dive into a double dip.  After all, if sequestration remains in place, the Pentagon alone will have to trim $50 billion from its budget during 2014 and $500 billion over the next decade. Instead, after four years of budget deficits of more than $1 trillion, spending has been chastened. The government instead has raised tax revenues (mostly due to investors taking profits on investments sooner than they might otherwise have because of fear over a hike in capital gains) and lowered spending meaning the deficit will probably shrink to $378 billion, or 2.1 percent of GDP in 2015, from 7 percent in 2012, according to the CBO.

What all of this has brought back is confidence. Foreign investors and governments are parking their money in dollars again. Its share of global foreign-exchange reserves rose to 62 percent on March 31 from a low of 60 percent in June 2011, according to International Monetary Fund data.

Home Prices Spike But Is It Real?

Monday, May 6th, 2013

Economists tell us that the reason the US is doing better than Europe is because of two things: our equity markets and our housing sector.  And now comes the news that housing is posting its best numbers since 2006.  The widely followed Case-Shiller indexes showed the price of single-family homes across 20 of the most important U.S. cities grew 9.3% in February, its fastest rate since May of 2006. Single family starts are expected to rise to 700,000 new homes (from 535,000 in 2012) and to 1 million in 2015.

All of this activity is, of course, being driven by all-cash investors looking for high returns (the Blackstone Group is reputedly spending $100 million a week buying homes). And homebuyers eager to lock in at record low interest rates who have very little to choose from. The reasons for short supply aren’t however related to the health of the market but because of the obverse. Home prices are still 29% to 30% off their mid-2006 peaks and monthly foreclosures are more than double what they were before the recession. Clearly, underwater homeowners and people who’ve seen some part of their equity vanish simply don’t want to take a loss so they’re waiting it out. As a result, we’re building more.

As housing price gains 23% per year in Phoenix; 17.6% in Las Vegas, and 16.5% in Atlanta, let us think carefully before we go on a building spree. We still have 1.1 million homes in some state of foreclosure and a shadow inventory that tops 2 million. It is important that we temper the current exuberance with a view to not flooding the market with excess inventory. The housing sector is critical to our recovery for two large reasons – the wealth effect which bolsters consumer spending and the fact that small to medium-sized businesses rely on home equity lines of credit to underwrite their businesses. True recovery can only happen with housing.

IMF Says Less Austerity, More Spending

Monday, April 22nd, 2013

For those who have stressed the need for austerity and deficit reduction, who think that fiscal cliffs and sequestration are a good corrective to reckless spending, it may be helpful to consider what the IMF is saying. Lowering the outlook for U.S. growth to 1.9% from 2%, IMF Economic Counselor Olivier Blanchard called the U.S. spending cuts, known as the sequester, “the wrong way to proceed.” The U.S., he said, should impose less belt-tightening now, when the economy is still gaining its footing, and more in the future.

Take a look at Europe where the 17 countries using the euro currency remain in recession. Many are cutting spending sharply and raising taxes to slash mountainous debt, but the austerity strategies are stifling growth. The UK is expected to grow 0.7% this year and by 1.5% in 2014 and that’s better than France or Germany. During a recent trip to Europe, U.S. Treasury Secretary Jacob Lew urged officials there to put more near-term emphasis on government spending to stimulate growth, as the U.S. did with its $800 billion stimulus from 2009 to 2011.

The IMF says next year will be better:  3% growth as the effects of the federal cutbacks fade and a housing rebound continues to bolster a strengthening private sector.

The IMF had been calling the global recovery “two-speed,” with emerging markets growing strongly and advanced economies weaker.  Now, it says, it’s a three-speed recovery, with a growing divide between a strengthening U.S. and a still floundering Eurozone.

Want to Feel Better About the Economy? Take a Look at the Rest of the World

Monday, September 10th, 2012

There is no doubt that America needs to get its economic mojo back: in the 2nd quarter its GDP grew at an annualized rate of 1.7 percent, according to revised figures published on August 29th.  That growth number is down from two percent in the 1st quarter and 4.1 percent in late 2011. But, anyone ready to ascribe that number to mismanagement or competition from emerging economies should consider the state of much of the developed world.

Europe remains the cautionary tale with GDP shrinking by 0.2 percent (an annualized decline of 0.7 percent) in the 2nd quarter. The Greeks are on the verge of quitting the common currency and Spain is looking for a bigger bailout.  According to the Economist, the research firm Markit is predicting a further fall in GDP in the 3rd quarter.

Finland’s economy shrank by 1.1% in the second quarter. The country had been one of the euro zone’s best performers, but the crisis is now starting to take its toll on exports, which account for 40% of Finnish GDP. In July the finance minister said Finland would “not hang itself to the euro at any cost”.

The Japanese economy is feeling the European gloom with exports to the European Union falling by a steep 25 percent in the year to July.  The only reason their economy grew by 3.5 percent over the last 12 months is because of all the reconstruction work after the tsunami and earthquake.

Even the high-flier BRIC countries (Brazil, Russia, India and China) are sputtering.  Brazil’s fall from grace has been particularly marked:  Brazil’s economy grew at an annualized pace of only 1.64 percent in the April-June period. It is forecasted to grow 1.9 percent this year, less than the 2.15 percent in the U.S. and 2.5 percent expected in Japan. One bright spot – Brazil scored the rare coup of winning the bid for the 2014 World Cup and the 2016 Summer Olympics, leading to $38.1 billion in foreign direct investment this year.

Flagging imports suggest that China’s slowdown will prove to be more severe than previously expected.  The country’s exporters are also having a hard time.  In August, new export orders for manufacturers were at their weakest since March 2009, according to Markit.

So, while the campaign rhetoric heats up, with each side blaming the other, it is important to see the bigger picture. A big part of our weak job numbers was that U.S. factory activity shrank for a third straight month in August — because of factors outside our control.  Weak demand from China (our 3rd largest market) hits our farmers, IT firms and chemical companies. When Europe contracts, that makes our manufacturing free fall because they buy 20 percent of our exports.  In the end, we need to place our woes in context and recognize that the recession is indeed world-wide.

The New Nostradamus: The IMF, the US and the Fiscal Cliffhanger

Monday, July 23rd, 2012

The French soothsayer, Michel de Nostredame or Nostradamus, became something of a celebrity starting in the 1550s because of his prophecies in all he made 6,338 predictions in a series of almanacs — everything from plagues to invasions to the end of the world. People still raise his name today when they speak about impending danger (remember Y2K?).

Our own version of a Nostradaman prophecy may be the upcoming fiscal cliff at the end of the year, which has been painted in similarly dire terms. The latest is the IMF, which in the process of shaving its 2013 forecast for global growth to 3.9 percent from its previous 4.1 percent, also issued a sober warning about the scheduled expiration of Bush-era tax cuts and $1.2 trillion in automatic spending reductions which will hit the US at the end of the year.  If the United States failed to deal with the “fiscal cliff” it could potentially be an “enormous shock” to the U.S. and other advanced economies, IMF Chief Economist Olivier Blanchard told a news conference that if all the provisions go into effect, they would take more than $500 billion out of the economy in 2013 alone.

The mix of tax increases and spending cuts would slash the deficit in half – to 3.8% of gross domestic product, down from the 7.6% projected for this year. The IMF has recommended a slower course of deficit reduction, so that it drops by just 1 percentage point next year. “A more modest retrenchment in 2013 … would be a better option,” the IMF said.

A new study conducted for the Aerospace Industries Association says the cuts in federal spending will cost the economy more than 2 million jobs, from defense contracting to border security to education, and reduce the nation’s gross domestic product by $215 billion next year, if Congress fails to resolve the looming budget crisis.  Add to this the fact that the country’s debt load will near its legal limit of $16.394 trillion next year, requiring the political theater of Congress raising the debt ceiling to pay all the bills the government has incurred.

As with Nostradaman prophecies, the worst part of all of this isn’t the actual event (which often passes with a whimper) but the uncertainty and paralysis that precedes it. As these warnings build, the markets roil, ratings get cut, businesses sit on their money in a case of nerves and people pull back on buying government debt because the US starts  to look like a risky bet.

History proves it’s not so much the prophecy as the press around it.

Got Lemons? Make Lemonade

Wednesday, February 25th, 2009

Amidst all the depressing economic news of late, it’s like a breath of spring when a related news article elicits a hearty laugh.

bernard-madoff-doll1The rage of this week’s 2009 Toy Fair at New York City’s Jacob Javits Convention Center was the Smash-Me Bernie doll, a $99.95 devil-suited, pitchfork-wielding effigy of legendary swindler Bernard Madoff.  The doll is accessorized with a gold commemorative hammer, all the easier to vent some frustration.

The doll’s maker is Phoenix-based Mini-Me ModelWorks, which creates custom-made dolls made of a tough plastic resin.  According to Graeme Warring, the company’s president, he decided to make the doll after a friend lost money in Madoff’s alleged Ponzi scheme.  So far, Warring has more than 1,000 orders for the Smash-Me Bernie doll.

Lenders Get Green

Thursday, October 2nd, 2008

Marketing green is a new step in the emergence of sustainability.  In a tight credit environment when rates have climbed and LTVs have dropped, green may offer a way to ease the underwriting criteria on a deal.

The green-building revolution is spreading, and the underwriting community has embraced sustainable design because it enhances marketability and income.  To illustrate, net rent in a particular office market may include a $15 psf in base rent and another $8 in common-area costs – the latter driven largely by energy and water-use costs.  It adds up that if you reduce that common-area cost and pass the savings along to the tenant, your building will be more attractive because it operating costs are lower.

Community banks in environmentally conscious markets or in areas where local building requirements foster sustainable projects are offering standard loans with terms favoring green development.  In San Francisco, the New Resource Bank offers qualifying green projects a generous loan-to-value ratio of as much as 80 percent, and a slightly better interest rate than it does to conventional project developers.  Green lenders look for incremental steps such as preferential review, quarter-point interest-rate discounts, longer amortization and relatively small changes in return for LEED or Energy-Star certification.

In Houston, the Green Bank recently moved into a 20,000 SF headquarters specifically designed to earn LEED’s gold certification.  Previously known as the Redstone Bank, it was acquired by a local banker who rebranded it as Green Bank and launched in January of 2007 with a focus on sustainability.  Just 1 ½ years later, Green Bank has $275 million in assets and is creating a group of environmentally conscious companies and individuals.  One vital goal is to educate team members to identify green-oriented customers, whether they are recyclers or LEED-certified construction space users.

Economy Grows 3.3 Percent During 2Q

Wednesday, September 3rd, 2008

Contrary to the recent grim news about home foreclosures, bank failures, the credit crunch, rising unemployment rates, soaring oil prices, inflation and stock-market jitters, the United States’ economy — surprisingly — grew by 3.3 percent during the second quarter of 2008.

The economy grew at its fastest pace in nearly a year, thanks primarily to foreign buyers purchasing inexpensive U.S. exports, as well as the tax rebates that sent Americans on a shopping spree.

According to Commerce Department statistics, the GDP increased at a 3.3 annual rate from April through June.  This revised statistic represents a significant improvement over the initial 1.9 percent estimate, and exceeded economists’ expectations of a 2.7 percent growth rate.

The rebound was welcome news after two grim quarters.  The economy contracted during the last three months of 2007, and registered a feeble 0.9 percent growth rate during the 1st quarter of 2008.  Spring’s 3.3 percent performance was the best result since the third quarter of 2007, when the economy grew by an impressive 4.8 percent.

Still, the good news is something of a fluke.  The economy is still quite fragile, according to Federal Reserve Chairman Ben Bernanke, who recently warned that the weakness will remain throughout 2008.  Analysts expect the economy to hit another pothole during the 4th quarter, once the glow of the tax rebates dims.  Additionally, exports could decline if other nations experience similarly slowing economies.

Add presidential politics into the mix.  Democratic nominee Barack Obama favors a second government-stimulus package, while Republican John McCain supports free trade and other business measures to energize the economy.  With less than two months remaining until the election, the candidates are certain to have a lot more to say on how they plan to energize the economy.