Posts Tagged ‘CoStar Group’

QE3 A Boon to CMBS

Tuesday, November 13th, 2012

If history repeats itself, QE3 will be good for commercial mortgage-backed securities (CMBS). The Fed’s third round of quantitative easing – which is purchasing $40 billion of residential mortgage-backed securities (RMBS) each month from Fannie Mae and Freddie Mac – will free up money for the commercial real estate market and lure investors away from other vehicles in their hunt for maximum yield.  QE3 is expected to last at least until 2015.

“The primary difference between 2012 and 2010 is that commercial property prices in healthy markets are stronger than they were just two years ago.  At its peak, CMBS constituted 40 percent of all commercial real estate loans,” said John O’Callahan of CoStar.  O’Callahan notes that “Investment returns of 40 percent or more for riskier assets during QE1 were largely a result of a bounce-back from the lows caused by investor panic in late 2008 through early 2009.  The overall impact of QE becomes clearer upon examining QE2.  Prices of equities and high-yield bonds, including CMBS, gained a respectable 12 to 15 percent.”

Low interest rates mean that returns will narrow to as little as 150 basis points, forcing investors to look elsewhere for respectable yields.  Currently, B-piece CMBS investors are achieving 20 percent and higher yields.  By contrast, the Dow Jones Industrial Average’s yield has remained below three percent each of the last 20 years.

CMBS has “been a boon for us,” said Kenneth Cohen, head of CMBS at UBS Securities.  “You’ve seen a fairly good size increase in loan pipelines.  Our pipeline has increased probably 50 percent over the last six weeks.”  Borrowers also are cashing in on the favorable loan terms.  According to Fitch Ratings, loans in 2012 are averaging 95.7 percent of a stressed property’s estimated value; that’s up from 91.6 percent in 2011.

Despite the good news, industry experts don’t expect the resurgent CMBS market to resolve all financing woes.  For example, the encouraging loan terms are of minimal help to commercial real estate owners who are under water, nor will new issuance be adequate to refinance the $54 billion in CMBS loans coming due this year.  Additionally, some ratings firms warn that the credit quality of CMBS loans could increase risk for some investors.  In response, Moody’s Investor Services’ now requires that senior bonds have expensive credit protection.

CMBS Stages a Comeback

Monday, March 14th, 2011

CMBS activity came back strongly during February with more than $6.5 billion in new securitization reported. Additionally, Freddie Mac brought two multifamily-backed offerings totaling $1.86 billion to market.  February’s level of activity is almost two-thirds of all CMBS deals offered in 2010.  The level resembles 2007, when commercial mortgage-backed securities offerings were at their peak.  Because of CMBS’ resurgence, the commercial real estate market is both bullish and fretful.  The rising volume in CMBS loan origination is a welcome sign that liquidity is returning to the markets.  The fact that a relatively large amount was created during the year’s shortest month is raising worries that the still delicate condition of commercial real estate is being sustained by too-eager lenders.

“I think it is clear that CMBS is coming back — something that is probably positive in the short-term as far as jump-starting the investment marketplace and helping to establish a new baseline for pricing while, hopefully, alleviating some of the distress issues out there. But is it a good thing in the long run?” asks Garrick Brown, Northern California research director of Cassidy Turley BT Commercial asked.

“As the number of participants in CMBS lending continues to increase, the competition to originate loans eligible for new CMBS deals will be fierce,” said John O’Callahan, capital markets strategist for CoStar Group.  “Insurance companies, GSEs (government-sponsored enterprises), and even the healthier large banks will lend on the best properties in desirable markets, while CMBS originators will compete among themselves for the leftovers. They will have to cast a wider net across all markets to garner the volumes anticipated in 2011.”

Just 15 months after the initial CMBS issuance, structural, leverage and issuance amount trends have quickly changed, according to Standard & Poor’s. The ‘CMBS 2.0’ market started with the pricing of three single-borrower transactions with relatively simple structures in late 2009; more recent deals have been more complex, more highly leveraged and with significantly higher opening balances.  “Most recently, three $1.2 billion plus conduit/fusion deals were issued this month, each of which included an average of 10 principal and interest bonds and two interest-only classes.  Compared with late-2009 issuances, the newer multi-borrower deals have higher leverage, less debt service coverage and somewhat looser underwriting,” says Standard & Poor’s analyst James Manzi.

Despite the good news from February, Trepp LLC, a provider of commercial mortgage-backed securities (CMBS) and commercial mortgage information, analytics and technology to the global securities and investment management industry, found that the CMBS delinquency rate rose 9.34 percent in January. The value of delinquent loans exceeds $61.4 billion.  “While the rate continues to head higher, optimists can point to the fact that the rate of increase is significantly smaller than it was in the prior two months,” said Manus Clancy, managing director of Trepp LLC.  “Pessimists can counter that the jump comes despite the fact that new issues continue to make their way into the calculation and servicers continue to resolve troubled loans.”

The re-emergence of CMBS does not mean a return to the go-go years of 2004-2007. If $35 billion is issued in 2011, it will total just 15 percent of the peak.  Additionally, the revised underwriting criteria are far more conservative and issuances are smaller and geared toward low-risk assets.  Significantly, originators are more frequently required to retain stakes in the offering.  The CMBS market is expected to steadily climb this year and could see additional issuance in 2012, perhaps rising to $100 billion by 2013.  This would still be less than half the peak level of 2007, but a substantial amount, bringing desirable liquidity to the commercial real estate market.

Distressed CRE Has Hit a Plateau

Monday, January 10th, 2011

Distressed CRE Has Hit a PlateauDistressed commercial real estate volumes seem to have reached a plateau of $186.9 billion in October,  according to a report prepared by Delta Associates that crunched numbers provided by Real Capital Analytics.  The trend has been apparent for several months, according to Delta’s CEO Greg Leisch.

Even as the industry breathes a collective sigh of relief, the question remains:  When will the amount of distress start to recede?  Industry experts believe that is unlikely to happen before 2012.  According to Delta, the plateau first came onto the scene in the spring of 2010, though the firm doesn’t expect any consequential progress next year.  Leisch says that lenders will continue to extend debt obligations, even as commercial property values stabilize in some markets.  2011 is likely to bring yet more pain, with $300 billion worth of CRE loans coming due.  Delta’s report notes that the office sector has the greatest number of distressed assets, valued at $45.6 billion nationally.

There’s also good news in the fact that commercial property values increased 1.3 percent in October, according to Moody’s Investors Service.  That’s the second consecutive monthly gain and represents a 3.2 percent increased over the previous year, notes the Moody’s/REAL Commercial Property Price Index.  The Moody’s/REAL Index is 42 percent below the high point it reached in 2007.

Robert Bach, chief economist for Grubb & Ellis, Inc., said demand is rising for trophy office buildings in cities such as New York, San Francisco and Washington, D.C.  In Chicago, 300 North LaSalle went for $655 million and the Hyatt Center fetched $625 million.  Next year, investors may purchase lower-quality buildings in prime markets, and top-tier office towers in secondary markets.  “This investor enthusiasm has been confined to core properties in primary, supply-constrained markets,” Bach said.  “There’s still a lot of distress out there.”  Despite the remaining distress, commercial properties sales doubled to $16 billion during the 3rd quarter when compared with the same timeframe in 2009, according to Real Capital Analytics East Coast properties averaged a 22 percent increase over 2009, with prices rising 9.1 percent in New York City and 17 percent in Washington, D.C.

Foreign Governments Paying Cash for Pricey Manhattan Real Estate

Thursday, May 27th, 2010

Foreign governments are snapping up prime Manhattan real estate for consulates, U.N. offices.Foreign governments are a growth engine for New York City commercial and residential real estate at a time when many cash-strapped European nations are facing financial crises.  For example, Sri Lanka’s Permanent Mission to the United Nations has $8 million to spend and is looking at Manhattan office space.  Laos recently paid $4.2 million in cash for a five-story townhouse in the Murray Hill neighborhood.  Writing in the Wall Street Journal, Anton Troianovski notes that “Even the Western Hemisphere’s poorest country – Haiti – was gearing up to bid on a Second Avenue office condominium when the earthquake struck and derailed its plans.”

Foreign governments “are almost the only game in town,” according to Ken Krasnow, managing director with Massey Knakal.  During the boom years, foreign governments looking to buy real estate for consulates and U.N. missions found stiff competition from private developers.  Since last year, however, Senegal, Singapore, South Korea and the United Arab Emirates have purchased prime properties for redevelopment.  Additionally, governments are paying top dollar – usually in cash – for office space or land sites that are within walking distance of the United Nations.  Troianovski notes that “This trend underscores the bench strength of New York real estate:  When certain buying groups move to the sidelines, others are waiting to take their place.”

Dealing with foreign governments means that the transaction typically progresses at a glacial pace.  Philips International spent three years in negotiations with the Ivory Coast to close on an $8 million office condominium at 800 Second Avenue.  The transaction, which closed last September, spent 377 days in escrow.

Is CRE Seeing Light at the End of the Tunnel?

Wednesday, May 19th, 2010

First quarter bank returns for commercial real estate not as bad as once predicted.  As the 1st quarter 2010 numbers come in, banks across the country are still uneasy about the short-term outlook for commercial real estate – and their portfolios in particular.  At the same time, there is a growing sense that the potential for disaster has faded and that problems are being resolved.

In general, banks reported that troubled loan assets were moving through their books.  Older construction loans are being converted to term loans, which gives borrowers an opportunity to hang on when cash flow is sluggish.  At the same time, banks are reporting that new non-performing commercial real estate loans were coming in at a slower pace.  Some loans labeled as non-performing were moving into the real estate owned (REO) grouping, meaning that they will eventually be sold back into the marketplace.  The International Monetary Fund’s April 2010 Global Financial Stability Report offers a fairly optimistic point of view for bank losses in the near future, as anticipated write-downs on U.S. bank’s loan and securities books diminished in comparison to late last year.

“These improved short-term losses are due primarily to two factors.  First, signs of an improving economic environment have decreased loss expectations,” said Mark Fitzgerald, senior debt analyst for CoStar Group.  “Second, some write-downs have simply been pushed forward as external factors, including low interest rates, have enabled banks to push off distress into the future.  What are the implications for commercial real estate investors?  The banks supply approximately 50 percent of all debt capital to the sector, so lending capital could be constrained for some time.  However, there is a bright side.  If we continue to follow our current path, and distressed assets bleed slowly into the market over time, then healthy lenders may have enough capacity to meet low transaction volumes (especially with depressed pricing).  The large banks that have recently reported healthy earnings (primarily due to their trading and fixed-income operations) are a potential source of capital, and these banks have historically been under-allocated to commercial real estate compared to the overall banking sector.”