Posts Tagged ‘distressed assets’

Waiting for Defaults

Tuesday, October 5th, 2010

Commercial real estate may be in better shape than thought. Real estate professionals who had been expecting a worst-case scenario – an onrush of distressed commercial properties coming onto the market – are still waiting for that to come to fruition.  Ben Johnson, writing in the National Real Estate Investor, notes that “Keep on waiting/lurking seems to be the prevailing view.  According to New York-based researcher Real Capital Analytics, the default rate for commercial real estate mortgages held by the nation’s FDIC-insured depository institutions did increase by nine basis points to 4.28 percent in the 2nd quarter, up from 4.19 percent in the 1st quarter. For those of you keeping score on a historical scorecard, at its cyclical low in the 1st half of 2008, the commercial mortgage default rate was 0.58 percent.  A mere pittance.  Year-over-year, the tale is more striking, with the commercial default rate up by 139 basis points.”

Instead of accelerating, Johnson says that the negative drift seems to be slowing.  “Year-over-year increases had been accelerating for 13 consecutive quarters through the end of 2009, but have moderated more recently,” he said.  The dollar volume of commercial mortgages in default recorded the smallest increase since the 2nd quarter of 2007.  Approximately $46.2 billion of bank-held commercial mortgages currently are in default, an increase of $547 million from the 1st quarter of 2010.

Wells Fargo, LNR Looking to Sell $2 Billion in Distressed Assets

Thursday, June 3rd, 2010

One bank, one special servicer, both offering $1 billion in distressed real estate.  Wells Fargo & Company and LNR Property Corporation are hunting for buyers for $1 billion each of distressed commercial real estate assets and loans.  San Francisco-based Wells Fargo, the nation’s largest commercial real estate lender, is soliciting bids on $500 million to $1 billion worth of office and hotels.  LNR, the nation’s largest CBMS special servicer, is looking for buyers for approximately $1 billion worth of defaulted loans.

“The availability of capital and better prices than a year ago are driving sellers to move things off their balance sheets,” says Matthew Anderson, managing director at research firm Foresight Analytics.  “Depending on how the auction goes, you may see more of this.”  According to Anderson, banks and special servicers currently are holding approximately $185 billion in distressed loans.  Of those, Wells Fargo had $12.9 billion in non-performing loans in the 1st quarter.  LNR is the special servicer for $24 billion in delinquent assets, according to Bloomberg.

Wells Fargo and LNR were left holding real estate debt once the global credit crisis and recession sent commercial values down a whopping 42 percent from their October of 2007 high.  The majority – as much as 60 percent — of the assets that Wells Fargo is selling were inherited when the bank purchased Wachovia Corporation in October 2008.  If Wells Fargo and LNR can sell the properties, the move would represent an improved market for distressed assets, according to Ben Thypin, an analyst with Real Capital Analytics, Inc.

“We’re certainly aggressive in terms of liquidating the portfolio,” said David Hoyt, who heads Wells Fargo’s wholesale banking arm.  “At the moment, there is a lot of liquidity in the market to resolve problems.”

Investors Still Wary of Distressed Assets

Wednesday, September 23rd, 2009

Commercial real estate investors are taking a wait-and-see attitude before jumping in and buying distressed assets, according to an Ernst & Young study.  “We haven’t seen many portfolio transactions so far,” says the study’s author, Chris Seyfarth, who is national director of E&Y’s non-performing loans.  “Given the size and the magnitude of the untitledproblem with banks, I think the expectation is that at some point we’ll start seeing sizable portfolio transactions.”

According to the E&Y study, 53 percent of respondents have purchased distressed or non-performing loans in the last 18 months.  Another 45 percent believe it is too early to even think of buying non-performing loans.  Distressed assets are “piling up faster than they’re being resolved,” Seyfarth says.  “The broad view is that commercial real estate assets are getting worse, not better, and that’s going to impact financial institutions.  The issue is that the price expectations are different between the two players, and in some cases significantly different.”

Only 35 percent of those investors claim to have return requirements above 20 percent, and an equal number actually are shooting for returns in the 10 percent to 15 percent range,” Seyfarth concludes.  Once the anticipated tsunami of distressed assets his the market, it could be met with a rush of pent-up capital, all trying to get the best deals at the same time – which may, ironically, further cushion price declines, resulting in a more competitive investment market.

News about the spike in housing starts and the buoyancy of the stock market, which has recaptured $3 billion in value in just a few months, suggests that the recession has at least stabilized and economic recovery is near.  This should encourage increased liquidity in the credit markets, eventually supporting the commercial real estate investment market.

Investment Banking in an Economic Meltdown

Friday, May 1st, 2009

Investment banks are hunkering down to preserve capital, primarily because there are grave concerns about current property valuations, says Charles Krawitz, Senior Loan Sales Asset Manager, Fifth Third Bank, in an interview for The Alter Group podcasts on real estate.  Banks are reluctant to lend $10 million to a property that might be worth only $8 million, and with good reason. Multifamily housing currently is the least distressed asset class, thanks to Fannie Mae, Freddie Mac and FHA financing that is creating a market for loans on these properties.

Distressed assets fall into three tranches – buildings, loans and securities. According to Charles, if a property is struggling and the cash flow is impaired, there is a commercial lending problem. In a CMBS structure, the loan has been sliced and diced so many times that it’s likely to be toxic and beyond restructuring. Fully 1.8 percent of commercial loans cannot be restructured, and $400 billion in loans are rolling over this year alone. The challenge is to pin down values in a distressed market when there are no comparable sales statistics.

One smart thing that the government has done is expand loans to small businesses through the Small Business Association (SBA). With interest rates so low, this is very beneficial to small businesses, Charles notes. Capital is once again flowing – though not in a tsunami – but that’s very good news. The government will be an equity partner, and it’s likely that certain approved vendors will be part of this program. A lot of questions remain, but it’s a very strong effort on the government’s part.

Use the player below to listen to Charles Krawitz’s entire interview on the state of investment banking:

 
icon for podpress  Charles Krawitz on the Credit Crisis: Play Now | Play in Popup | Download

Sold!

Wednesday, March 18th, 2009

The successful auction of 45 condominiums at the Vetro project in the South Loop raked in sales of more than $12.1 million – though sharply discounted at $258 PSF.  That’s 73 percent of the original $353 PSF asking price, but far better than the 61 percent the auctioneers expected.

auctioneer-with-gavelThis isn’t the first time that distressed condos have been auctioned lately.  In December, 20 units at Jazz on the Boulevard in North Kenwood were auctioned with deep discounts.  And in January, 34 condominiums in the McKinley Park Lofts development were auctioned, again at bargain prices.

This is extremely hopeful news, because the simple act of auctioning off the condos stabilizes the assets and proves that troubled projects can save themselves.  These auctions also signal signs of elasticity in the residential market.

Similarly, office buyers should be ready to purchase quickly, since cherry-picking Class A assets may have an extremely brief window of opportunity.  The $300 billion in opportunity funds means there is plenty of competition for good deals.