2009: A Beautiful Relationship That Ended in a
Nasty Divorce
By: Ernest DesRochers, New York Regional Office
For the commercial real estate industry, our current
real estate economy can best be described as the nasty
divorce in the aftermath of a beautiful relationship.
Like the Bogart character Rick Blaine in Casablanca,
real estate borrowers experienced a beautiful
relationship with their lenders and investors from
2000-2007 that was characterized by easy money, followed
by still easier money, and finally “Here take the money
and we will worry how you will pay me back later as
there is no real risk to this investment and I have it
securitized anyway!” Now borrowers can relate with the
cynical and somewhat jilted Rick Blaine, seems like a
good time to be drinking at "Rick's Café Américain."
The “aught” decade comes to a close in a manner
similar to that of the “aught” decade of 100 years
ago: Panic! The lyrics of “The Song for the Dumped”
by the Ben Folds Five best describes in a humorous
way the situation between Borrowers and Lenders:
“Give me back my money \ Give me back my money \I
want my money back\ and don't forget to give me back
my black t-shirt!”
The lack of capital that became evident in
mid-2008 continued through 2009. Conduit lenders
withdrew from the market, driven by the simple
premise that they did not make enough money in the
boom years to cover the losses now being incurred.
For portfolio lenders it was not getting paid enough
for the risk. Given the following statistics, who
could blame them for not making new loans?
- Alternative investments, such as corporate
bonds promised significantly less risk than what
was perceived in commercial real estate and had
significantly higher yields. Corporate spreads
hit an all-time high in mid-2009.
- According to Moody’s, commercial property
values peaked in October 2007 and have since
fallen almost 43.7% in aggregate through October
2009. Most of the decline (36.4%) occurred in
2009. This fall in values is the worst since the
Great Depression and greater than that of the
early 1990s.
- At the same time, commercial vacancy rates
continued to increase with vacancy rates
nationally in multi-family (8.4%) and retail
(18.6%) reaching all-time highs. Falling rents
and rent concessions are impacting bottom lines
and will continue in 2010. Asking rents for all
property types are down year-over-year. Class A
office rents in Manhattan are down 50% in some
cases.
- Investment sales were down more than 90% on a
dollar volume basis over the past two years and
down 72% in 2009 vs. 2008. 2008 was down 66%
over 2007.
- “Cap rate compression” became a greater part
of the lexicon: cap rates fell from the 8-10%
range in the early 2000s to 5-7% by 2007 and now
have increased to a range of 7.0%-9.0% with
another 60- to 90-basis-point rise forecasted by
CBRE Econometric Advisors through mid-2011.
Commercial property cap rates are benchmarked to
spreads over 10-year Treasuries. The current
spread is 200 bps above its 25-year average
(250+/- vs. 450+/-). The spread reflects the
risk premium in real estate transactions.
- According to Realpoint LLC, delinquent
balances of loans sold as CMBS grew to $38
billion in 2009 from $7.03 billion in 2008, a
440% increase. According to the MBA, the overall
CMBS delinquency rate is more than 4% in 3QE09
and is expected to double in 2010. In contrast,
life company and agency delinquencies are both
below 1%. Our NorthMarq service mortgage
portfolio of $39 billion in 5,530 loans is
0.67%. A positive sign did occur at the end of
the year in that only $601 million of CMBS loans
were transferred to special servicing in
December, the smallest increase in 15 months.
- Commercial real estate lending ground to a
halt in 2009. In 3QE09, commercial loan volume
originated by MBA member companies indicates
mortgage production volume from all sources
(banks, thrifts, agencies, life companies,
conduits, etc.) is approximately half that for
2008 and down 12% from 2QE09. More importantly,
volume is down 75% since 2007.
- Availability of capital had been limited at
best throughout the entire year. Most of the
lending came from insurance companies, banks and
credit unions during the first half of the year
with virtually none from conduits. Rates in
early 2009 generally ranged from 7.5% to 9% for
5- and 10-year mortgages. Today those rates are
generally 5.75% to 6.75% for the same 5- and
10-year mortgages. LTV ratios were generally 55%
and less at the start of the year. The year
ended with loans up to 65% available on a
non-recourse basis and up to 75% on a recourse
basis. Amortization on loans is very important
with 20-25 years the norm in any type of lender
transaction.
Capital was most available in the multi-family
lending arena with GSEs leading the way. Freddie Mac
and Fannie Mae both had near-record years in lending
with pricing up to 100 basis points lower than
insurance companies and banks through most of the
year. 75% leverage was readily available all year
though underwriting standards were more stringent.
Freddie Mac introduced a new CME program, which
currently has mortgage pricing of 175-200 bps over
Treasuries, making this very attractive.
>> Continue reading: 2010 - The Steps to
Recovery
__________________________________________________________________________________________________
Ernest DesRochers is Senior Vice President and
Regional Manager of NorthMarq
Capital's New York office. He can be reached at
edesrochers@northmarq.com.
NorthMarq offers commercial real estate services,
including brokerage, property management, corporate
solutions, investment sales and debt/equity services, to
investors and occupiers of commercial real estate from
its headquarters in Minneapolis, Minn. The company
manages more than 60 million sq. ft. of retail,
industrial and office assets in 22 markets around the
country and handles more than 7,500 transactions
annually. It also provides real estate debt and equity
financing, and commercial loan servicing in 32 offices
coast-to-coast, with an average of $10 billion in annual
production volume and services a loan portfolio of more
than $37 billion.