2010: The Steps to Recovery
By: Ernest DesRochers, New York Regional Office
The party has been over for two years, and the real
estate industry has suffered from a severe hangover
since the beginning of 2008. The hangover is rapidly
coming to an end as the commercial real estate industry
should finally hit bottom by mid-2010. The recovery should commence thereafter. Full
recovery from this binge may take two years, with real traction in 2011
and a normalcy (whatever that is) by 2012 or 2013.
According to American Psychological Society, there
are six guiding principles that one must adhere to in order to get on the road
to recovery. The first principle is admitting
that we cannot completely control our addiction to make
bad loans as they are caused by bad
underwriting and bad economic conditions. Lenders must
recognize that extending and pretending can be a recipe
for disaster as they hide the truth of what is going on.
The second principle is recognizing there is
a greater power that can give strength. After
massive direct and indirect assistance from the
government through TARP and historically low interest
rates, the loan loss reserves in financial institutions
should be at levels this year that will allow them to
foreclose or strike deals with many overleveraged
The third and fourth principles are examining
past errors with the help of an experienced market
participant and make amends for making these errors.
We have begun to see this through increased
loan sales such as the recent Colony Capital purchase of
a 40% interest in a $1.0 billion portfolio of mixed
quality assets owned by the FDIC. These were 1,200 small
loan balance mortgages located in Florida, Nevada,
California and Georgia. One-third was performing and the
balance are non-performing or sub-performing. Collateral
included everything from funeral homes to land loans to
retail, multi-family, office and industrial. The price
was reportedly 44 cents.
The fifth principle is learning to live a new
life with a new code of behavior. Lending
should improve this year as more and more life company
lenders enter the market, albeit on a reduced basis, as
lending programs are probably less than half of what
they were in 2007. Pricing for new mortgages is
currently in the 300 to 350 over range with mortgage
terms of 5-10 years readily available. Loan-to-value
ratios for non-recourse debt are 65% and less, though
some institutions will go upwards of 70% for the right
deal. Loan sizing should be in the 10-12% range. Note
that underwriting guidelines will be strict, and lenders
will require actual cash investments in transactions.
Because of increased loan availability transaction
markets will continue to thaw and values should begin to
stabilize. We think that transactional cap rates will be
in a range 7.50% to 9.50%, depending on product type.
Money for deals to $25 million should be readily
available, slightly more difficult to $50 million, and
few options for those loans greater than $50 million.
Life companies, regional banks, and credit unions should
do the lion’s share of the business in 2010.
The sixth and last principle is helping
others that suffer from the same addictions or
compulsions. The CMBS market did improve in
late 2009; there were a couple of highly structured
transactions that were offered and successfully sold
into the market. Most notable was the very successful
$450 million Goldman Sachs offering on behalf of DDR.
This deal was highly structured, with a low average
loan-to-value ratio and amortization of 25 years.
Unfortunately, the CMBS market is where the most
serious addicted and compulsive behavior occurred.
According to the ULI / PWC Emerging Trends study there
are $200-$300 billion of average annual CMBS maturities
between now and 2015. Coupled with the fact that the
underlying structures are extremely complex and the real
estate markets themselves are not good, mounting levels
of troubled loans will likely occur through 2015 as
capital availability will be for the best-in-class
deals. Restoring confidence in a revamped CMBS model
should be a major priority for the government and
financial industry. "Louis, I think this is the
beginning of a beautiful friendship."
>> Continue reading:
2009 - A Beautiful Relationship that Ended in
a Nasty Divorce
Ernest DesRochers is Senior Vice President and
Regional Manager of NorthMarq
Capital's New York office. He can be reached at
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.