by David Bodamer December 22nd, 2008
U.S. commercial properties at risk of default could triple if rental income from office, retail and apartment buildings drops by even 5 percent, a likely possibility given the recession, according to research by New York-based real estate analysts at Reis Inc.
Lenders that used optimistic rent estimates to grant mortgages beginning in 2005 stand to lose as much as $23.1 billion, or 7.02 percent, of total unpaid balances if landlords lose 5 percent of net operating income, according to Reis. Analysts examined data on 22,890 properties that together may account for unpaid loans of about $329 billion in 2009, said Victor Calanog, director of research.
Banks are at risk as office vacancies are forecast to rise to 15.6 percent next year from an estimated 14.6 percent at the end of 2008. Lenders who sold commercial mortgage-backed securities to pension funds, investment banks and foreign governments have been hit by more than $1 trillion in losses and asset writedowns connected to bad residential loans.
“A large decline in net operating income isn’t necessary to shift a lot of properties underlying CMBS loans into debt- service coverage ratios that would be worrisome,” Calanog said in an interview.
Link.
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by David Bodamer December 22nd, 2008
It’s been a while since I posted anything on the lighter side. The Washington Post has an entertaining story about how a change in mall Santas caused some dischord in the D.C. suburbs.
Until this season, Mann had been the mall’s only Santa. Before the mall opened in 1999, Mann played Santa at Tysons Galleria for several years.
I was saddened to learn that Mann would not be returning as Santa. (I haven’t told the kids yet; too many questions will come of it.)
Matt Bressler of Sterling was also upset at the news. His children have been photographed with Mann every year since 1993. Bressler’s kids are now 20 and 22, and as they grew, he said, they never turned down an opportunity to have their picture taken with Santa. Bressler and his wife, Deb, joined their children in the photos beginning in 2001.
Now that Mann is absent from the mall, the Bresslers have decided their annual Christmas photo tradition will come to an end. “We could not possibly have our picture taken with a pretend Santa now,” Bressler said.
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by David Bodamer December 22nd, 2008
A recent letter sent to Treasury Secretary Henry Paulson, and signed by a dozen real-estate trade groups, painted a bleak scenario: “Right now, we believe there is insufficient systemic capacity to refinance expiring, performing commercial real-estate loans,” said the letter. “For many borrowers, [credit] simply is not available,” the letter noted.
To head off some of the impending pain, the industry is asking to be included in a new $200 billion loan program initially created by the government to salvage the market for car loans, student loans and credit-card debt. This money is intended to go directly to help investors finance purchases of securities backed by these assets. If commercial real estate is included, banks might have an incentive to make more loans to developers since they’d be able to repackage and sell them more easily to investors with the assurance of government backing.
As part of their lobbying efforts, some industry representatives have asked lawmakers to explore the idea of setting up a separate program aimed at boosting lending to commercial real estate only.
“We’ve been urging Washington to put this as one of the top priorities in dealing with the economy,” says Steven Spinola, president of the Real Estate Board of New York, underscoring the need for the government to help spur commercial property lending either directly or indirectly.
Link. You can download the full letter, which is signed by the Real Estate Roundtable, the American Land Title Association, the American Resort Development Association, the Appraisal Institute, the Building Owners and Managers Association, International, the International Council of Shopping Centers, the Mortgage Bankers Association, the National Apartment Association, the National Association of Industrial and Office Properties, the National Association of Real Estate Investment Managers, the National Association of Real Estate Investment Trusts and the National Multi Housing Council here.
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Example of Owner Walking Away
by David Bodamer December 22nd, 2008
As I posted earlier, commercial real estate groups have begun to directly push for a bailout. Of course, a few months back the same groups got on board backing Henry Paulson’s questionable TARP plan. This new appeal makes more sense to me since the groups are being more specific about what they want as opposed to getting behind Paulson’s original amorphous plan that provided few details on actually how the government was going to value and buy troubled assets.
In any case, the motivation for a bailout is becoming more clear as examples like this are starting to crop up.
It’s become apparent that financing was a central component to how commercial real estate worked the past few years. Developers and owners became reliant on being able to roll over debt rather than paying it off. Overall, there’s more than $3 trillion in outstanding commercial real estate debt with $400 billion coming due through the end of 2009, according to the statement the trade groups put out. It seems to me that a more stable model might be on where the industry becomes less reliant on debt. So is the proposed bailout about extending commercial real estate a lifeline enabling it to get there? Or is it about sustaining what very well may be an unsustainable business model?
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