Residential Property Analytics

Goodbye For Now...

2009-08-13T20:16:00.000-07:00

As of 9/1 I will be starting a very challenging new position, and between then and now we will be relocating from Seattle to Los Angeles. On the down side, I expect it will be many months before I will be able to make time for regular posting. On the plus side, I expect I will have a whole new set of topics to talk about when I resume posting.Thanks to my regular readers - blogging is a lot more

Now is a Great Time to be a Major Tenant: Part 2

2009-08-01T11:50:00.001-07:00

A few weeks ago I posted about the opportunity for a major tenant to lease at 250 Montgomery Street. A major New York law firm did such a deal last week. From the Wall Street Journal article, Reduction in Rent for Law Firm Proves Patience Is a Virtue: In 2007, when the law firm of Orrick, Herrington & Sutcliffe LLP began looking for a new location for its New York office, rents in a

Knowing When to Stop

2009-07-31T06:27:00.001-07:00

When you think about bad CRE loans, most people picture homes being demolished in Victorville, unsold high rise condos in Miami, or vacant office buildings in Orange County. But how about Minnesota? From a Minneapolis Star Tribune story (hat tip Calculated Risk): Minnesota ranks fifth nationally, with 50, or 12 percent, of its banks carrying particularly high levels of dead real estate loans,

More on Fractured Condos

2009-07-30T07:00:00.001-07:00

Fractured condos are condo projects where only a portion of the project is sold to individual owners, and the remaining units are rented to tenants. A couple of recent examples: The Millworks at Novato (from the Marin Independent Journal): Millworks, a 420,882-square-foot residential/commercial project at De Long and Reichert avenues, had a grand opening in May but has only sold two of 124

Borrower Risk, Net Worth, and Liquidity

2009-07-29T06:38:00.001-07:00

You are considering making a $10,000,000 loan to one of two borrowers. Both borrowers have a $10,000,000 net worth and $1,000,000 in cash. Your astrologer has told you one borrower will default and the other won’t, but she can’t tell you which one. You are allowed to ask each borrower three questions. What do you ask? Here are my questions: What are your total liabilities (contingent and

Commercial Real Estate Market Stability and Government Centers

2009-07-28T06:46:00.001-07:00

Last week I posted on the merits of college town markets (although I glossed over the reasons – Chris Rodriguez goes into more detail in his post “Commercial Real Estate in College Towns – Recession Proof”). Markets with heavy concentrations of government employees also weather the storm better. The charts below show the 12 month percent change in employment for the largest market in the state,

Retail CRE: Which Deals Get Renegotiated?

2009-07-27T06:43:00.001-07:00

One answer: new, incremental deals in outlying areas. Calculated Risk put up this post a few days ago: “We’re dumbfounded. We’ve been working on this deal for four-and-a-half years. I don’t know how, all of a sudden, the numbers don’t work.” JMW Development Principal Mark Johnson From the Minneapolis / St. Paul Business Journal: SuperTarget planned for Woodbury now on hold (ht Arnold)

Preserving Favorable Financing in Bankruptcy

2009-07-26T08:59:00.001-07:00

Section 1124 of the Bankruptcy Code allows borrowers to reinstate debt under certain conditions. Via Zero Hedge, an excerpt from a letter from Watchell Lipton reporting a settlement in the Spectrum Brands bankruptcy case: Section 1124 of the Bankruptcy Code provides that if, pursuant to its Chapter 11 plan, a debtor cures all nonbankruptcy defaults under a debt instrument and does not alter

REITs Positioning to Take on CRE Debt

2009-07-25T08:36:00.001-07:00

As banks pull back from CRE debt and the CMBS market lies dormant, REITs are raising capital to step in. From REIT Wrecks: In addition to LRCF, Alliance Bernstein, Angelo Gordon, Apollo Global Management, Colony Capital, Starwood Capital and Western Asset Management have all registered to raise equity for their own Mortgage REITs… The filings make for great reading. Ladder said there is

Commercial Real Estate Market Stability and College Towns

2009-07-24T06:46:00.001-07:00

If you’re looking for CRE markets that are insulated from downturns, college towns are a good place to start. The Creative Class post “Where Unemployment Is Worse Than Expected” analyzes the performance of various metro areas in this recession. Here’s one of their graphs: Low and to the left is good (Iowa City), high and to the right is bad (Detroit, Kokomo and Elkhart). An excerpt from the

Picking the Right Distressed Asset Broker

2009-07-23T07:04:00.001-07:00

If you’re selling in this market, almost by definition you, your asset, or both are distressed. It’s also pretty likely that unless you were selling assets back in the early 1990’s you’ve not been a seller in a market like this. What to do? The short answer is to find someone who is successful at moving similar product in your market. For example, if I were the unfortunate owner of undeveloped

Real Estate Values, Uncertainty, and Anchoring

2009-07-22T06:50:00.001-07:00

Everyone knows that real estate values today are much different than the values assigned to the same real estate two or three years ago. Elena Panaritis argues that value uncertainty is the underlying cause of our crisis in her Financial Times post “The Real Estate Roots of the Crisis in the US”. Some excerpts: Traditionally, economists are trained to assume that pricing in general is a point

Zombie Banks’ Distressed Assets

2009-07-21T09:02:00.001-07:00

John Reeder’s post Distressed Assets Market and FDIC Closures on Real Property Alpha is a must read for those that want to understand what’s going on with regional banks. An excerpt: Our business working in the commercial real estate industry (see the Deal Breaker site, or upcoming Sperry Van Ness auction) puts us on the front lines of the current blow-up that is going on in the banking

Are Fractured Condos a Good Investment Opportunity?

2009-07-20T07:27:00.001-07:00

A fractured condo project is one in which only some of the units have been sold. They occur when sales stall, and usually the construction lender ends up owning the project. Some see these projects as a great investment opportunity. An excerpt from Unnatural Rent: In fact, one of the more promising investment opportunities may be taking over broken condo developments, for instance, a 100-

New Blog Feature

2009-07-19T08:24:00.001-07:00

Most of my posts are prompted by what I read on other sites, but I don’t have time to discuss everything I find interesting. I’ve added a “Shared Item” gadget on the right sidebar under the email subscription for these posts by others. I hope you find them interesting too.

The Problem With Medians

2009-07-18T07:40:00.001-07:00

Prices, vacancy rates, rents - most pronouncements of real estate trends are the medians of a set of data. These reports are largely meaningless, or, even worse, actively misleading. Lansner on Real Estate’s post “Is Median Price Giving Bum Signals?” quotes John Burns, and Orange County housing consultant, on the subject: We are extremely concerned that policy makers, banking and real estate

Why Lenders Don’t Modify Loans

2009-07-17T06:37:00.001-07:00

Economists at the Federal Reserve Bank of Boston and Atlanta have researched "Why Don’t Lenders Renegotiate More Home Mortgages?". Their conclusion also applies to commercial real estate: We argue for a very mundane explanation: lenders expect to recover more from foreclosure than from a modified loan. This may seem surprising, given the large losses lenders typically incur in foreclosure,

Why Haven’t There Been More Construction Loan Defaults?

2009-07-16T06:26:00.001-07:00

Delinquency rates for CRE construction loans are “only” 12%; why is that? Distressed Volatility quotes testimony from Richard Parkus - Head of CMBS and ABS Synthetics Research, Deutsche Bank (italics mine): 90+ day delinquency rates are currently in the 12% range for construction loans in bank portfolios, but are somewhat higher for construction loans in regional bank portfolios. In fact,

Illiquidity = Risk, Commercial Real Estate is Illiquid, Therefore Commercial Real Estate is Risky

2009-07-15T05:48:00.001-07:00

Illiquid investments are risky. From the Knowledge at Wharton Post “Why Economists Failed to Predict the Financial Crisis”: "When there's a default in one kind of bond, it causes reassessment of all the risks," says Wharton economics professor Richard Marston. "I don't think we have really fully learned from the LTCM crisis, or from other crises, the extent to which things are illiquid."

Trust and Workout Negotiations

2009-07-14T06:44:00.001-07:00

Two consecutive posts on trust showed up in my Google Reader (Trust, by Jonah Lehrer on Frontal Cortex, and A Matter of Trust, by Randy Pennington on the Sales and Sales Management Blog), which led me to think about the lack of trust inherent in most workout negotiations. First, is trust a necessary condition to do a loan workout? No – people who don’t trust each other can reach an agreement.

Complexity, Predictability, and Cascade Effects

2009-07-13T06:39:00.001-07:00

Duncan Watts has a great piece in the The Boston Globe titled, “Too Complex to Exist.” I love the illustration: Some excerpts: ON AUG. 10, 1996, a single power line in western Oregon brushed a tree and shorted out, triggering a massive cascade of power outages that spread across the western United States. Frantic engineers watched helplessly as the crisis unfolded, leaving nearly 10

Are Banks Failing to Mark Down Toxic Assets?

2009-07-12T10:35:00.001-07:00

There is a widespread believe that banks are failing to mark their toxic assets to their true value (see, for example, the Economist’s View post “The Fall of the Toxic Asset Plan”). A commenter on this post, however, has a rejoinder that rings true to me: I believe banks are generally marking to market their troubled assets at appropriate levels, not due to empirical evidence but in view of

Why Lenders Don’t Do Principal Writedowns

2009-07-11T12:08:00.001-07:00

If only lenders wrote off principal on loans in default, our problems would be solved. Gretchen Morgenson on her New York Times article So Many Foreclosures, So Little Logic: If banks have written down the value of these loans to the 40 cents on the dollar that they are fetching on foreclosures — the only true value for these homes right now — then why don’t they bite the bullet and reduce

Debacle at 250 Montgomery Street: Now is a Great Time to Be a Major Tenant

2009-07-10T05:52:00.001-07:00

GlobeSt.com has a story about the debacle at 250 Montgomery Street in San Francisco: Realty Finance Corp. of Connecticut has sold its original $47-million loan on a class A office building here for approximately $25 million or $200 per square foot, according to a source familiar with the transaction. The building is 250 Montgomery St., a 15-story, 126,736-square-foot office building completed

Debacle at 250 Montgomery Street: Other People’s Money

2009-07-09T06:08:00.001-07:00

Why Now Is a Great Time to Become a CRE Lender

2009-07-08T06:31:00.001-07:00

What would you do if you won the lottery? My wife and I have speculated about this, and we’ve always been pretty much in agreement (travel, a big loft in a major city, more travel, etc.). We haven’t played this game lately, however, because now I want to buy a bank and specialize in CRE lending, which is a goal I can tell she is not enthusiastic about. To be clear, now is not a good time to

After the Honeymoon: Trusting Loan Brokers

2009-07-07T06:33:00.001-07:00

Should a loan broker who has established a successful relationship with a lender be trusted by that lender? Not according to research by Mark Garmaise, a finance professor at UCLA Anderson (working paper “After the Honeymoon: Relationship Dynamics Between Mortgage Brokers and Banks”). From a July 6, 2009 Financial Times story on the research: The financial industry’s vaunted belief in trust

Rising Markets Create Lender Losses

2009-07-06T06:46:00.001-07:00

People anticipate the future will be like the past. From a DNA article, “Why Economists Can’t See a Recession Coming”: Robert J Barbera, chief economist, Investment Technology Group, in his book The Cost of Capitalism -- Understanding Market Mayhem and Stabilizing our Economic Future, writes: "Since the economy is not in a recession 80% of the time, the safe strategy is to predict recessions

“Evidence” on the Foreclosure Crisis

2009-07-05T21:40:00.001-07:00

Stan Liebowitz, an economics professor at University of Texas, Dallas, has an op ed piece in the Wall Street Journal touting the results of research he has done using “a huge national database containing millions of individual loans”. His conclusion: The analysis indicates that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had

Mortgage Modification Blues

2009-07-03T06:15:00.001-07:00

The New York Times article "Paper Avalanche Buries Plan to Stem Foreclosures" documents the logistical nightmare of processing single family mortgage modifications. An excerpt: A note in the system shows that the bank confirmed receiving documents on April 29 — pay stubs, tax returns, a letter disclosing her hardship, bank statements. Since then, the company has been waiting for WaMu to

Five Underwriting Issues Which Kill CRE Deals

2009-07-02T06:43:00.001-07:00

I have an article in the July, 2009 commercial edition of Scotsman Guide which talks about five underwriting issues CRE lenders are focusing on, and which frequently kill deals in this environment: Upcoming loan maturities on the Sponsor’s other deals Sponsor liquidity Sponsor exposure to distressed loan types (e.g. condo construction loans) Lack of Sponsor experience in the

The Commercial Real Estate Landslide

2009-07-01T06:33:00.001-07:00

Disasters are interesting, as evidenced by the success of shows like Destroyed in Seconds (30 minutes of one disaster after another, courtesy of the Discovery channel). A while ago the show aired this video of a landslide in Japan: The images have stuck with me, and I think there are some strong parallels to what is going on in commercial real estate: First and most obviously, a disaster

How to Best Index Commercial Real Estate Performance?

2009-06-30T21:09:00.001-07:00

Currer Bell (whose blog Unnatural Rents is highly recommended) asks a great question in a comment to my post criticizing Moody’s REAL index: I agree that the small sample size makes this index of questionable value. But the larger question becomes: How do you build an index to track commercial real estate performance? Moody's/REAL have gone for a repeat-sale methodology (pros: price movement

Bend, Oregon, and Elkhart, Indiana: Employment

2009-06-29T09:01:00.001-07:00

I was in Bend, Oregon on Friday. For those not in the Pacific Northwest, Bend is famous for its unemployment rate. From the AP, on June 3: The Labor Department said Wednesday that unemployment in April rose from a year earlier in all 372 metropolitan areas it tracks. Indiana's Elkhart-Goshen's rate jumped to 17.8 percent, up 12.7 percentage points from a year ago. The Indiana region, which

Housing Was Not Massively Overbuilt

2009-06-28T15:42:00.001-07:00

It’s widely taken as a given that because we have too many empty housing units now and because prices have collapsed, that housing was overbuilt. For example, from Unnatural Rent: In addition, the recession and rising unemployment have slowed down new household formation, encouraging people to live with roommates. In many markets, apartment rents are unlikely to post any growth during this

Waves of Stupid Money, and One Eye Money

2009-06-26T08:22:00.001-07:00

The Psy-Fi Blog has a post on Edward Miller’s research into irrational gambling, which gives some insight into bubble psychology. An excerpt: Edward M. Miller in Do The Ignorant Accumulate the Money has done some research around the effect on the stockmarket of slot machine investors and reckons that there are periods where waves of stupid money can genuinely cause the rough efficiency of

Construction Lending Blues

2009-06-25T05:52:00.001-07:00

Although most of what you read about CRE loan problems refers to CMBS loans, the reality is construction loan defaults are a much, much bigger problem. The reason you hear so much about CMBS is availability bias; CMBS loan performance is closely monitored and loan level data is readily available, while construction loan performance data is extremely fragmented. John Reeder at Real Property Alpha

Moody’s Commercial Property Price Indices are Meaningless

2009-06-24T06:38:00.001-07:00

The latest bad news on CRE prices, from Zero Hedge: Moody's has released its April Moody's/REAL Commercial Property Price Indices (CPPI) update and it is a doozy: -8.6%, after what many had expected was a shooting green reading of just -1.7% in March. The problem that many don't grasp, that even Moody's has finally caught on, is that once capitulation in CRE sets in, the bottom will be torn

Pain and Cheating

2009-06-23T06:53:00.001-07:00

These are two entirely separate topics which are both covered in an excellent talk by Dan Ariely on TED (which I found through this post on Geary Behavioral Economics). Some teaser questions answered in the video: Which is better, intense pain for a shorter period, or less intense pain for longer? Short answer: less intense pain over a longer period, ideally with some breaks in between

Valuing Note Purchases

2009-06-22T06:55:00.001-07:00

There is a common misconception that lenders know the value of their CRE loans. For example, here’s an excerpt from a Naked Capitalism post (Yves is talking about the PPIP Legacy Loan program): The problem isn't, contrary to PR designed to mislead the public, that the assets are hard to value. That holds only for an itty bitty percentage of the total. The real problem is that the banks are

Workout Strategies: “The Boss has Lost It!”

2009-06-21T17:38:00.001-07:00

Suppose you were the only wealthy member of a very large extended family. A kidnapper takes a niece – would you pay the ransom? Of course you would. The next week the kidnapper takes a nephew, and you pay again. The third week a cousin is taken, and you realize as wealthy as you are, you can’t pay for everyone’s return. How do you break this cycle? For lenders, loan modifications are like this.

Leverage and Return on Investment

2009-06-19T06:22:00.001-07:00

Last week Barry Ritholtz at The Big Picture had a good post on interest only CRE mortgages. In the comments I talked about why borrowers wanted IO (to goose the initial cash on cash return numbers), and in response one of the commenters made the point: Maximizing leverage implies boosting ROI. No, no, no. If anyone should have learned anything in the last two years, it’s that maximizing

Willingness to Pay, and Crescent Resources

2009-06-18T07:05:00.001-07:00

Generally, borrowers pay until they can’t (a theory I discuss in more detail in “Does Recourse Matter on Income Property Loans?"). There are exceptions, of course; a recent example is Crescent Resources, LLC, which (along with more than a hundred subsidiaries involved in separate developments) filed bankruptcy last week. From Pensions & Investments: Crescent Resources LLC, a joint venture

Why Are CMBS Multifamily Delinquency Rates So High?

2009-06-17T06:49:00.001-07:00

The 60 day delinquency rate for multifamily CMBS loans is skyrocketing. From a Fitch release: Declining performance, particularly in oversupplied markets, as well as in secondary and tertiary markets, has pushed the multifamily delinquency rate to 4.55%, the highest of all property types. Multifamily properties have been highly susceptible to default in CMBS during the current economic

Crescent Resources’ Bankruptcy and the Single Asset Entity Put Option

2009-06-16T06:22:00.001-07:00

Lenders’ plans to isolate their loans from borrowers’ problems on other properties are devolving to a borrower put option. The first big case testing the sanctity of single asset entities was General Growth Properties, which placed 166 of its malls in bankruptcy along with the parent company (see Todd Sullivan’s Valueplays for a nice summary of the status of this case). Now, Crescent Resources

Morgan Stanley Real Estate Group: The Problem With Partners II

2009-06-15T06:26:00.001-07:00

Morgan Stanley’s real estate partners are not happy. Excerpts from Pensions & Investments: Two investors — the $60.5 billion New Jersey State Investment Council and the $3.86 billion Contra Costa County Employees Retirement Association — backed out of their commitments to its latest closed-end fund, the approximately $5 billion Morgan Stanley Real Estate Fund VII. Contra Costa had committed

Loan Paydowns from the Borrower’s Perspective

2009-06-12T06:45:00.001-07:00

I previously posted comparing CRE underwriting in 2006 and today (bottom line, even if your project income is unchanged, loans are 15-20% smaller, mostly because cap rates have increased). Suppose you have one of those 2006 loans and it’s maturing. What should you do? A look at the numbers reveals borrowers are much better off if they can negotiate an extension. Here’s an example drawn from an

CRE Interest Only Revisited

2009-06-11T07:05:00.001-07:00

Barry Ritholtz at The Big Picture has a good post today on interest only CRE mortgages (although I think he got one thing wrong, as discussed below). Interest only structures were very common during the boom. Sometimes loans were IO for the full term, but more often the loan was IO for a two, three, or five year period, so many loans made at the peak are seeing 15% –20% increases in payments now

Home Court Advantage in Real Estate

2009-06-10T15:44:00.001-07:00

Home court advantage is a huge factor in sports; for example, historically the home team in deciding games has won 78 of 97 games up until the second round of the 2007 NBA Playoffs. There is a comparable effect in commercial real estate. I learned about real estate home court advantage from Gus Williams, the Seattle-based basketball star that led the Sonics to their 1979 championship. Somehow

Getting Tilled: How a $6,425 Truck Loan May Decide the Fate of General Growth Properties

2009-06-09T06:43:00.001-07:00

General Growth Properties, the bankrupt mall owner, has $27,700,000,000 in debt outstanding. The fate of the company will depend on the restructured terms of that debt. Those terms will probably be set according to a Supreme Court precedent which restructured a subprime truck loan. Lee Till filed Chapter 13 bankruptcy and attempted to get the interest rate reduced on the loan secured by his 1991

Craigslist Unglues Apartment Rents

2009-06-08T06:52:00.001-07:00

After reading John Reeder’s post over on Real Property Alpha about fundamental changes in the CRE market, I started listing some of the changes I’ve been seeing. The first on my list is the effect better information is having on the stickiness of rents. In the good old days when the market softened you might need to drop your rents and/or offer concessions to rent a vacant unit, but you could

General Growth Properties and Distressed Sales

2009-06-07T16:09:00.001-07:00

Pre-bankruptcy, General Growth Properties refused to sell properties at discounted prices. From an April 27, 2009 Bloomberg story: Simon Property Group Inc., the largest U.S. shopping-mall owner by stock-market value, tried to buy real estate from rival General Growth Properties Inc. before it filed for bankruptcy, Chief Executive David E. Simon said. “They didn’t realize they were a

The Geography of Job Losses

2009-06-05T06:20:00.001-07:00

There’s an extremely cool animation of job gains and losses since 2004 at Tip Strategies. Here’s a couple of screen shots: The animated version is amazing. This reminded me of Jim Hamilton’s powerpoint which shows the regional propagation by quarter of recessions between 1969 and 2004, saved here. Did you know that the recession starting in 1990 actually began in Arizona in the fourth

Full Recovery of the CRE Market in 2-1/2 Years? The Global Economy

2009-06-04T05:57:00.001-07:00

Robert Sanchez thinks a full CRE recovery could take as long as 2-1/2 years. From The Saint Report (hat tip The Dirt Lawyer's Blog): During a panel discussion for Pepperdine MBA alumni in downtown Los Angeles last month, Robert Chavez, former CEO and founder of Staubach LA and current president and CEO of Guardian Commercial Realty, said that a full recovery in the commercial real estate

Don’t Blame Loan Officers for Poor Loan Performance

2009-06-03T06:42:00.001-07:00

The Obama Administration thinks loan officer pay should be tied to the quality of their loans. From the Wall Street Journal: The Obama administration has begun serious talks about how it can change compensation practices across the financial-services industry, including at companies that did not receive federal bailout money, according to people familiar with the matter…Among ideas being

CRE Miniperm Underwriting Today and Yesterday

2009-06-02T06:58:00.001-07:00

Deal Junkie suggests in this post that although the CMBS market is frozen, balance sheet lenders continue to lend on CRE. Traffic Court counters here that, although balance sheet lenders are making loans, the underwriting is much more conservative. I took the current loan terms and underwriting parameters from one of the banks mentioned in the Deal Junkie post and compared them to the terms and

Why There Are Very Few CRE Sales

2009-06-02T05:41:00.001-07:00

According to Sam Zell, the lack of CRE sales is a result of a combination of falling values and low interest rates. An excerpt of a post from Todd Sullivan’s Valueplays (reporting on a Bloomberg interview with Zell): “Well, there’s been a lot of speculation and a lot of journalists have written about the impending demise of commercial real estate,” he said. “First of all, I think that the fact

Lender Groupthink

2009-06-01T06:59:00.001-07:00

Here’s an excerpt from Michael Skapinker’s opinion piece in the Financial Times, “Diversity Fails to End Boardroom Groupthink”: Disagreeing with the company’s direction is hard enough. Doing so when an entire industry is going in the same direction is harder still. It is not just boards that suffer from groupthink; entire sectors do. The banking industry did. Any investment banking chief

Legacy Loan PPIP versus FDIC Note Sales

2009-05-29T07:14:00.001-07:00

It’s difficult to work up much enthusiasm for the Legacy Loan segment of PPIP, a program which will reduce losses for banks by goosing returns for private investors with low cost public leverage. Most people (other than the banks themselves) think banks should be punished with big losses, and most people are not keen on helping the investors who will get richer as a result of the mess do even

Why Did Financial Middlemen Do So Well in the Bubble?

2009-05-28T06:52:00.001-07:00

Ryan Avent at The Bellows thinks the compensation finance people received during the boom indicates something was drastically wrong: When you have a few people taking home billions, that’s a sign of either very good luck or some brilliant new strategy. When you have a lot of people in finance taking home billions, then something has gone badly wrong. Either something unsustainable is building

Does Tim Geitner Read My Blog? Are Regulators to Blame for the Housing Crisis?

2009-05-27T06:55:00.001-07:00

From a Washington Post interview over the weekend, via Calculated Risk: Geithner: "For something this big and damaging to happen it takes a lot of mistakes over time. And it is that combination of things. Interest rate here and around the world were kept too low for too long. Investors made - took a bunch of risks without understanding the risks. They were betting on the expectation that house

Low End Infill versus the Exurbs

2009-05-27T06:22:00.001-07:00

Lansner on Real Estate has a story and podcast on the successful sellout of a new development in Fountain Valley, CA: Lissoy tells ocregister.com that the quick Fountain Valley sales may have been a bit of an anomaly due in to its rarity — new homes are hard to find in that city… Also, the podcast interview reveals Lissoy’s thoughts on how some builders are selling simpler, smaller,

How Much REO Should A Lender Have?

2009-05-26T05:56:00.001-07:00

Bubble Meter notes this story from Business Week: Buyers looking to purchase foreclosures should still have plenty of opportunities. Only 30% of bank-owned properties are listed on the multiple listing services, says Rick Sharga, senior vice president at foreclosure listing firm RealtyTrac. He figures banks still own as many as 500,000 properties that they want to sell but haven't put on the

The Problem With Partners

2009-05-22T06:01:00.001-07:00

From Luke Johnson’s column in the Financial Times, “Time of Trial Brings Out Our Litigious Side”: The truly vicious [lawsuits] are those where professional partners have a dispute…Falling out can arise through envy, through desperation, through honour, and a feeling that some are not pulling their weight. Writs are being served all over the place for non-payment of debts, warranty claims over

“Legacy” CMBS?

2009-05-21T06:50:00.001-07:00

What is a “Legacy”? From Merriam Webster: Main Entry: 1leg·a·cy 1 : a gift by will especially of money or other personal property : bequest 2 : something transmitted by or received from an ancestor or predecessor or from the past Usually a legacy is good, but sometimes you inherit something really screwed up. When WAMU tanked 18 days after Alan Fishman

What Should Lenders Do With Maturing CRE Loans?

2009-05-20T07:31:00.001-07:00

We’ve had some conversation in the comment thread on this post about what lenders should do with maturing loans. Today I will attempt to address that question in more detail, starting out with what I would do if it were my money, and moving on to some of the reasons lenders adopt different strategies. Foreclose on properties the borrower is driving into the ground. At this point in the cycle

CRE Problems: Rate Structure, Maturity, and Vintage

2009-05-19T06:50:00.001-07:00

Zero Hedge’s post, “The Special Servicing Problem,” talks about the ballooning transfers to Special Servicing status. The post includes a table of large CMBS loans which have been transferred, which I think gives a nice snapshot of the types of loans which are in trouble: (Click on image for a larger version in a new window) Rate Structure. The only floating rate loans in this group are loans

Lender Conspiracy to Destroy Competition?

2009-05-18T18:27:00.001-07:00

The developers of the Fontainebleau casino and hotel development in Las Vegas believe Deutsche Bank is out to get them. From Zero Hedge: In a stunner of a development, Las Vegas casino operator Fontainebleau has amended its ongoing lawsuit against a set of banks, and has alleged that Deutsche Bank is now "seeking to destroy the Fontainebleau in order to minimize competition" with the

Investor Returns on FDIC Discounted Note Purchases

2009-05-15T07:03:00.001-07:00

John Reeder over at Real Property Alpha and I have a discussion going on the implications of the FDIC selling performing CRE loans at 50 cents on the dollar (see John’s posts here, here and here, and mine here). One of John’s commenters asks about cap rates on these transactions, which I’m taking as an opportunity to show how these deals can be such a home run for the note buyer. I’ve expanded

Why Are Performing CRE Loans Selling for 50 Cents on the Dollar?

2009-05-14T06:57:00.001-07:00

Zero Hedge and Real Property Alpha have picked up on the results of recent FDIC auctions of CRE loans (Zero Hedge posts here and here, Real Property Alpha posts here and here). A graph from Real Property Alpha shows performing CRE loans are being sold at roughly 50% discounts: You might think the sales price on the performing loans indicates the collateral backing the loan is worth only half

The Commercial Real Estate Risk Culture at Deutsche Bank

2009-05-13T05:34:00.001-07:00

Zero Hedge has published a letter from a former risk manager at Deutsche Bank which speaks to the difficulties of being a risk manager in a lending institution. Some excerpts: For more than two years, I have been working internally to improve the inadequate governance structures and lax internal controls within Deutsche Bank. I joined the firm in 2006 in one of its foreign subsidiaries, and

Indications of a Credit Bubble

2009-05-12T06:13:00.001-07:00

From Socializing Finance’s post Flashback: The Quality of Credit in Booms and Depressions, some commentary from 53 years ago: In the past few years important new historical evidence has been developed on the cumulating deterioration in the quality of credit during the period of prosperity that precedes severe depression. […] With respect to the current situation we must concern ourselves with

Abandoned Projects Everywhere

2009-05-11T06:47:00.001-07:00

Calculated Risk has a post featuring a video of an abandoned condo project in Irvine, CA: Yesterday, the Wall Street Journal had a story on abandoned construction projects. An excerpt: No one tracks precisely how many construction projects nationally have been stopped by developers midstream. But an indication of the scale comes from New York-based Real Capital Analytics Inc., which

Economy and Real Estate Post Picks: Week of May 3, 2009

2009-05-11T06:45:00.001-07:00

Wholesale Sales Continue to Slide: Commodities are the hardest hit The Latest Employment Report: Not as bad as previous months, but still not good Does a Decline in Initial Jobless Claims Signal the Recessions End? A discussion of the impact of initial, continuing, and net jobless change Regional Disparity in Unemployment Rates: The West Coast is faring poorly in this recession CMBS Loan

Seeing Patterns Where There Are None: Geography

2009-05-09T10:28:00.001-07:00

Humans are wired to detect patterns, but sometimes there isn’t one. For example, what distinguishes the best and worst performing submarkets in Orange County? You might focus on geography first; the real estate mantra is location, location, location. Are the best and worst performing submarkets concentrated in a particular area? Here’s a map, with the five best performing markets (as measured

Is General Growth Properties in Denial?

2009-05-08T06:38:00.001-07:00

The CEO of one of their largest competitors thinks so. From an April 27, 2009 Bloomberg story: Simon Property Group Inc., the largest U.S. shopping-mall owner by stock-market value, tried to buy real estate from rival General Growth Properties Inc. before it filed for bankruptcy, Chief Executive David E. Simon said. “They didn’t realize they were a distressed seller,” Simon said in a

Successful, Until You Aren’t

2009-05-07T06:14:00.001-07:00

Lansner on Real Estate reports Pacific Property Assets has defaulted on the interest payment due on $90,000,000 in notes held by its investors. PPA has a 2,400 unit multifamily portfolio in Southern California and Arizona. Some excerpts: Company CEO Michael Stewart said interest payments on about $90 million in notes would be suspended for an undetermined period, adding that he’s hoping

Roads Before Roofs, Roofs Before Retail

2009-05-06T07:07:00.001-07:00

The stories and video of new houses being demolished in Victorville are continuing to pop up in blogs and other news sources (see Calculated Risk, the LA Times, and the Wall Street Journal, for example). It’s a compelling story, but the way it’s being presented almost everywhere is misleading. First, here’s the video if you haven’t already seen it: The video, and every story I’ve seen

Rent or Buy: San Jose or Columbus?

2009-05-05T06:26:00.001-07:00

David Leonhardt has an article in The New York Times (hat tip Wehr in the World) about his decision to switch from renting to buying a house. There is an accompanying graphic showing the ratio between the purchase price of a house and the annual rent for an equivalent house by city. I’ve highlighted the ten markets with the highest ratio in green, and the ten markets with the lowest ratio in red:

Fighting Foreclosed Home Blight

2009-05-04T05:15:00.001-07:00

Calculated Risk has a post here detailing efforts some cities are making to force lenders to maintain the vacant homes they’ve foreclosed. Apart from the obvious fact that blight upsets constituents, attacking blight aggressively is good policy because it helps maintain values (and tax bases). I came to this view via Wesley Skogan’s Disorder and Decline and George Kelling’s Fixing Broken Windows

Economy and Real Estate Post Picks: Week of April 27, 2009

2009-05-03T20:48:00.001-07:00

GDP Growth 1950 – 2009: First quarter GDP decline the worst since the early 1980’s Credit Crisis Indicators: Credit indicators are headed in the right direction Recession to End by Fall: Indicators are turning positive April’s Economic Data in Graphs: Big collection of graphs showing economic data released in April for everything from new home sales to restaurant performance Consumer

CRE Construction Loan Rates Today

2009-05-02T20:24:00.001-07:00

The Wall Street Journal has a story here (hat tip Deal Junkie) about a $215M construction loan Boston Properties obtained on a mixed use project in Boston. As you would expect, the terms are much tougher in many respects than were available a few years ago. The loan is for only 40% of the cost of the project (compared to loan-to-cost ratios of up to 90% during the boom days), and there are

When Real Estate Is A Liability: The Movie

2009-05-01T06:40:00.001-07:00

I’ve previously posted about how real estate values can fall close to zero here and here, and the importance of completing projects here. This video of new homes being demolished at the direction of the foreclosing bank takes the concept to a whole new level: This is not as crazy as it appears when you know the bank’s side of the story, available on this post from Vision Victory Manifesto (

Humans Are Wired to See Patterns Where There Are None

2009-04-30T05:58:00.001-07:00

From Jonah Lehrer’s post on Frontal Cortex, Patterns and the Stock Market: Alas, the human mind can't resist the allure of explanations, even if they make no sense. We're so eager to find correlations and causation that, when confronted with an inherently stochastic process - like the DJIA, or a slot machine - we invent factors to fixate on. The end result is a blinkered sort of

Occupancy and Rent Change News Can Mislead You

2009-04-29T05:20:00.001-07:00

When you see a headline saying rents or occupancy in a market has declined, you need to remember you need to consider both rents and occupancy to understand what’s going on. Lansner on Real Estate reports multifamily rents and occupancy are declining in Orange County, based on a RealFacts first quarter survey. The chart accompanying the story illustrates my point: Which is the best

Complexity is not a Virtue

2009-04-28T06:10:00.001-07:00

The General Growth Properties bankruptcy filing actually involved 166 entities (here's a link to the petition). To help everyone understand the relationships between the entities, a helpful organization chart was provided: (Click on image for a larger version in a new window) Clear? Oh wait, there’s more: And more: And more: And more: In fact, there are 25 pages of

Problems Mounting in Orange County Multifamily

2009-04-27T05:31:00.001-07:00

Lansner on Real Estate reports it’s taking twice as long to rent vacant units in Orange County, rents are falling, vacancies are rising, and landlords are looking the other way on tenant credit issues and cutting back on maintenance. None of this is surprising; all these things go together in a softening market. But, it’s nice to see an article which puts all the symptoms of a soft market in one

Economy and Real Estate Post Picks: Week of April 20, 2009

2009-04-26T15:46:00.001-07:00

Will the Recession End in a Few Months? Two economic forecasters think so Can the Economy Function Without Securitization? This post argues restoring securitization markets should be a top priority. Commercial Real Estate Values at 2005 Levels: Moody’s Commercial Real Estate Indices indicate gains over the last four years have been reversed. Which Way Are 10 Year Treasury Rates Headed? Two

Innovation versus Old School, Big Lenders versus Small Lenders

2009-04-25T08:40:00.001-07:00

Matt Yglesias is not comfortable with how easy it was for him to get a mortgage, and talks about it in his post, “Financial Innovation Takes the Homework Out of Banking.” An excerpt: An old-school local bank can expect the people supervising loan applications to have specific knowledge about situations. And perhaps more importantly, the head of a small institution can directly monitor what

Let the Judge Sort Them Out: How Bankruptcy Remote are Single Purpose Entities?

2009-04-24T06:59:00.001-07:00

CRE lender standard operating procedure is to make loans to entities whose sole purpose is to own the real estate collateral. The goal (as I’ve posted about here) is to ensure the loan is not entangled in a bankruptcy related to other obligations of the borrower. From an Arent Fox article: Lenders customarily require that the real estate projects they finance be owned by SPEs. In this context

General Growth Properties’ Bankruptcy: An Example of a Balance Sheet Default

2009-04-23T06:00:00.001-07:00

I’ve previously posted on the difference between an operating statement default (when deteriorating income means a borrower can no longer service its debt) and a balance sheet default (when a maturing loan can’t be paid off through sale or refinance). General Growth Properties’ bankruptcy filing is a result of a balance sheet default. From their press release announcing the bankruptcy filing:

Maturity Kills: Operating Statement Defaults Versus Balance Sheet Defaults

2009-04-22T06:50:00.001-07:00

No question CRE rents are falling and vacancy rates are rising, and these trends are getting a lot of attention (see, for example, Calculated Risk posts here, here, and here, and Zero Hedge posts here, and here). However, this threat is minor compared to what’s happening on the balance sheet side of the business. There are two ways a CRE loan defaults; an operating statement default, or a

My Securitization Misconceptions

2009-04-21T06:39:00.001-07:00

I am not a CMBS insider – although I’ve been doing nothing but income property finance for 30 years, it’s almost always been for whole loan lenders. However, a good chunk of that time was spent originating Fannie Mae multifamily loans and competing against CMBS lenders for business, and we lost that competition on many, many deals. I found this surprising – how could pricing be better on a

Were Mortgage Brokers the Real Culprits to Blame for the Demise of Financial Companies?

2009-04-20T05:10:00.001-07:00

Jeff Mathews makes this argument in his post “The New McCarthyists, Part II: Where the Culprits Are.” Some excerpts: In April 14th's “Older Borrowers, Out in the Cold,” reporter Ellen Schultz lays out in cold, hard facts—as opposed to the vague, nameless short-selling conspiracy theories—how mortgage brokers destroyed the banking system along with peoples’ lives: YUBA CITY, Calif. -

Economic and Real Estate Post Picks: Week of April 13, 2009

2009-04-19T20:23:00.001-07:00

Is the Cutback in Consumer Spending Abnormal? Consumer spending patterns in prior recessions Job Loss Patterns in this Recession: An interactive map showing the geographic pattern of job losses in this recession over time General Growth Property Bankruptcy: A set of stories exploring various aspects of the bankruptcy of the nation’s second largest mall owner. What Direction is the Economy

Value, Cash Investments, Equity, Cash Out Refinances, Anchoring, and Sunk Costs

2009-04-18T09:22:00.001-07:00

When I’m talking to a borrower about a loan workout, there is often a major disconnect between the reality they see and the reality I see. One of the disconnects almost always relates to the equity in the property. Let’s say Bill Ant buys a property in 2005 for $10,000,000, and I make him a 75% LTV loan. Here are the numbers: Bill’s equity is the difference between the value and the debt,

CRE Performance by Property Type: It’s the Tenants

2009-04-17T08:59:00.001-07:00

Zero Hedge has a chart this morning showing CRE loan performance by property type. The information supports the idea that loan performance in a downturn is largely driven by tenant type, and specifically the term of the tenant lease. Here’s the chart: (Click on image for a larger version in a new window) The Zero Hedge post has an attribution to Lehman, but not enough information to

How Big a Hit Can Lenders Take on Note Sales?

2009-04-16T06:31:00.001-07:00

I’ve previously posted on how driving away borrowers can leave a bank in a better position to handle losses on the remaining portfolio (link here). Here is the simplified balance sheet side of the math: In this example, $250,000,000 in loans are paid off and used to reduce liabilities. The loss reserve and equity are unchanged, but have increased in size relative to the remaining portfolio,

This Time is Very Different: Attack of the Zombie Properties

2009-04-15T07:01:00.001-07:00

The last time we had a severe CRE downturn was 1990 – 1995. For those of us who were around, the current situation feels similar – plummeting employment, deteriorating income fundamentals, spiking cap rates, and loss of liquidity in the market. However, there are some huge differences this time which have important implications. First, some history. Here is a chart of cap rates taken from a

Why CRE Lending Needs its Own Center for Disease Control

2009-04-14T07:21:00.001-07:00

Imagine there is a disease that lies dormant for between 5 and 20 years, and then, over a 3 to 5 year period, kills 5 – 10% of our population. Now, suppose the first signs of a new outbreak are occurring. Would it surprise you if there was no central data repository to monitor the spread of the disease? That no teams of scientists study who survives, and who doesn’t? That no theories are