Commercial real estate death watch

August 10, 2009

It’s no wonder that the Federal Reserve has a watchful eye on commercial real estate. Lending hasn’t come back, prices are plummeting and those that poured funds into the sector during real estate boom are getting killed by high vacancy rates and falling rents.

Maguire Properties is one such company. The Wall Street Journal reports the debt-laden REIT is handing over seven buildings to its creditors along with the $1.06 billion of debt that comes along with them. But rather than restructure the debt, the creditors may try to offload them into an extremely soft market, suggesting they’d rather take their lumps now rather than wait for a snapback in the market that may well be years away.

That’s not good news for office building prices since such sales could pressure prices even further.

Chief Executive Nelson Rising, who was brought in by the company’s board last year to succeed Mr. Maguire, said in an interview that restructuring the debt on six of the buildings, located in Orange County and Los Angeles, is one possibility. But he said the most likely scenario is that the mortgage holders will take over the properties and try to sell them. Maguire already has a deal to turn over one of the buildings, Park Place One, in Irvine, Calif., to LBA Realty, a real-estate company that acquired the debt on the property at a discount in the spring. A telephone call placed to LBA’s principal wasn’t returned.

Among the office buildings that Maguire will turn over to creditors is Stadium Towers Plaza.

The debt on the other six properties was packaged by Wall Street firms and sold as commercial mortgage backed securities, or CMBS, to dozens of institutional investors. Mr. Rising said that Maguire would work closely with the servicers of that debt to transfer control of the buildings. The seven buildings, with 4.2 million square feet, make up about 20% of Maguire’s portfolio.

The CMBS market, though on firmer footing thanks to government programs to revitalize it, still hasn’t seen any new issuance since the market closed down last year. That makes refinancing debt difficult if not impossible since banks and insurance companies – the other big lenders – have all but abandoned the sector.

As the FOMC meets this week, CMBS and the broader commercial real estate market is sure to be on policymakers’ minds as they consider what stimulative programs should die a natural death and which ones need more time to work their magic. While the Treasury purchases are likely to among the first significant program to wind down, the dismal state of commercial real estate suggests that its lending facilities for CMBS will be with us for a long time to come.

11 comments

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Commercial real estate faces serious challenges. Namely the fact that virtually all buildings financed in ’06-08 will fail to qualify for refinance without substantial recapitalization. (hard equity [cash] injection from owners / sponsors) and that the CMBS market is a non-factor when if comes to liquidity.

That-being said the Mortgage Bankers Association recently reported a 50% jump in commercial & multifamily mortgage originations in Q2 ’09. We are, of course, still down from the highs but that number is significant;. +50% in Q2 ’09 over Q2 ’08.

I would also point out that commercial real estate REITs have participated nicely in the recent stock market rally and the Wall Street Journal recently reported $600m in new commercial real estate purchased by public and private pension funds in a single week in July. Investors, it would seem, do not fear that the sky is falling in on commercial real estate.

Things are bad but, according to my calendar, Christmas will come before Armageddon does.

[...] Government assistance aside, the CMBS market is closed to new issuance.  (Agnes Crane) [...]

MP Capital is right, U.S. Commercial Real Estate is going to face many challenges in the coming years. We had Deutsche Bank forecast a recovery to 2007 levels not coming until…..drum roll…. 2017. With Prime mortgages having their defaults rise as well, I think this is going to put a hamper on any “green shoots” recovery. There was way too much building in the retail, condos and the hotel sector to support these values. My bet is we will see a government program coming out to help refinance these loans while the rates are still historically low compared with the environment we are operating in. .02

Dear writer,
your article on this subject are some what for useful to real investors and for business tycoons.
After reading so much articles on the same patterns from different media networks,i have derived the following findings.
1.because of more earnings from attractive salaries,more job openings in previous years,American,migrants,many business,political leaders,many top level executives had started bumped their money on real estate segments.so real prices had touched to high rocketing prces.
2.many banks,other financial instituations had voluntarily came forward to encourage many Americans,young upcoming youngsters,senior citizens to come forward for buying houses in larger extents.
3.heave advertisements in many leading newspapers,net sites for more addictions either borrowing money from banks,co-supported,co partners had created an artificial boosting to house sectors.
4.Many big investors from their usual famous business ventures have entered into these very big bounty to their boxes.
5.These sorts were continued for so many years.
6.These media barons also entered into this business..
7.All these forces,bodies had received very huge profits and consolidated their brackets buying more lands,more houses from small independents in prime localities.
8.Banks,mutual funds,industrial house played vital parts in these lucrative buisness.
9People were tempted,some were greedy to get become quick returns.
10.After Iraq,Afghan conflicts,Iran crisis had given counter results.
because of the above 10 main reasons were made American Real estates started cracks in the beginnings,but later on fallen like pack of cards.
these bad things were spread to all developed nations.
many banks were gone.
not able to get their loans in real terms added miseries to them and to concerned governments.
Now recessions made to worse.
these bad economic collapses not only to America,but to France,Italy,U.K.Greece,Dubai,and to India,China,Singapore and to many more countresNow,all the above countries were realized,some bailouts started showing some hope full pictures.
Once exports,job realizations will bring some halfhearted smiles to investors,buyers at the earliest.
I like this world news provider to any,so i have taken more time,interests to share with this editors,future readers to your team.

Dear,editors,viewers,team members,all leading economists,friends,and from others are requested to send your opinions,comments to this website,and please take your good times to send an e-mail to me for further in depth to write till more useful,lively writings to this world famous website’
I am very honest,truthful,fearless journalist with reading,supporting,press ethics at all times..
After writing,here in India, time is12am-next day
taken a cup of coffee,got a micro ware from America with bread and butter.
Countless thanks to this website..)

Don’t worry guys Tim is all ready on the case. Why do you think he asked congress to increase the US debt limit. You didn’t really believe the line ” to reassure investors around the world.” That line is a bit like a crack addict asking for a supplier for a bigger hit to reassure investors worldwide.
But Tim boy is certainly addicted to the debt fix at the moment. It’s th poor US taxpayer and any US bond holders that are likely to suffer the withdrawls.

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[...] Commentaries » Blog Archive » Commercial real estate modification check … [...]

It’s clear that the recession is affecting markets nationwide. Virtually all industry sectors absorbing job losses so it is expected for real estate sector too. Rents are approximately down about 20 percent in the last quarter.
Recovery is unlikely to happen before late 2009.

Thanks info about real estate prices.

[...] Commercial real estate death watch [...]

We work with commercial lenders and projects each day. While the times are tough – the market is far from dead.

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