Commentaries

Now raising intellectual capital

Real estate investors go begging

Investors in real estate funds can’t give their stakes away.

In another sign of more bad news to come for commercial real estate, NYPPEX Private Markets reports a sharp drop in prices for limited partnership stakes in real estate funds in the unregulated secondary market. NYPPEX says the average bid for these partnership shares plunged 61% over the past month to a price that represents roughly 22 cents on the dollar.

NYPPEX, one of the larger dealmakers in the secondary market for private equity ownership stakes, says the rapid deterioration in bid prices for commercial real estate funds reflects rising concern about “vacancies, rental rates and refinancing risks” on the properties the funds’ either control, or have ownership stakes in.

And NYPPEX, in a client report to be released later today, says investors have good reason to be wary of buying shares in commercial real estate-focused funds. In the report, NYPPEX writes:

We estimate that less than 60% of commerical loans originated during the 2005 to 2008 period will qualify for refinancing in 2009 to 2012 due to lenders’ tighter underwriting standards, reduced cash flows an price declines. We expect fund terms to extend and investor returns to decline for commercial real estate partnerships unable to refinance loans coming due.

from Rolfe Winkler:

The CRE disaster

Earlier this week, I was surprised when I read that Moody's put the decline in commercial real estate at 16% over the last TWO MONTHS.  That's a stunning rate of decline that has very negative consequences for banks who are still carrying commercial whole loans on their balance sheet at close to 100¢ on the dollar.cre-vs-residential-prices For comparison, consider the chart to the right, which compares the Case-Shiller Composite 20 Index for residential real estate prices with the Moody's/REAL National All Property CRE Index.*

(Click chart to enlarge in new window)

Rejected CMBS looks stressed out

More on the CMBS deal rejected by the Fed under its TALF program:

The deal has above-average stress points when compared with those that were accepted. According to Bank of America’s breakdown, 90-day plus delinquencies, for example, were at 3.2% compared with the 1.27% average of those accepted. The highest delinquency rate of those accepted, however, was 4.41%.

Looking at the underlying collateral is where the fun really starts.

At the time the deal was put together in March 2007, Moody’s Investors Service noted that 79% of the loans in the pool backing this class and others had loan-to-value ratios over 100%. Talk about easy lending! Additionally, 78% of the loans pay only interest for the entirety of the loan, leaving a big balloon payment at the end.

Fed’s TALF not stimulating much of anything in CMBS

The numbers are out and they’re not looking too good for the commercial real estate market. Investors only applied for $669 million of loans using old, or legacy, CMBS, as collateral, Reuters is reporting. No one requested loans from the New York Fed using new CMBS, but that’s hardly a surprise since the market has been frozen since last year.

The Fed is hoping to jump start the $700 billion market for CMBS because without it the commercial real estate market is in big trouble. With banks and insurance companies no longer in the commercial real estate lending business, the securitization market is shaping up to be the last great hope for developers and property owners who need to refinance maturing debt.

The debt nightmare is still with us

Pouring trillions of dollars into the global financial system has done more than pull the world away from the abyss.

It has convinced many to look again to well-worn signposts like major stock exchanges, currencies and sovereign debt to gauge where things are headed, rather than keeping their eye on credit markets to figure out where and when it will end. Take the attention being given today’s stock market rally.

Commercial real estate in the dumps

David Bodamer over at Clusterstock has some interesting color from a commercial real estate conference where the mood was decidedly grim. Rather than being cheered by the hope that the Fed’s inclusion to commercial mortgage bonds its TALF program will alleviate the stress, participants seem resigned that the worst is yet to come.

I, too, am doubtful that central bank policy will be able to do much to stem the pain. The double-whammy of loose lending standards and overly optimistic assumptions during the boom coupled with the severe downturn in the economy mean the big losses are yet to come.  The commercial sector typically lags other parts of the economy.

  •