Commercial Real Estate Update

The thing I find so interesting in a number of these articles is the cavalier and matter-of-fact attitude towards default and the fact that default doesn't seem to affect a company's reputation as it once did. I don't know whether this is good or bad but to me it certainly represents a fundamental change in business behaviour. With credit markets in their current state and increasing volatility in all markets, I really wonder if the leverage employed in the markets and the other attributes attendant to this leverage (so what if I made the wrong bet, it's someone elses money!!) are truly good for the economy in the long run.


Quote of the Day
"Kimco has done it, and they should. There's no problem. It's part of the game.” - Lawrence Longua, director of the REIT Center at New York University's Real Estate Institute, about defaulting on non-recourse loans and giving the property in question back to the lender. Grocery-anchored neighborhood shopping centers, where a loss of the grocery store often represents a loss of at least 40% in the property's income, may do this more than any other type of property owner. Kimco Realty Corp is the largest U.S. owner of grocery-anchored shopping centers, and had in the past defaulted on individual mortgages… Since then, Kimco has had no problem attracting lenders. (Guardian UK, June 10th)

Financing Trends For Commercial Real Estate and Real Estate Investment Trusts [REITs]
CMSA Study Finds CMBS Market Turning Around. “Jun Han, author of the CMBS market study for the Commercial Mortgage Securities Association: The commercial mortgage-backed securities market has turned the corner… Investors have marked-to-market… despite the fact that the CMBX market represents only a very small and thinly traded segment of the market. Han’s extensive tests of all 19,543 loans in the four CMBX indices against the [three recent] recessions, found few risks of poor performance… The CMBS market actually turned the corner with the Fed’s rescue of Bear Stearns... CMBS spreads peaked in mid-March. [However,] spreads will need to come down for buyers to be willing to move on deals.” (Commercial Property News, June 10th)

Expert: CMBS Fears Largely Unfounded. “Jun Han, author of the study commissioned by the Commercial Mortgage Securities Association and a principal of JHP Capital: One thing the commercial real estate market has going for it, unlike other down cycles, is that there is not an overbuilding scenario. For example, 1% of commercial real estate’s total inventory is under construction right now, as opposed to the recession of 1991, when 7% was underway. “There’s really not a lot of construction activity,” he said.” (Globe St., June 10th)

What's Next For The CMBS Market? “Moody’s: "The main issue is a standoff in the CMBS industry. Issuers don't want to make new loans unless they can sell the resulting bonds to investors, but investors don't want to buy bonds until the spreads have settled down. More people are sitting on the sidelines." Even banks that have cleared out their balance sheets and are in a position to issue new CMBS have been impacted by the overhang problem. That's because new loans are priced on the basis of recent CMBS issuance, but because no CMBS are being issued, the valuation of new paper and the potential yield in which it would trade remains uncertain.” (Real Estate Portfolio, May-June)

More US Commercial Property Defaults Likely. “Commercial property investors may soon follow the residential real estate trend [to] surrender a property to lenders when its value falls below the amount owed on a mortgage… Real Capital Analytics: U.S. commercial property transactions were off nearly 70% in Q1’08 versus Q1’07… Rather than sell at a loss, some REITs and other borrowers are opting to turn their assets over to lenders when the associated mortgage is "non-recourse"… Tara Innes, managing director of AIG Global Investments: “Corporate bond holders also may view default on a non-recourse loan favorably. They would rather see the company preserve its cash to repay corporate-level debt than use it to repay a mortgage on a bad investment.” (Guardian UK, June 10th)