by Paul Braungart, President, Regional Capital Group
In the current commercial real estate market multifamily properties appear to be outperforming other income producing property types. Investors have targeted apartment projects for acquisition partly due the availability of funds for this sector of the marketplace. In the past 18 months there has been some downward pressure on property values as a result of a decrease in average rental rates and an increase in the vacancy rate across some markets. Many in the industry feel that from an economic standpoint, the worst is over for multifamily properties and that a small recovery has begun in this sector, but it may not be fully realized until 4th quarter of this year or until early 2011. Buyers and sellers appear to be motivated to work together to complete transactions.
Over the past year many markets have experienced a decrease in capitalization rates as the demand for higher quality projects among the larger players has heated up. Existing apartment properties have a distinct advantage over new projects due to the barriers to entry including a difficult and lengthy process of project approvals along with the challenge of finding construction financing.
With supply being somewhat constrained, it is expected that the children of baby boomers will have a major impact on the multifamily industry. As a result household demographics expect a substantial increase in new renters over the next 10 years which will contribute to the growth of the industry. Employment rates appear to be declining while new job creation has helped tremendously to improve this sector of the commercial real estate market. Those new to rental housing have exhibited more confidence in the economy and have helped the decline of vacancy rates. The housing market is still struggling and the lack of homebuyers contributes to the growth in multi-family occupancy rates. Declining housing starts, weak existing home sales, and difficulty in obtaining residential mortgages have also helped the rental housing market.
Although most of the commercial real estate markets are in flux, the multifamily arena continues to be a positive indicator that real estate capital is available in the market. The most active players are the agencies including FNMA, FHLMC, and HUD which are typically financing acquisitions or refinances. The life companies have also stepped back into the game with lower leverage loans, but have shown a steady stream of loan closings. The CMBS market has reappeared on a smaller scale as well as a number of bridge lenders, all capable of closing in a shorter period of time. Leverage, sponsorship, and performance are all critical factors when trying to secure financing in today’s market. Equity is also available for multifamily and student housing project types in proven markets. The interest rates are still very attractive and most of the commercial real estate closings in the market are for this sector.
Several of our clients and partners are looking to acquire new projects either performing or non-performing. RCG continues to be very active in all sectors of the multifamily marketplace as historically the firm has been a real estate opportunity fund manager participating in all pieces of the capital stack. RCG has expanded its services to coordinate the funding for both short and long term loans for borrowers and to really meet every financing need a borrower may have.
By Joe Caton
Scarce capital no longer to blame for investors’ indecision
Not only have signs of life returned to commercial real estate finance, but there are also signs that the capital markets are on the mend. As 2010 began, analysts called for about $20 billion in new issuance of commercial mortgage-backed securities (CMBS). But by the beginning of the second quarter, those estimates rose to $25 billion, and may rise even further.
CMBS issuance is a major barometer of real estate finance because it is one of the most orderly and low-cost funding sources available. With the winding down of the Term Asset-Backed Loan Facility over the next two months, investors are looking to CMBS for stable government-free opportunities.
[BLOGGER COMMENT: As liquidity and leverage return to commercial real estate – now the question will be: “Who will blink first… Sellers? or the Opportunity Fund buyers that have raised trillions and deployed a small fraction of their allotted capital?]
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A New York Times article from Feb 11th has an interesting title and the typical mainstream media focus on the glass being half full… buried in the story is the ray of light investors have been looking for:
Mr. Fine said he thought that more than 90 percent of an estimated 8,000 community banks “are strong, stable and growing.”
This means the media’s focus on the negative ignores the fact that the great majority of our lenders are not in trouble. While many high profile loans are underwater the vast majority of commercial real estate loans were prudently underwritten and still provide substantial debt coverage.
New lenders are entering the market every day. Current underwriting standards change on a daily basis, but it is safe to say that strong Sponsors with A properties in A locations that do not require massive leverage will be pleased by the rates and terms available in the market.
Today the Wall Street Journal has an article that is a must read for anyone in the commercial real estate industry.
The gist of the article is that this may be the year that banks, “begin biting the bullet and accepting losses to get distressed commercial real-estate assets off their books.” Past blogs have discussed the trillions of dollars raised by Opportunistic investors that are sitting on the sidelines. This may be the year that they get to deploy their capital. In the last month I’ve met with private equity investors that have $350million, $400million and $500million war chest brimming with cash. These three investors have a combined $1.25billion to invest. In 2009 they invested less than $100million. This may be the year they get to acquire real estate and loans for a fraction of what they feel is the true intrinsic value. I’m looking to be part of it.
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Investors Showing an Appetite for Bonds Backed Even by the Weakest Real Estate Sector and No Government Support
By Mark Heschmeyer in CoStar
The commercial mortgage bond securitization window that has been closed for nearly two years during this recession has reopened for business in the last few weeks and investors have lined up encouragingly to take advantage of a new round of CMBS offerings.
Several investment banks have announced that they are firing up their conduit lending programs and will begin to originate and warehouse loans for multi-borrower securitizations, said Chris Moyer, an associate with Cushman & Wakefield Sonnenblick-Goldman in New York.
At least three have publicly announced, or are actively discussing, such programs, while others, have brought on senior managers who have experience building conduit-lending platforms. The active banks are Goldman Sachs, Bank of America and JPMorgan. Word on the street is that RBS and Deutsche Bank are also ramping up securitization activity.
BLOGGER COMMENT: Be prepared for much more prudent underwriting with DCRs starting at 1.3x on the highest quality properties. Leverage will not come close to the 80-85-90% leverage of the glory days, but 60-75% leverage sounds pretty good compared to 0% leverage as we have seen for the past 2 years as CMBS securitizations plummeted by 99.99%.
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NEW YORK (12 October 2009)–The reprieve is over for U.S. CMBS as delinquencies resumed their upward trajectory to end the month at 3.58 percent, according to the latest Loan Delinquency Index results from Fitch Ratings. The hotel sector now leads as the property type with the largest proportion of delinquencies at 5.83 percent.
“The recent surge in hotel defaults is consistent with Fitch’s view that hotel property values will decline by as much as 50 percent from peak levels,” said Managing Director and U.S. CMBS group head Susan Merrick. “While budget hotels have fared best during the downturn, continued pressure on the luxury, resort, and gaming sub-sectors will likely push lodging delinquencies to approximately double that of the other property types.”
BLOGGER COMMENT: The biggest problem facing commercial real estate is the capital markets’ lack of liquidity. CMBS issuance went from $230 billion in 2007 to $12 billion in 2008 to less than a billion dollars YTD in 2009. Higher vacancies, higher operating costs and higher reserves can be built into financial models to determine an underwritten cash flow (UCF). We can apply a stressed interest rate and a higher than normal debt coverage ratio to the UCF to determine very conservative maximum loan proceeds. As delightful a geeky math exercise that might be… when there is no functioning capital market to provide liquidity, there are no transactions in some market segments especially hotels!
In the glory days construction loans on hotels were sized for a relatively easy takeout from a CMBS lender. What used to get easily financed by the voracious CMBS machine at 75-80% LTV/LTC now will only justify 40-65% LTC/LTV (lesser of) financing from long term investors such as insurance companies and pension funds based on the new ultra conservative underwriting standards. This makes commercial real estate a “rich man’s game” once again and will knock all the amateurs out of the business. For those with massive amounts of cash and a long time horizon this is the greatest opportunity to acquire multi-generational assets at a fraction of replacement cost. A stunning amount of assets will be lost by developers / investors that do not have the staying power to sustain losses (or have non-recourse debt and can painlessly give ’em back the keys).
View original article in Hotel News Now