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Surge in Loan Workouts is Healthy Sign for Distressed Real Estate

 

The worst of the debt crisis may be over for the commercial real estate industry. Several measures suggest that the pace of loans newly classified as delinquent, in default or foreclosure has slowed and lenders are gaining ground in their efforts to resolve problem debts.

Some $6.3 billion in U.S. commercial real estate loans fell into distress in June, the smallest monthly increase since October 2008, according to New York-based Real Capital Analytics (RCA), which tracks loans on commercial real estate properties valued at $5 million or more.

In fact, the $56.8 billion in loans that moved into special servicing or delinquency in the first half of 2010 marked a 24% decrease from the distress that accumulated in the first half of 2009.

Lenders and special servicers resolved $14.6 billion in troubled commercial real estate loans during the first half of 2010, up 272% from $3.8 billion during the first half of 2009.

Resolution entails a 100% recovery rate or repayment of the loan amount, as opposed to a loan modification, which may bring a partial recovery through recapitalization, an extension or other changes that leave the lender exposed to the collateral.

The dollar volume of loan modifications also more than doubled to $15.6 billion, bringing total workouts to $30.2 billion, equivalent to the workout volume for all of 2009.

“This is the first clear evidence we’ve been able to gather that lenders are starting to resolve their troubled issues,” says Dan Fasulo, managing director at RCA.

Stabilized, core assets in primary markets have recovered much of the market value lost since the onset of the credit crisis and recession, Fasulo says. That is making it easier for lenders and borrowers to restructure debt or bring in equity partners to resolve loans, he says.

For example, an office tower at 333 Market St. in San Francisco sold in June for approximately $333 million, about 5% less than the $370 million it traded for in 2006.

In Chicago, a 60-story office tower at 300 North LaSalle traded for $655 million this month. The capitalization rate on the deal was close to 6%.

“That’s pricing we haven’t seen since close to the height of the market,” Fasulo says. “Clearly, we’ve seen a situation develop where owners that may have been under water 12 months ago may now be in the black again.”

The recovery in property values is limited so far to stabilized assets in markets and locations highly sought after by investors, Fasulo emphasizes. Property values remain depressed for assets out of favor with investors, including undeveloped land or buildings with high vacancy rates.

Recovery rates vary

Resolutions accounted for 48% of all workouts in the first two quarters this year, up from 43% of workouts a year ago. Recovery rates are uneven across lender types.

Regional and local banks recovered just 64% of the unpaid loan balance in their workouts during the first half of 2010, for example, compared with recovery rates of 71% for national banks and 77% for international banks.

The poorer performance of regional and local banks is due in part to a heavier concentration of construction loans on those balance sheets, according to RCA.

Commercial mortgage-backed securities (CMBS) special servicers had the lowest recovery rate at 63%. In fact, CMBS lags other forms of commercial real estate debt by volume of workouts.

Securitized loans accounted for 64% of new distress by dollar volume in the first half of the year but only 45% of workouts, according to RCA.

The low recovery rate in CMBS stems in part from a preference among special servicers to extend loans in hopes of more favorable market conditions down the road rather than liquidate debt.

Special servicers restructured $9.8 billion in delinquent loans in the first half of 2010, compared with just $3 billion in loan resolutions, according to RCA.

Hopeful signs for CMBS

Even so, there are signs that CMBS special servicers are making headway to address the level of distress. For one, the CMBS delinquency rate is slowing in its ascent after nearly a year of steady monthly increases on loans 30 days or more past due, in foreclosure, or taken back by lenders as real estate owned.

July’s all-time-high delinquency rate of 8.71% marked a gain of just 12 basis points from the previous month’s rate, according to Trepp LLC, a New York-based commercial real estate data and analytics firm. The rate climbed only 17 basis points in June.

June and July’s increases pale in comparison with the previous 10 months, when the delinquency rate jumped an average of 39 basis points each month, says Paul Mancuso, vice president of Trepp.

“Although the volume of distress in the CMBS market remains at historic levels,” he says, “the last two months give hope that perhaps the darkest days for the CMBS market are behind us.”

Nearly $3.2 billion in conduit loans were referred to special servicers in each of the first five months of 2010 before tapering to $140 million in June and $500,000 in July, according to Trepp.

Mancuso attributes the slower growth in CMBS delinquencies in part to increased loan modifications. In fact, the $12.1 billion in CMBS loan modifications that Trepp tracked in the first half of 2010 exceeds the $9.2 billion total for modifications in 2008 through 2009.

Fasulo of RCA acknowledges that lenders and CMBS special servicers still have most of their work ahead of them when it comes to resolving the current volume of distressed debt, but he is encouraged by this summer’s progress in the sector.

“Do they still have a long ways to go? Sure, especially the regional and local banks,” he says. “But incremental improvement is a positive sign for the marketplace.”

Surge in Loan Workouts is Healthy Sign for Distressed Real Estate

Global Property Sales Soar in First Half of 2010 as U.S. Deals Rebound

Aug 4, 2010 11:20 AM, By Denise Kalette, NREI Managing Editor

 

A new report on global commercial property transactions shows that sales of major properties valued at $10 million or more surged in the first half by 75% compared with the same period in 2009. 

Through the end of the second quarter, 2010 sales reached $231 billion, according to the report issued today by New York-based research firm Real Capital Analytics (RCA). That figure is 75% higher than a year earlier and includes the apartment, retail, office, industrial and hotel sectors.

Commercial property sales in top U.S. markets such as Washington, D.C., New York and San Francisco helped drive the global momentum and a 21% increase in transactions within the Americas from the first quarter to the second, according to RCA.  

“Activity in the Americas really exploded,” says Dan Fasulo, managing director at RCA. “It makes sense in that the U.S. has been two to four quarters behind Europe and Asia with recovery.”

Sales of commercial properties in the Americas totaled $22.1 billion, the highest since the third quarter of 2008, the company reports. Total volume in the first half reached $39.7 billion in the Americas, an 83% gain over the first half of 2009. Of that total, the largest share, $33.2 billion in property sales, took place in the U.S.

The biggest buyer in the Americas in the first half was Denver-based Dividend Capital Total Realty Trust, a non-traded real estate investment trust that spent $1.3 billion on a portfolio from iStar Financial (NYSE: SFI).  The portfolio included 32 office and industrial properties in 16 U.S. markets. 

The acquisition further diversified Dividend Capital’s commercial real estate holdings by property type, tenant base and region, the REIT’s president, Guy Arnold, said after the sale was completed in late June.

The number of properties trading in the Americas rose by just 12%, however, indicating that the transactions taking place this year have been significantly larger than last year — a sign of an improving marketplace, RCA reports.

Investors pause as prices rise

Although the year-to-date sales increased dramatically over the same period in 2009, the pace of global sales in the second quarter slowed from the first quarter of this year. One reason for the slower pace in the second quarter was uncertainty over prices, says Fasulo.  “Investors are digesting the new price levels,” he says.

Although commercial property prices have risen in Europe and Asia, prices have not appreciated as significantly in the U.S. “America has lagged recovery in Europe and Asia, but it is starting to catch up,” says Fasulo.

Worldwide, commercial property sales of at least $10 million in the second quarter reached a total of nearly $100 billion. That represented a decline from the $135.1 billion in transactions recorded in the first quarter of 2010. Still, the second-quarter sales were 33% higher than in the second quarter of 2009, according to RCA. 

The six-month transaction figures are a strong showing, even though they do not rise to the level of pre-recession sales, says Fasulo. As the market attempts to return to the earlier pricing levels, it needs to digest some of the overhang of properties still unsold. Fasulo foresees strong sales for 2011 and 2012.

“The year-over-year figures are very bullish. Barring another slowdown in the world economy, the global markets are well on their way to recovery.”

Global Property Sales Soar in First Half of 2010 as U.S. Deals Rebound

Signs of Life in Commercial Property Sales

For several months now, the perception, at least, is that the frozen commercial property sales market is thawing. Now there is some basis for that notion grounded in reality.

Some $9.7 billion in properties valued over $5 million traded in June, according to New York-based researcher Real Capital Analytics. That’s the highest volume since September 2008.

So what’s happening exactly?

RCA notes that U.S. investors brushed off concerns about the sputtering economic recovery and its potential impact on the commercial real estate sector.

Certainly despite more recent fears of a “double dip” recession, sales velocity has increased of late, pushing total volume for the second quarter to $20.6 billion, up by 32% from the first quarter.

Sales in the first half of the year totaled $36.2 billion, which is an 11% improvement over the second half of 2009. It’s also a huge 67.1% gain over the first half of 2009. The gain is smaller when measured by the total number of transactions, up just 6% between the first half of last year and the first half of 2010, at a total of 1,790 properties. That means the average transaction size has increased.

According to RCA, several large corporate portfolios sales accounted for a disproportionate share of total volume in the first half of 2010, particularly in June, when volume was up significantly across the core sectors.

The 31-property iStar Financial portfolio, purchased by Dividend Capital Trust for $1.3 billion, accounted for 14% of June’s total closed volume. Other large June sales included several high-profile office buildings such as 300 N. LaSalle in Chicago ($655 million), 340 Madison in New York ($570 million), and the Wells Fargo Building in San Francisco ($333 million).

Generally speaking, the trendline shows that larger properties are trading at lower cap rates, which have seen their largest declines on apartment, industrial and retail properties.

Nationally, average apartment cap rates fell by approximately 25 basis points between the first and second quarters, to an average of 6.8%. Over the same period, average industrial and retail cap rates fell by approximately 35 basis points and 20 basis points, respectively.

Office cap rates, which had fallen by more than 100 basis points in Q1’10 from their peak in Q4’09, held steady in the latest quarter, declining by less than 10 basis points to 7.9%.

It’s perhaps not surprising, given the slower pace of economic recovery, that most deals are being done in so-called “top tier” coastal markets, including Washington, D.C., New York and Boston. There, investors are bidding up the few top-shelf investment-grade properties that have come to market.

Washington, D.C. reported an average office cap rate of 6.4% for the first half of 2010, while Baltimore, just to the north, saw an average office cap rate of 9.0%.

The New York and Boston metros each reported over $1.5 billion in total volume in the first half of 2010, corresponding with year-over-year sales increases in excess of 100%. At least one inland Midwest market, Chicago, posted similar results as these two coastal cities.

When it comes to pricing, the picture was mixed. Here are a few tidbits to consider, according to the most recent (June) Moody’s/REAL Commercial Property Price Index report:

• The All Property Type Aggregate Index increased by 3.6% between March and April, down by 6.3% from one year ago, and 33% from April 2008.
• Over the first half of 2010, four of five property types posted increases in average price-per-unit.
• Hotel lead this group, rising by 68%
• In the core sectors, industrial rose the most, by 29%.
• Average per-unit pricing fell in the retail sector by 4%.
• The average size of single property deals fell in both the retail and apartment sectors by over 30%, while in the office sector it fell by 77%.
• In the hotel sector deal size increased by 50% in spite of a drop in per-unit price, because of large resolved and restructured volume in that sector.

Still, one of the biggest question marks overhanging the commercial property sector has not materialized. Where is the tsunami of distressed sales (nearly) everyone has been expecting? Simply put, it’s not here just yet.

As a share of total volume, sales of distressed properties slipped in the first six months of 2010, from 21% in the first quarter to 10% in the second quarter. In June, distressed sales accounted for less than 10% of all sales activity. The higher volumes of distressed sales in the first quarter reflected several large corporate portfolio workouts.

On a “positive” note, more than 25% of all apartment sales in June were classified as distress, the highest share for any property type. This is good news in the sense as fundamentals for both apartments and hotels are showing early signs of stabilizing, lenders may loosen their grip on these assets over the coming quarters.

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