Market News Headlines:
Market News Investor Blinks After Staredown CMBS Market Rises from Ashes of Collapse CoStar Reports Office Markets Have Bottomed $2.3 Billion in Troubled CMBS Loans Coming Due Over Next 6 Months
Investor Blinks After Staredown Building Outside Atlanta Goes at a $2 Million Loss; 'We Were Wrong'—Buyer WSJ - JULY 21, 2010 By Anton Troianovski For months, real-estate buyers and sellers of commercial property have stood eyeball-to-eyeball, with buyers holding out for steep discounts and sellers refusing to cut prices. But ever so slowly, the unlucky souls who bought at the bubble's peak are getting impatient and selling, even though that has meant taking losses. For example, Atlanta dealmaker Kris Miller paid Equity Office Properties Trust Inc. $33 million in 2007 for 9000 Central Park, a 205,000-square-foot, seven-story office building that was about to become half empty. At the time, all that vacancy was supposed to be a good thing: There were few large blocks of space available in the northern Atlanta suburbs where it was located, and corporations in the area appeared to be itching to expand."It turns out we were wrong," Mr. Miller says. As firms in the area consolidated or went out of business, the vacant space turned into a liability. Mr. Miller recently bit the bullet and sold the building to Atlanta media and automotive services company Cox Enterprises at a $2 million loss. "Sure, the market's going to get better," says Mr. Miller, president of Atlanta real-estate company Ackerman & Co. "How long will that take? I don't know." Return to top of page
CMBS Market Rises From Ashes of Collapse Big Banks Lead the Return of Key Funding Source for Commercial-Property Owners; Still, a Fraction of Precrash Levels WSJ COMMERCIAL REAL ESTATE - JULY 21, 2010 By LINGLING WEI Even as woes mount in the commercial-real-estate market, a once-vital source of funding for commercial-property owners is showing signs of life. Banks including J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. are expected to launch in the coming weeks two offerings of commercial-mortgage-backed securities, or CMBS, totaling $1.4 billion, according to people familiar with the matter. Representatives at the banks declined to comment. J.P. Morgan is leading a $650 million offering backed by properties owned by real-estate investment trust Vornado Realty Trust, the people with knowledge of the situation said. Vornado, of Paramus, N.J., will use the proceeds to repay existing debt, these people said. A spokeswoman for the company declined to comment. Goldman and Citigroup are leading a $750 million CMBS issue which includes a $100 million loan that Citigroup is making to Flagship Partners LLC. The landlord is using the loan to refinance debt on the portion of 660 Madison Ave. in Manhattan that houses the Barneys New York retail department store. These transactions, along with four CMBS issues sold earlier this year, represent further evidence that some big banks are coming off the sidelines partly because property values have started to stabilize after plunging more than 40% from the peak in August 2007. But the CMBS market is coming back only in drips, enabling the strongest owners to get stronger by taking advantage of distressed prices. Few expect a rush of new CMBS deals in the near term as the real-estate industry braces for more than $1 trillion of maturing debt over the next five years. While the handful of fresh issues have begun to revive one of the most important funding sources for commercial real estate in the past decade, it will likely provide little solace to owners of hundreds of billions of dollars of office buildings, strip malls and other commercial property now worth less than their mortgages. "It won't help the borrowers who are deeply underwater," says Scott Simon, managing director and head of mortgage- and asset-backed securities portfolio manager at Pimco, a leading bond house. The rise in delinquencies on existing CMBS loans also is worrying issuers and investors. Today, more than 8% of $578.6 billion of loans packaged into CMBS are at least 60 days past due. Credit-rater Standard & Poor's expects that rate to reach as high as 11.5% by year's end. Securitization—pooling loans and repackaging them into investment products—was a leading source of financing in commercial property until the financial collapse of 2008. Wall Street sold $230 billion of CMBS in 2007, a record. In contrast, there were $1.4 billion in new issues in 2009. This year they could reach $10 billion But even this slow growth outshines other businesses that also depended heavily on securitizations, such as credit cards and residential mortgages. So far, there has been only one offering of "private-label" securities backed by home loans without government support. Debt investors find securities backed by commercial real estate attractive because the properties have a relatively safe cash flow, especially for buyers of the mostly highly rated tranches. Credit quality of the issuers also is the highest it has been in years, improved by tighter loan underwriting standards. The new crop of deals feature simpler structures and a smaller number of loans than those sold during the go-go years. Past deals often had more than 10 tranches backed by hundreds of loans. And CMBS debt has relatively healthy returns compared to other kinds loan-backed securities. For instance, investors who bought the top-rated slice of a $716 million CMBS offering sold by J.P. Morgan last month could get a return of about 3.6%, according to Thomas Zatko, managing director of the real-estate finance group at Babson Capital Management. That compares to a return of about 2.5% on shorter-term securities backed by credit cards and some 2% on those collateralized by auto loans. Among other potential CMBS deals in the coming months: about $2 billion debt to be made by J.P. Morgan Chase and Deutsche Bank AG to help a group led by Centerbridge Partners LP finance the $3.9 billion purchase of Extended Stay Inc. out of bankruptcy protection, according to people familiar with the matter. Part of the debt is expected to be sold as CMBS, these people say. A bankruptcy judge approved Tuesday the acquisition by the group, which also includes Paulson & Co. and Blackstone Group.
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CoStar Reports Office Markets Have Bottomed Office Job Growth Spurs Positive Net Absorption; Office Vacancy Rates Have Peaked with Some Markets Even Seeing Increases in Average Rent By Mark Heschmeyer July 14, 2010 Fundamentals in U.S. office markets appear to have stabilized and are headed toward an expected recovery, according to CoStar Group in its The State of the U.S. Office Market: Mid-Year 2010 Review & Forecast. In its detailed quarterly analysis of the U.S. office market, CoStar Group confirmed positive net absorption for the quarter and office vacancy rates that appear to have peaked and are no longer rising. "As we anticipated two quarters ago, it now appears we have hit the bottom of the market in terms of vacancy and that is critical here in this business," said Andrew Florance, CEO of CoStar. "The fact that we are clearly showing some sort of bottom and we don't have a significant increase in vacancy this quarter is very positive news." In presenting the latest findings based on CoStar's research, Florance sought to dispel confusion over the office market's performance that may have resulted from conflicting media reports. "I think there may be some conflicting news [about vacancy rates] here and there," Florance continued. "I saw something the other day saying that vacancy rates were still going up and were expected to continue to do so for another year or more. I think that is just wrong. I think this is big news and it's important." Of the 20 largest office markets, eight posted positive net absorption so far this year, three had little or no change and nine posted negative net absorption. Washington DC led the country with 2 million square feet of net absorption followed by Denver with 1.6 million and Minneapolis with 1.3 million. New York City was the biggest loser at 2.8 million square feet of negative net absorption, Los Angeles with a negative 2 million and Philadelphia at negative 1 million. But even the markets experiencing negative absorption were doing so at much reduced levels compared with last year. Importantly though for New York, all of the negative absorption occurred in the first quarter, while the market absorbed more than a half a million square feet in the second quarter and as a result saw its vacancy rate decline one-tenth of a percent. Similarly, across the country, the quarterly change in vacancy rate has been rising at a less rapid rate and appears to have stabilized, approaching zero percent change. New York, Long Island and Minneapolis are all now reporting single-digit vacancy rates, 9% or less in fact. Much of the highest office vacancies (17% or higher) are found in markets in the South and Southwest (Atlanta, Dallas/Fort Worth and Phoenix), while Detroit continues to suffer through the lackluster automotive demand. The good news, though, is that all of those markets saw office vacancy rates decline about one-tenth of a percent or more in the second quarter. In addition, more U.S. office markets posted positive absorption in the second quarter than in the first quarter. At the current pace, if the current absorption and delivery trends hold, CoStar projects the office vacancy rate will fall from 13.6% to less than 11% in 2013. Asking office rents, while continuing to dip in the second quarter, are declining much less sharply than they had for the previous four quarters. At the current pace, asking rents could fall another 4% or so before flattening out and turning positive in 2011. In fact some markets have begun to experience increases in asking rent, including in such markets as Boston, New York, San Francisco, Seattle and Washington DC. CoStar Group highlighted two economic trends that are helping to support office market fundamentals. The first is a historically low pipeline of new delivery of inventory. In fact, with building conversions and obsolescence factored in, the U.S. office market could see overall negative inventory growth in 2011 and 2012 - an unprecedented occurrence. That means that office markets are actually shrinking. Not only is there very little new office product being built, there likely won't be for some time as new office construction starts are also at historically low levels - less than 5 million square feet in each of the last three quarters. CoStar also pointed to other current economic factors constraining new office supply. "One of the things playing into all of this is the current lending standards (for funding new development)," said CoStar Senior Director of Research & Analytics Jay Spivey. "With the financial crisis, we've had tightening lending standards that are having an impact on construction financing and likely will continue to have an impact over the next few years and restrain construction in the near term." "The inventory of commercial real estate in the United States right now is contracting and if you have any job growth or positive absorption coming along with that, you have falling vacancy rates," Florance said. Also according to Florance, office employment growth has been one of the bright spots this year. While the overall the number of unemployment is high and may yet increase, there has been positive job growth in the office sector. Professional and business services added 360,000 jobs in the last three quarters; government workers increased by 290,000. Layoffs in the financial services and information sectors have only amounted to about 161,000 positions. "From a commercial real estate perspective, as long as you have any net job growth, it is eating away at the vacancies out there," Florance said. "The most important thing here is that this positive employment growth in the office sector will be reducing standing inventories of (available) space." Vice President of Analytics Norm Miller noted how the return among lenders to "1970's levels of loan-to-value ratios" has worked to the advantage of equity investors able to acquire high quality office property at a substantial discount to replacement cost. "Office rents will trend up following a few quarters of positive absorption and we expect to see a return of NOI growth in office properties over next several years, which should attract larger numbers of investors," said Miller. Return to top of page
$2.3 Billion in Troubled CMBS Loans Coming Due Over Next 6 Months By Mark Heschmeyer June 30, 2010 There are 960 fixed rate loans representing $9.6 billion scheduled to mature by the end of the year, according to a Fitch Ratings' review of CMBS fixed rate commercial loans. Of these 960 loans, 103 loans representing $2.3 billion (23.3%) are in special servicing. Of those in special servicing, 27 loans (representing 48% by balance) are current. The maturity breakdown by month through December is as follows: * July: 148 loans, $1.7 billion * August: 134 loans, $1.4 billion * September: 154 loans, $1.1 billion * October: 180 loans, $1.9 billion * November: 161 loans, $1.6 billion * December: 183 loans, $1.9 billion Of the 148 loans maturing in July, 133, having an average balance of $8.5 million, are current and performing. Retail properties secure 40% of the loans (by dollar balance), followed by 34% office and 12% multifamily. By vintage, 57% of the maturing loans are from 2005 transactions, followed by 26% from 2000 and 8% from 2006 transactions. A majority of the loans have reported year-end 2009 results and have a weighted average debt service coverage ratio of 1.72 times. While liquidity appears to be slowly returning to the market, the time it takes for borrowers to refinance has continued to be a lengthy process. Loans may remain with the master servicer for 60-90 days while the borrower works to close a new loan. In instances where a borrower is not responsive or has not provided documentation supporting their efforts to refinance; loans are being transferred to special servicing. The lack of liquidity in the market for refinancing mortgages coming due increases the likelihood of a transfer to special servicing for a modification or extension. Of the 11 loans greater than $20 million scheduled to mature in July, Fitch expects eight loans to default at maturity based on its assumptions. The average loss expectation for these loans is less than 5%, with only four loans being modeled with an expected loss.
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