It doesn’t make sense to commercial real estate investors that they aren’t seeing a steady stream of foreclosed assets for sale. So what’s the deal, they ask a guy like John Bell, managing director of DTZ Rockwood in Miami.
“Investors were expecting a flood of distressed real estate to hit the market, but this has not materialized,” says Bell, who recently issued a special report on the subject. Instead, he explains, lenders are employing the “extend and pretend” method, extending maturing loans for a year or two hoping for a market rebound.
At the same time, banks have been under pressure from regulators to clean up their balance sheets, and in many cases are avoiding taking possession of assets that could create more trouble, Bell says. “Deferring the inevitable during a declining economy has only made the situation worse,” he says. “Borrowers in a state of limbo are not motivated to invest capital or significant tenant improvements in their assets and market fundamentals have not materially improved, resulting in a further erosion of value in the real estate securing troubled loans.”
DTZ Rockwood projects a slow but steady stream of foreclosed assets hitting the market in the near term, but the supply won’t be enough to meet the demand of investors armed with capital. Bell says the better play is to keep aware of maturities and proceeds of loans coming due on real estate in their favorite markets.
“Relationships with those owners before their loans reach maturity will provide a variety of investment options through direct sales and potential joint ventures recapitalizing the asset’s capital stack,” he says. Investors will be rewarded with the deal profile they hoped to find via bank and CMBS foreclosures, he concludes.
(Personal note: I’m taking some time off from Commercial Grove for the next few weeks while recovering from surgery. I’ll be back!)
very on point comments except for ….“extend and pretend” method, extending maturing loans for a year or two hoping for a market rebound. I have heard this refrain for several months now and the only part I disagree with is the reasoning, i.e. a market rebound. Many debt holders are not forcing a liquidation because they cannot afford the hits right now. If a property backing a $5MM loan is only worth $4MM right now (when it orignally appraised at $5.5MM or so), the inability to take the $1MM hit right now is more a factor than some delusion that everything will be ok in a year or two. Being able to bleed the $1MM loss by taking quarterly reserves of $165k over the next 6 quarters is doable in many cases. Many folks can absorb the hit; just need time.
The fundamentals aren’t going to improve until the banks start taking back the properties and take the hit. Bring in the new investors at a basis that reflects the current market realities and then we will start seeing leases signed and space removed from the market. If rents are down 20% and cap rates moved up 30% you have lost about 40% of the value of the property. The banks are dreaming if they think they will make up that kind of shortfall in “a year of two”.
We are a loan sale advisor dealing primarily in commercial real estate loans. Our customer is the community and regional banking sector. We get feedback daily from bankers that are dealing with problems. They are not able to sell because of the loss that results in most cases ( interpreted as “illiquid”).
If you think the problem is going to fix itself anytime soon, you should find a copy of the recently issued “Policy Statement on Prudent Commercial Real Estate Loan Workouts” and read it. It was issued on October 30th by the Financial Regulators.
(The financial regulators consist of the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the Federal Financial Institutions Examination Council (FFIEC) State Liaison Committee (collectively, the regulators).
We need the market to clear. There will have to be some pain and (unfortunately) more bank failures in order for this to happen.
Barry Smith
President
LoanSaleCorp.com