Playing For Time

Doug Marshall
Market Assessment
Published April 30, 2009

I hate being right these days.

In a previous post, I talked about a "different kind of boom" where maturing CRE mortgages ($814 billion worth) and the inability for many to find refinancing threaten the very fabric of the commercial real estate market.

Now a large and prestigious corporation has unfortunately presented a very real example of this gloomy prediction.

U.S. mall owner General Growth Properties, founded in 1954 as a family business and now sporting total assets of $29.56 billion, has declared bankruptcy simply because they cannot find a lending source to refinance their properties.

Unfortunately the company also carries $27.29 billion in debt. While the company claims to have a good core business and seeks simply to gain time to reorganize, the crux of the problem lays in the lap of the credit markets.

General Growth has $15.17 billion in debt from securitized CMBS loans that have to be refinanced, somehow. They have been unable to secure that financing and are now, as the second-largest mall owner in the US, required to seek Chapter 11 protection from creditors in order to make the miracle happen that they’ve been seeking since November.

According to Sam Chandan of Real Estate Economics, this is not going to be a unique case.

He states, “We will see a significant rise in delinquent and defaulted mortgages in commercial real estate above and beyond what we already experienced.”

The question then arises: with so few lending sources able to soak up $814 billion of CRE debt due to mature over the next few years, how many corporations of General Growth’s stature will suffer this fate?

And what will our world look like then?

Source:
Ilaina Jonas and Emily Chasan, Reuters
“General Growth Files For Bankruptcy Protection”, April 16, 2009

A Different Kind Of Boom

Doug Marshall
Market Assessment
Published April 15, 2009

Over the next three years a record volume of commercial real estate loans, $814 billion, will be coming due. In normal times, that would not be a problem. But in a very tight credit market this is a potential recipe for disaster, according to a newly released report from Foresight Analytics.

Already, the refinancing wave has taken shape. Matt Anderson of Foresight Analytics says that fully 80% of loan originations in 2008 were refinances. And he anticipates no slowing of the loan volume.

What happens, though, to new loan opportunities on the horizon? Have they a chance of finding financing? Very little, says Anderson.

“If there is enough capacity out there to keep the existing inventory afloat for a while, the dollar amount of loans maturing will really soak up so much of the capacity of the market that there will be very little net new growth for the next decade.”

With liquidity already scarce, it’s difficult to see where money is going to come from for loans maturing every year at an all-time rate through 2017.

Many investors are already attempting to delay the inevitable by requesting one-year extensions. Although these extensions relieve some of the pressure now, all they are doing is postponing the inevitable.

To make matters worse, many of the lenders that could relieve this pressure aren’t around anymore. Commercial mortgage-backed securities (CMBS), life insurance companies, and banks, a great many of the originators of these loans in better times no longer exist.

“Unless there’s a big shift and the CMBS engine gets revved up again, there’s definitely going to be a shortfall,” says Anderson.

To avoid massive distress, Anderson says, lenders will need to become more lenient in the way they underwrite loans which is the exact opposite of what is actually happening in today’s lending environment.

So at the present time, there is an obvious disconnect between the reality of the situation and what needs to happen in order to make it through this lending crisis. How are we going to get through this? Stay tuned. We’re not out of the woods yet, not by any means.

Source: Sibley Fleming, NRE Investor Magazine, Marh 18, 2009

First Signs Of Economic Recovery

By Doug Marshall
Market Assessment
Published April 8, 2009

Fear is rife and worry is rampant. The economy’s ills are affecting the mood and optimism of a world that’s been sent into a downward economic spiral.

Or so it seems on the street…

From an investor’s standpoint, however, there are some positive signs that recovery may be coming. Not today, not tomorrow, but soon and hopefully of an enduring nature.

Here are some indicators that bring hope:

· Banks are making money. With spreads over the cost of funds at recent historic highs, those lenders still lending are making huge premiums on their loans.

· Housing starts have surged. Having hit an all-time low in January of 2009, recent upward trends in housing and pending starts show a marked slowing in the pace of decline.

The bottom may still be a ways away, however, and a housing glut continues to plague home builders and developers.

· The stock market is up. Always a good thing, the stock market has continued to climb in recent weeks, with the Dow Industrials breaking 8000 last Thursday, for the first time in two months.

The news from the Commerce Department that factory and manufacturing orders were up, as well as the loosening of mark-to-market accounting standards on banks by the Financial Accounting Standards Board, fueled the rally.

· Retail sales are recovering. In weekly chain stores sales throughout the US, retailers have seen slight but positive increases in sales. Recent surveys conducted by ICSC and Johnson Redbook confirm that consumers are beginning to spend more.

· Airline traffic is better than expected. Full airports and planes reveal that the airline industry does not lack for sales. It’s taken some drastic measures. Many airlines have cut back on services and routes and begun charging for services normal included in airfare.

· Not all are pessimistic. Dr. Mark Dotzour, who is the head economist from Texas AM University, spoke at the national TICA conference in San Diego last month. He said that he believes the data shows that this recession should be over by year end.

It’s interesting to consider that the average time needed to sell a house has gone from 11 to 6 months over the course of the past year.

Spring has sprung. And it’s to be hoped that the American investor reads all the news before panicking into error.

We’re on the way…

Source:
Rich Karlgaard, Digital Rules, "Twenty Reasons to Be Optimistic"
As printed in Forbes, April 13, 2009