The Oregonian Weighs in on Banking Crisis

by Doug Marshall, CCIM
Market Assessment

It is not often that I agree with an editorial written by The Oregonian Editorial Board. And it’s even less often when I just quote an article (it’s been shortened a bit) without comment. But this article is spot on and needs no comments by me. Please read this insightful opinion piece regarding the current commercial real estate banking crisis.


The Oregonian
March 7, 2010
“A wave of commercial real estate loan failures could threaten America’s already-weakened financial system,” begins a Feb. 10 report by the Congressional Oversight Panel, which gloomily predicts that losses at banks alone could reach $300 billion as more than $1.4 trillion in commercial real estate loans become due over the next five years.

This is leading to a massive recalibration of the commercial real estate market, and is likely going to spell a wave of foreclosures or distressed sales of commercial buildings. It also has the potential to undermine a swath of small and mid-size banks that made commercial real estate loans.

As the oversight panel put it, “their widespread failure could disrupt local communities, undermine the economic recovery and extend an already painful recession."

What to do?

The choices range, roughly, from writing down all the values to reflect current market conditions, which would likely spell the failure of many independent banks, to some sort of coordinated, TARP-like intervention by the federal government in the small-bank sector. Neither direction is promising or desirable.

A middle course would be to encourage lenders to work out with borrowers the terms of loans that have sunk underwater. This is precisely the course mapped out by a set of financial regulators last fall, but it doesn’t seem to be happening in any consistent way.

A policy statement issued by a coalition of regulatory agencies in October encouraged examiners to make it easier for banks and borrowers to work out under performing loans.

Yet independent bankers in Oregon complain that examiners haven’t relented on their demands that banks purge their balance sheets of underwater loans, or raise more capital in reserve. This has the effect of taking out of circulation money that would otherwise be lent to credit-worthy borrowers.

What’s best for the economy is that credit keep flowing, because it is the lubricant that makes it possible for businesses to hire people and buy equipment. We’re just coming out of a period when they were doing neither: we want to avoid driving ourselves into another recession.

There’s a growing tension between the forces of rigorous regulation and those who want to buy time to let lenders and borrowers work their loans, while hoping for a market rebound.

Washington Gov. Chris Gregoire, Rep. Barney Frank D-Mass., Sen. Chris Dodd, D-Conn., and others have expressed alarm about inflexible bank examiners, but market purists call that “extend and pretend,” and say it’s imprudent to allow banks to keep bad loans on the books without taking action.

A lot of loans shouldn’t have been made and deserve to be written down. But a massive, economy-wide write down will be destructive. It’s OK that some buildings will be sold at a loss and that some banks will be closed.

But the guiding principle for regulators, from senators to bank examiners, should be to keep credit flowing and follow no rule over a cliff, especially since valuation is an inexact science.

The bias should be toward survival. Close the banks that made too many imprudent loans, but don’t close the ones that deserve to survive, as angry shareholders of the wrongly seized Ben Franklin Savings and Loan would remind us.

Nobody wants to make a bad situation worse.

Banks in Path of Commercial Real Estate Crash, The Oregonian, March 7, 2010.

So Who's Financing Commercial Real Estate?

by Doug Marshall, CCIM
Market Assessment

Last week I showed you who in 2009 was lending on apartments. If you did not read that post and would like me to re-send it, please contact me.

This week I have the final results of who was lending in 2009 on commercial real estate sales transactions. But first I must define what I mean by commercial real estate.

I am referring to investor-owned real estate (not owner-occupied) and the property type could be office, flex, industrial, retail or shopping center.

Last year there were 81 arms length commercial real estate sales that occurred along the I-5 corridor from Kelso, Washington to Eugene, Oregon including Bend that were $1,000,000 to $10,000,000 in size.

As was true with apartment lending, the lenders for commercial real estate sales were both surprising and predictable. 41% of all sales transactions were financed either by all-cash buyers, seller financed or private sources!

That’s huge!!!

This is a very real indicator of the lending crisis we are currently going through when traditional lending sources are not lending.

Another interesting tidbit is that 22% of all loans did not disclose any financial details. What’s with this?

My hunch is that these transactions were distressed sales. Either lenders foreclosed on borrowers or sellers sold under duress to buyers where loans were assumed.

Local and regional banks totaled 30% of the financing for commercial real estate sales. On the banking side of lending, there has emerged some very real winners as well as some very real losers. We’ve all heard about those lenders that have been taken over by the FDIC.

Another interesting statistic is that over two-thirds of Oregon banks were not profitable last year. However, 2009 proved to be very profitable for a small group of lenders both regional and local.

The key to borrowing these days is to know which banks are still lending and which ones have the most competitive rates and terms.

As was true with apartments, life company lending was virtually non-existent in 2009 with only 2 transactions. I keep hearing that the life companies are back but that has yet to be proven by the statistics.

Please contact me if you have any questions, or better yet, if you have need for a loan quote on your next transaction.

So Who's Financing Apartments?

The final results of all apartment sales transactions for 2009 have been tabulated.

The CoStar Group identified 65 arms length apartment transactions that took place along the I-5 corridor from Kelso, Washington to Eugene, Oregon including Bend that were $1,000,000 or more in size.

As a mortgage broker my primary interest is who financed these 65 transactions and do I have access to these lending sources?

The results are both surprising and predictable:

Thirty percent of all the sales transactions were either all cash buyers, seller financed or private individuals.

That seems like a huge percentage! I wonder how that compares to previous years? My guess is that this percentage is substantially higher than a typical year when financing is readily available.

The federal agencies, Fannie Mae, Freddie Mac and HUD comprised 24% of the financing for apartments.

Fannie Mae was the primary lender of the three but Freddie Mac’s strategy was to do the larger transactions so loan volume between the two was very similar.

Even with the 35 year fully amortizing loan with no balloon and a reasonable step down prepayment penalty HUD could not overcome the negatives of financing with them: 6 to 9 months to close, and substantially higher closing costs.

Local and regional banks totaled 34% of the financing for apartments. This did not come as a surprise to me.

If a borrower wants a five year fixed rate loan, 30 year amortization at a reasonable rate it’s the banks that will be the most likely to come through.

But the key is to know which banks are the most competitive.

Surprisingly, no apartment sales were financed by the life companies. When it comes to apartment financing, life companies are generally not competitive with Fannie Mae or Freddie Mac.