Monday, May 10, 2010

"Mind the Gap": The Illiquid CRE Market

Current CRE Market Conditions

Of $3.4 trillion of commercial real estate debt outstanding, 45% is held by banks and thrifts:

“The Congressional Oversight Panel has warned that $1.4 trillion worth of commercial real estate loans will reach maturity between 2011 and 2014. With the plunge in property prices, nearly half of these loans are at present "underwater," meaning that the borrower owes more than the underlying property is currently worth….as many as 65% of these loans will have difficulty refinancing.” Source: rttnews.com

“The CMBS market, traditionally a key source of financing for property owners, has remained largely dormant despite the launch of four deals totaling about $2 billion over the past six months. In the year 2007, Wall Street sold a record of $230 billion CMBS in the U.S.” Source: Wall Street Journal

"There is a significant supply-demand imbalance for commercial real estate credit….There are over $1.4 trillion of loans maturing by 2012 and little known supply of capital as a result of the inactivity in the CMBS markets and slowdown in new lending by money center banks." Source: Steven Ball, President of FundCore

“An analysis… has found that nearly 3,000 of the nation's more than 8,000 banks have potentially dangerous exposure to commercial property loans.” Source: rttnews.com

“According to our (The Fed’s) January (2010) survey of senior lending officers, banks continued to tighten standards on CRE loans and, presumably in light of the poor economic outlook for the sector, appear to have been reluctant to refinance maturing construction and land development loans. In this environment, a turnaround in CRE is likely to lag the improvement in overall economic activity.” Source: The Federal Reserve


Will CRE continue to be an anathema for banks? In the near term, YES. Over 700 banks are on the FDIC’s problem bank list with a total of $400 billion of assets, much of it CRE assets. There were 140 bank failures in 2009, 68 in 2010. To deal with failed banks and problem commercial and residential assets, the FDIC has entered into 94 Loss Sharing Agreements covering assets totaling $122 billion in 2009. In 2010 alone, an additional $43.3 billion in loss sharing agreements were entered into with acquiring banking institutions. There may be in excess of 200 additional bank failures in 2010 and the market for assets placed into Loss Sharing assets will exceed $300 billion, cumulatively. A large number of commercial real estate assets will need to be resolved by banks over the next 3-10 years. New financing sources are essential to the resolution process.

The opportunity exists, on a massive scale, to provide well underwritten and structured interim financing that will facilitate the movement of viable loans and valuable relationships from the ailing banking sector to permanent, stable sectors of the commercial real estate finance market, over the next decade.