Browse Tag: Commercial mortgage-backed security

Are we headed for inflation or deflation?

The following guest post is by REALTORS(R) Signature Series Speaker Rob Nahigian, FRICS, SIOR, CRE.

As we focus on the third quarter of 2011, we are faced each day with investment decisions based on projections. Where is the economy headed for the remainder of 2011 or for the next 5 years? Are we headed into inflation or deflation? Are interest rates going to rise or fall?

I recently posed similar types of questions to members of the Charleston Trident Association of REALTORS® during their Commercial Education Program – with opinions differing across the room.  After mixed responses from the audience, I offered my thoughts, along with those of well-respected industry experts.   I let them know that I am in the midst of reading “The Age of Deleveraging” by Dr. Gary Shilling. Shilling’s outlook on inflation is quite bearish.  Shilling feels that the U.S. consumer, after 30 years of spending, is now ready to pay off the bills and “stash the cash.” He also feels that Governments cannot afford to spend more money either.

Commercial real estate professionals must think like economists because investors do!  I believe that in the very near future it is becoming evident that we will see immediate inflation. These 5 listed issues below will help influence your answer this summer.

  1. The market’s reaction after the end of QE 2 on June 30th. The M2 Money Supply is already starting to shrink. Will interest rates increase dramatically, slowly or nominally?
  2. The proposed Risk Retention Rules would require that CMBS issuers hold at least 5% of the credit risk of any loan as part of the pool. Lenders could curtail financing or dramatically increase interest rates.
  3. Trillions of dollars of CMBS financing is coming due and KC Conway, CRE has stated that the CMBS debt will break the dam during 2011 with new defaults (and foreclosures?). Will this cause deflation of real estate pricing?
  4. The Federal Debt Ceiling: will the Feds vote to increase it? If not, interest rates will skyrocket.
  5. Greece and its debt and the impact on the German bondholders. Can Greece really pay off these loans?  I am suspicious.

Bob Rodriguez, the successful fund manager of FPA Capital Stock was interviewed in the June, 2011 Money Magazine article. In early 2007 he felt that the housing debt would be a crisis and he had worried then about the federal debt. He took a sabbatical in 2010 and now observes “I would say a lot of nothing has changed. Investors are still chasing after high yields and loading up on risky investments. Very little has been learned. At best, we’re facing a substandard recovery.”

We cannot spend our way out of this mess without some repercussions years down the road. We need economic encouragement that investing in real estate and other assets will not result in penalties as well. The long-term capital gain tax rate will expire in 2 years and I anticipate a flurry of activity. But I would be fooling myself in not admitting that this recovery will be slow and will need 4 more years to recover. But the question, are we headed into inflation or deflation? We may need the summer to see how matters settle out.

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Commercial Loans Up, Hotel Market Trending in Right Direction

W Hotel Times Square lobby
Image by marcus_jb1973 via Flickr

The latest bit of good news: according to data gathered from the Federal Reserve, the amount of commercial real estate loans ticked up in April 2011.

Even better, the number of delinquent commercial RE loans has gone down in the hotels and lodging sector.  The data comes from Trepp, LLC, a leading provider of CMBS and commercial mortgage information, analytics and technology to the global securities and investment management industries.   The decrease in delinquent loans found across the country came in at a whopping 52 basis points bringing it down to 15.45%.   You can find more evidence of this positive movement from Crain’s Chicago Business.

Also on the sunny side: Colliers International says industrial real estate is poised for a rebound.  The brokerage believes manufacturing is coming back with a vengeance in several primary markets such as Chicago, Dallas, New Jersey and a few more.

What are some strategies for brokers?  While we are waiting for many of these sectors to recover, we still have the lowest interest rates in history, so brokers should recognize it’s an ideal time for those businesses with solid cash flow and a great credit rating to take advantage of the market.  Since there are only a finite number of these type of clients, many commercial brokers have gotten creative and have taken to listing and leasing more properties than they have done in the past.  These type of deals are smaller in transaction number, but are more plentiful in today’s market.  Yes, it’s a lot more work for less money, but it’s a great way to push the market until things improve.  It’s also a great way to build relationships with those business owners who don’t have stellar credit, but do have a great product and decent cash flow,  who could turn into a loyal client because you were willing to work with them when they needed you the most.

Consider specialization – many brokers are now specializing in green buildings or industrial make-overs in up and coming areas in order to carve a niche out for themselves, too.   This is the type of market where there are opportunities to be had and relationships are waiting to be built to take you into the improving market conditions.

Lenders And Special Servicers Avoiding Foreclosures, Managing Recovery

Commercial property in Carnotstr., Berlin.

Securitizing commercial real estate financing into CMBS was a trend that hit a peak before the economic downturn of 2008.  Defaulting on financing that underlies instruments from which shares were sold to investors calls for the use of “special servicers” – management companies who, upon the event of a default of a given loan, represent the interests of those clients who own pieces of the troubled commercial mortgage-backed security.   These companies are, in much the same way as banks in similar situations, under great pressure to avoid foreclosures.  These specialists in dealing with defaulted mortgagel oans have been leading the way in creative methods to do just that.

The burst of creativity is timely.  A recent Wall Street Journal piece by Anton Troianofsky and Eliot Brown spells out that the workload for special services has jumped as the total of CMBS defaults have risen – around 16% over 2009 year-end numbers.

The firms, known as special servicers, are dealing with an influx of souring loans backed by commercial-mortgage-backed securities, or CMBS: a total of $90.9 billion as of the end of September, compared with $73.8 billion at the end of last year, according to credit-rating firm Fitch Ratings. But the pace at which those loans have been resolved has picked up at an even faster rate, with $27.9 billion recovered by special servicers from bad loans in the third quarter, compared with $8.9 billion in the first quarter, according to Fitch.

Many of those bad loans are simply getting modified and extended, pushing the borrower’s day of reckoning to a day into the future when, both sides hope, the market will improve to a point at which the property owner can refinance. But in other cases, servicers are trying more unusual methods to dispose of properties through sales or other means as they work through a volume of distressed loans that is testing the legal apparatus built up by Wall Street’s boom-time securitization binge.

Read the entire article here.  Looking for definitions of special servicer or CMBS?  Check out C-Loans databank.