I attended the Mortgage Bankers Association annual commercial real estate finance conference in Las Vegas last week. Attendance was about 2,000 people, which was better than last year’s 1,600 but well off the 5,000 who attended during the peak.
The mood was better than last year but still pretty bleak.
I would describe the major difference as this: This year, if you own a class A property that is well leased and you only need moderate leverage (based on today’s value), there is plenty of debt available. Last year, even for that deal, there was no money.
The problem is, not many borrowers need that deal. If you assume values are off by 40% and lenders are only willing to make 60% LTV loans, the amount of leverage available compared to 2007 pricing is 36%, calculated as
(100 – 40) x .60 = 36
Most borrowers still have debt equal to 80 cents of 2007 values so 36 cent debt is not that helpful. Nonetheless, at least the low-leverage money has come back.
Several new lenders and distressed funds were offering money, but that money is all chasing 20% yields. The problem they have isn’t accessing money; it’s finding deals that make sense. Low-leverage money is facing the same problem.
The problem really comes down to deal flow.
There’s no doubt that values are way off from 2007, but there hasn’t been significant deal volume for a host of reasons:
1) The extend and pretend mentality of lenders/special servicers,
2) The low interest rates on the distressed debt that is keeping them alive,
3) Regulatory relief in terms of suspension of mark-to-market accounting, and many others.
That being said, I sense the cracks are starting to grow and 2010 will be the start of the deleveraging process that needs to occur.
In CMBS, special servicers, I predict, will finally start moving bad loans in decent volumes. I also think the FDIC will continue to liquidate banks as quickly as they can.
Borrowers, on the other hand, will remain optimistic and only give up properties as a last resort, so the bid ask on non-forced sales will remain wide. Fundamentals will not improve (and may very well continue to deteriorate) so, despite my prediction for more deal flow, the market will be nowhere close to normal in 2010.
I spoke out on the need for disclosure of rent rolls for CMBS loans during the public policy meeting, the technology council and the servicers forum.
Not surprisingly, I was met with consistent and vocal opposition from the servicer community. I must say it is discouraging, but not surprising, that the servicers are still fighting this issue. The need for transparency is not their driving factor and, apparently, many are content to keep operating as they have in the past. In fact, I received complaints that MISMO was going too far in even creating rent roll standards. Ouch!
I will say that more and more folks are recognizing the common-sense need to disclose rent rolls to CMBS investors, but the old guard is fighting hard. I think the Senate passing the financial reform legislation and Obama signing it into law might be the only catalyst to force a change. Until then, we will keep up the pressure.
Off to Mexico with the family for winter break. I will report in after that.
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Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.