From an article in the sddt:

The commercial mortgage-backed securities market is making a comeback, and capital appears to be slowly returning, but construction financing may be elusive for a very long time.

These were a few of the conclusions reached by Mark Gibson, Holliday Fenoglio Fowler vice chairman and executive managing member during a session at The Grand Del Mar resort in the Del Mar Heights area recently. 

Gibson, whose mortgage banking and financial services firm has closed more than $235 billion in 11,000-plus transactions, contends that despite reports to the contrary, there isn’t a liquidity problem. “I don’t think it’s a lack of capital … it’s a question of price …” Gibson said adding that those who might sell are unwilling to at these depressed values.

Holliday Fenoglio, which sponsored the event, reported that by its calculations, prices are currently between 30 percent and 40 percent off their 2007 peak in the county according to location.


Scot Ginsburg, a Jones Lang LaSalle managing director, who has noticed a similar decline in commercial property prices, said investors are still very much out there.  “Real estate values have crumbled anywhere from 25-40 percent, but it does not appear a mass exodus has occurred at the investor level,” Ginsburg said.

HFF added that prices will continue to be depressed until double digit employment levels start to improve and noted that rents are also off 20 percent to 30 percent off their peak from a couple of years ago. This could be either bad from an investor’s standpoint because of the reduced income, or good in that the rents have room to grow.

In any case, both Gibson and Ginsburg agree the commercial markets won’t return to normal overnight. “Commercial real estate activity in 2010 will remain similar to 2009 at least for the first half of the year with the exception that concessions for tenants may continue upward,” Ginsburg said. “Year 2011 will commence the stabilization of the leasing market continuing into 2012. Concessions for tenants will start to slow as rental rates inch upward and supply and demand nears equilibrium. However, it could take until 2014 to 2015 for the tides to shift.”

Investors have been showing an increasing interest, but without commercial lender cooperation, they can’t buy property, let alone build new projects.

“Some banks have been told to stop accepting deposits because they have no place to deploy their loans,” Gibson added.  Gibson suggested many commercial properties that will become available this year, will be as a result of some sort of a monetary default. He said while banks will generally bend over backward to work things out on a structural default such as a maturing loan, the story is a different one when a borrower simply can’t make its regular payments.

Some landlords have simply walked away from these properties such as Sunstone Hotel Investors (NYSE: SHO) has done with the W Hotel downtown.

Some real estate investors have walked from their buildings, but not as many as predicted,” Ginsburg said. “Probably for a couple of reasons. First, landlords are not as leveraged compared with the last recession and second, banks are modifying near term debt maturations with short-term loan extensions. In other words ‘extend and pretend’.

For those who wish to build office, industrial retail or retail, Gibson suggests forgetting these impulses for a while. Apartments have a better shot but even this asset class has to wait for existing multifamily units to fill first.  “Construction loans will remain very difficult for the foreseeable future,” Gibson said. 

Major construction loans may be a far off dream, but Gibson said the commercial mortgage-backed securities (CMBS) market that had been dead for 18 months until late in the fall of last year, is finally waking up.

“The bottom line is CMBS is back,” Gibson continued adding that the if the projected activity since last fall is extrapolated out through the end of the year, it translates to $4 billion to $5 billion in CMBS transactions nationally each month.

Real Estate Investment Trusts (REITs) have historically been big players in the capital markets picture, but particularly if they are in the office or retail sectors, have been hammered in the past 1 1/2 years.

“Public REITs raised $29 billion in capital last year — which isn’t really a bad performance considering,” Gibson said.  Although that may be true, it is still a huge decline from the $71 billion volume recorded just a couple of years earlier. 

Gibson said another thing he has noticed is an increase in the activity of private REITs in the capital markets in recent weeks.  He added though that while private investors in general are slipping back into the market, “equity fund investors are stepping away.”

Gibson then addressed government intervention in the markets. While suggesting federal stimulus efforts may have helped, HFF takes issue with those who argue the market will collapse when the stimulus stops.  “We disagree and believe the recovery may already be under way,” HFF writes.

Both Gibson and Ginsburg were also quick to point out, however, that while markets are improving and will continue to do so, there is still plenty of pain to go around for two or three years to come.

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