Commercial real estate perks up
NEW YORK – April 20, 2010 – The darkest cloud over the economic recovery – the troubled commercial real estate market – may be clearing a bit. Prices of commercial property are up slightly compared with last fall. Loan modifications have risen sharply the past six months. Commercial mortgage-backed securities (CMBS), a big funding source that was comatose for two years, has come to life recently. The developments won’t alleviate the sector’s biggest problem: the rising pace of defaults. But they should contain the damage and provide a lifeline to better-performing properties, analysts say. Developers put up too many commercial buildings earlier this decade and paid the price when the economy wilted as vacancies rose and rents fell. Default rates jumped to 3.8 percent from 1.6 percent in 2009 and will hit 5.1 percent this year, Real Capital Analytics says. Many larger deals were financed by CMBS. Investment banks bundled loans for several projects into securities they sold to investors. A record $230 billion in securities were issued in 2007 vs. $3 billion last year, Commercial Mortgage Alert says. Already this year, $4 billion in deals have been done. Tom Fink of research firm Trepp predicts about $25 billion in CMBS will be issued in 2010. Investors and banks have waded back into the market because property values have bottomed and lending standards have toughened, says David Nackoul of mortgage broker Holliday Fenoglio Fowler. And with bond interest rates at low levels, investors are seeking higher yields. The money isn’t rescuing distressed properties. It’s refinancing high-quality loans as they mature. Even borrowers who bought projects before the real estate bubble have had a hard time refinancing because of scarce funding and lenders demanding higher downpayments. Michael Glimcher, CEO of Glimcher Realty Trust, recently snared $100 million in loans that will be sold into the CMBS market. He’ll use the money to refinance loans for shopping centers in Tennessee and Ohio after struggling to refinance malls last year. “The pipeline has opened back up,” he says. The funds’ availability also could help some borrowers whose properties have fallen in value since they bought them but who are still making payments, Fink says. Deutsche Bank analyst Richard Parkus says most of the $1.4 trillion in mortgages maturing by 2013 won’t qualify for refinancing unless borrowers put up more cash. That could lead to foreclosures, further depressing prices, though many lenders have extended loans on the hope prices will rebound. The new capital “will moderate (the slump),” Fink says. Other good signs: • Commercial real estate values have edged up 6 percent in recent months, Real Capital Analytics says. They fell 45 percent from 2007 to 2009. • About $13.7 billion in loans were modified the past six months, Parkus says.
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