Optimism growing in commercial real estate industry

Virtually everyone in commercial real estate these days will say things are better than they have been in some time.


Though not altogether supported by the data, a positive outlook is spreading slowly but surely into the business.


Nothing compares well with commercial real estate activity in the good old days of 2007, but "off the bottom" is not a bad place to be when the industry's prospects over the next few years "could threaten America's already-weakened financial system," according to a recently released government report.


The 183-page report was completed by the Congressional Oversight Panel, whose task was to assess commercial real estate loan loss risk to the country's financial stability.


Other observations in the report include that $1.4 trillion of loans come due between now and 2014, and 50 percent are underwater; and that there are nearly 3,000 banks with problematic exposure to commercial real estate.


The panel's bleak assessment of the industry is probably close to accurate if all banks with more than 30 percent of their assets tied up in commercial real estate loans closed shop tomorrow and liquidated.


The reality is much different.


Most banks that are overexposed to commercial real estate loans will continue to tread water, and those with capacity to lend will quite likely excel in growing their brand in the coming years.


Interestingly, it is the large banks that currently have the most capacity to lend. The top 20 banks in the country possess more than 80 percent of total bank assets. Of those, only two have commercial real estate exposure that exceeds 20 percent of their total assets (BB&T and Regions).


Conversely, all others - the 8,080 smalland medium-sized banks - have an average exposure that is closer to 40 percent (i.e., 40 percent of their assets are commercial real estate loans).


Another troubling commercial real estate trend is that loans are going into default and over to special servicers at an alarming rate.


Special servicers are tasked with handling problem conduit loans - the loans originated by Wall Street firms, bundled together and sold as commercial mortgage backed securities (CMBS).


According to data provided by Trepp, 10 percent of all CMBS loans are now specially serviced. Property types with the largest problems are hotel, multifamily and retail properties, with 19.7 percent, 13.8 percent and 10.7 percent, respectively, of each category being specially serviced.


According to Fitch Ratings Service, the actual delinquency rate for the same CMBS loans sat at 6 percent at the end of January, but with specially serviced loans at 10 percent, delinquencies are expected to rise.


So with all kinds of bad news, what's making commercial real estate people more optimistic?
As Franklin D. Roosevelt said, "There are many ways of going forward, but only one way of standing still." Said another way, things are starting to move.


Special servicers are so overwhelmed with problem loans it's forcing them to take action and dispose of what they can. The market has been waiting for this and views it as vital to commercial real estate's recovery.
Another disturbing problem for many institutions was lack of clarity and direction from the government. While this problem still haunts many lenders, those that have good controls in place and are not overexposed to real estate are back in the game.


The FDIC has not provided explicit direction on new lending activity, but its lack of ability to shut down banks with problematic loan exposure allows relatively healthy banks to move forward and go about their business.
The other positive factor is a pickup in transaction activity, particularly in larger cities.


The latest data from Real Capital Analytics indicate that December 2009 transaction volume for commercial real estate deals larger than $5 million was up 75 percent from the same period a year earlier.


Activity is a telling sign that we are moving away from the bottom.


Surprisingly, money is available at reasonable rates from the revised CMBS market as well as institutional lenders, such as pension funds and life insurance companies.


According to the John B. Levy & Company National Mortgage Survey, commercial mortgage pricing for five-and 10-year loans is in the 6 percent to 6.75 percent range for conservatively valued properties with good sponsors and solid leases.


The Richmond area is also showing promising signs.


Several large office properties are being marketed, and the Reynolds land near the Canal Walk is under contract.


Another positive example: A significant loan closing took place on the MeadWestvaco headquarters building. PB Realty Corp. financed the building for $68.4 million with a guaranty from NewMarket Corp.

Andrew Little is an investment banker with John B. Levy & Co. He can be reached at alittle@jblevyco.com