The mood coming out of the annual shopping center convention in Las Vegas last month was decidedly upbeat and cautiously optimistic. There is a feeling building that we have begun to turn the corner in retail real estate. As one attendee commented, “We are no longer looking into an abyss.”
There are still many hurdles to climb. While the unemployment rate across the nation and in Indiana shows signs of topping, it is still at a historically high rate of about 10%. Retail occupancy and rents are still well below previous levels and will likely remain so for the next 18-24 months. However, the increase in retail and restaurant activity is likely to pay benefits in 3Q and 4Q 2010 as more leases are signed and more store openings are emerging on the horizon. Fortunately, new development is at a virtual standstill and will remain so for the foreseeable future. We are yet not in need of new space because there is plenty of work to do leasing vacant space and helping our clients start new businesses. Today’s increased activity levels give us a bit more confidence going into the second half of the year.
Posted June 21st, 2010
by John Fox
Posted in Commercial Real Estate, Economy, General Retail
As reported here earlier, FDIC bank regulators were recently in the process of re-writing the guidelines for commercial real estate loan workouts. Well they did. These new guidelines were released on Friday just in time for Halloween. The end result is a 33 page policy statement on prudent commercial loan workouts (emphasis added). In a nutshell, this policy statement calls for a continuation of the so-called “extend and pretend” practice of extending loans upon maturity even while the value of the property has fallen below the loan amount. The FDIC is obviously concerned about bank failures which have cost the FDIC’s fund that insures deposits an estimated $25 billion so far this year and are expected to cost another $100 billion through 2013.
Regulators have now provided more explicit guidelines for commercial banks dealing with troubled commercial real estate loans. It appears likely that if the property is producing income sufficient to cover the debt and the borrower shows a strong likelihood of continuing ability to pay, the loan will be extended or re-worked. In fact, in the introduction on page one of the policy statement, the FDIC says “financial institutions that implement prudent loan workout arrangements after performing comprehensive reviews of borrowers’ financial conditions will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications.” In other words loans made to creditworthy borrowers that have been extended or restructured won’t be classified as high risk by bank regulators when the assets backing them have declined to a value that is below the loan balance. This is the strongest indication we have seen to date that the floodgates are not ready to be unleashed as far as OREO properties are concerned. However, delinquent loans still comprise around 9% of total commercial real estate loans outstanding and some 16% of all construction and development loans were considered delinquent at the end of the second quarter of 2009. This places delinquent commercial real estate loans at some $150 billion out of a total loan pool of $1.7 trillion held by commercial banks. If the loan is delinquent, what does this say about the borrowers ability to repay? And this says nothing of the $900 billion in securitized real estate loans, many of which will be seeking a new home over the next several years. I don’t see special servicers and hundreds of individual bondholders being willing to employ the same strategy as commercial banks. Regardless, it appears we may have to wait a bit longer for some significant OREO opportunities and there is so much dry powder out there sitting on the sidelines that some REITs are now talking about using it to pay down debt in 2010 if buying opportunities do not emerge.
This whole process sets up another dilemma just down the road. Valuations are actually coming back down to historical norms. Too many people have forgotten that cap rates were 10% earlier in this decade. At the same time as these loans are being extended, both occupancy and rents are continuing to drop. This trend is set to continue throughout 2010 for most real estate asset classes. The fact is we still have too much office space, too many apartments and too many shopping centers for the demand. Until we see some serious and sustained job growth this trend will not reverse. And then interest rates are expect to start rising soon…I still see someone eating OREO’s in the future.
Posted November 3rd, 2009
by John Fox
Tags: bank reo, commerical real estate loans, FDIC Posted in Commercial Real Estate, Economy, Retail Real Estate
