One of the big issues facing commercial real estate is the lack of financing for loans that are maturing. Property & Portfolio Research reports that $497 billion of loans from banks, insurance companies, commercial mortgage-backed securities and other sources will come due this year, with the annual totals declining only slowly to $451 billion by 2012. Of the $497 billion maturing in 2009, banks hold $365 billion or 73 percent; loans packaged into CMBS account for $36 billion or 7 percent; insurance companies hold $31 billion or 6 percent; and other sources such as private investors and government-sponsored entities hold $65 billion or 13 percent. Of the $365 billion held by banks, $237 billion are permanent loans, and $128 billion are construction loans.
The lack of available financing to cover these maturing loans is pushing a steadily rising number of properties into foreclosure. In the first four months of 2009, according to Real Capital Analytics, foreclosure proceedings were initiated on properties valued at $41 billion. By comparison, only $16 billion worth of properties were sold, while $60 billion were offered for sale.
Deteriorating leasing market fundamentals will accelerate the rate of foreclosures. Net absorption, slightly negative in 2008, increased sharply among all major property types in the first quarter of 2009 as the 6 million payroll jobs lost to the recession translated into empty space. Even though tenants are still on the hook to pay rent through their full lease terms, many are asking for rent reductions, a process that is far more widespread now than in previous softening cycles. This practice is especially prevalent among retail tenants, who have seen their sales slump as households reduce spending to compensate for their loss of stock market and home equity wealth, lost jobs, reduced hours or salary reductions.
The Federal Reserve’s $1 trillion TALF program – Term Asset-Backed Securities Loan Facility – is designed to provide a source of financing for new and maturing CMBS as well as certain types of securitized consumer and business loans. While the Fed is slowing purchasing various loan packages, no CMBS have been acquired to date, though several financial companies reportedly are assembling packages. The regulations governing CMBS provide little flexibility for the servicers to alter the terms of the original loans. Banks, however, appear more willing to extend loan terms, assuming borrowers are current with their payments, because they are not anxious to take the properties back, concerned as they are about their own capital reserve ratios. Nonetheless, the wave of foreclosures is likely to build through 2009 and 2010, creating deep discounts for investors with equity and good relationships with financially sound lenders.
To discuss your investment goals, contact Mark Hinkins t.925.274.2439 or mark.hinkins@grubb-ellis.com
The lack of available financing to cover these maturing loans is pushing a steadily rising number of properties into foreclosure. In the first four months of 2009, according to Real Capital Analytics, foreclosure proceedings were initiated on properties valued at $41 billion. By comparison, only $16 billion worth of properties were sold, while $60 billion were offered for sale.
Deteriorating leasing market fundamentals will accelerate the rate of foreclosures. Net absorption, slightly negative in 2008, increased sharply among all major property types in the first quarter of 2009 as the 6 million payroll jobs lost to the recession translated into empty space. Even though tenants are still on the hook to pay rent through their full lease terms, many are asking for rent reductions, a process that is far more widespread now than in previous softening cycles. This practice is especially prevalent among retail tenants, who have seen their sales slump as households reduce spending to compensate for their loss of stock market and home equity wealth, lost jobs, reduced hours or salary reductions.
The Federal Reserve’s $1 trillion TALF program – Term Asset-Backed Securities Loan Facility – is designed to provide a source of financing for new and maturing CMBS as well as certain types of securitized consumer and business loans. While the Fed is slowing purchasing various loan packages, no CMBS have been acquired to date, though several financial companies reportedly are assembling packages. The regulations governing CMBS provide little flexibility for the servicers to alter the terms of the original loans. Banks, however, appear more willing to extend loan terms, assuming borrowers are current with their payments, because they are not anxious to take the properties back, concerned as they are about their own capital reserve ratios. Nonetheless, the wave of foreclosures is likely to build through 2009 and 2010, creating deep discounts for investors with equity and good relationships with financially sound lenders.
To discuss your investment goals, contact Mark Hinkins t.925.274.2439 or mark.hinkins@grubb-ellis.com