Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: tejek who wrote (613057)	5/26/2011 2:29:13 AM
From: i-node	Read Replies (1) \| Respond to of 1587264

I'm glad to see they got my email. I just wish they'd fired him.

To: tejek who wrote (613057)	5/26/2011 9:16:48 AM
From: jlallen	1 Recommendation Respond to of 1587264

More bad news.... Commercial Real Estate’s Race To Loan Maturity By Chris Macke May 25, 2011 As a native of Indiana, every Memorial Day my attention turns to the "Greatest Spectacle in Racing," the Indianapolis 500. However, as senior commercial real estate strategist with CoStar Group, I have my eyes set on another race -- the one between maturing commercial real estate loans and the prices of the underlying properties securing those loans. And in that race, commercial real estate has recently been issued a yellow flag. In CoStar’s Commercial Repeat-Sale Index, which tracks pricing among commercial real estate properties, almost three out of every four properties that had been acquired between 2005 and 2007 and then resold in the first quarter of 2011 sold at a lower price. This is an ominous percentage considering that many of the "extend-and-pretend" loans are related to acquisitions made during the 2005-2007 period. The idea behind extend-and-pretend was the following: Properties facing loan maturities and that have current values that are lower than the current loan balance would have their loan maturity dates extended, as long as the property owners are current on their payments. This was intended to extend the time for the properties to recover their values, enabling successful refinancing of those loans. However, one result of these loan extensions is a concentration of these loans maturing over the next few years, rather than being dispersed over a longer period of time had they kept their original due dates. The result is a steepening of what has been called the "loan maturity cliff." In 2008, it was estimated that the United States would see $450 billion in 2011 loan maturities related to commercial real estate. Today that number is estimated at $900 billion. Each year that lenders continue this practice, this concentration risk increases. So, what will the values of those properties be when there are no more extensions and they must be dealt with? The answer depends a great deal on how fast the property values catch up to the maturity dates of those loans. And the values of the underlying properties depend on another key race between interest rates and net operating incomes, which is a subject for another time. The thinking was that delaying the refinancing of the loans on properties bought at the height of the most recent commercial real estate cycle, net operating income levels would have time to rise to a point where the properties could be successfully refinanced. As demonstrated by CoStar’s first-quarter pricing index results, this largely hasn’t occurred for the 2005-2007 era acquisitions. What are the implications of values not catching up to loan maturity dates? In one scenario, loan capacity at commercial banks will remain constrained by the underwater loans currently weighing down their balance sheets. There is also the chance that commercial banks will take losses on those loans, reducing their earnings, but also moving them closer to being able to increase their commercial real estate lending capacity. The level of severity of both of these scenarios depends on how close property values can recover by the time these loans come due. Fortunately, we are seeing positive signs in the market as we consider what the future holds for these loans: Property buyers are increasingly moving beyond New York and Washington, DC to also focus on Denver, Dallas and Minneapolis among other markets in search of better yields, providing some nascent price support in those markets. Vacancy rates have started to decline in a majority of office markets, albeit slowly. Declining vacancies will eventually lead to a recovery in rental rates, and thus net operating incomes. The commercial mortgage-backed securities market is returning to life, and could provide additional liquidty for property sales transactions. Institutional buyers significantly reduced their disposition levels in the first quarter of 2011, which will provide further price support if maintained. The Grand Marshall is holding the checkered flag. It’ll be interesting to see who crosses the finish line first. Chris Macke is a senior real estate strategist for the CoStar Group and a former vice president with GE Real Estate. He has 20 years experience in commercial real estate development, acquisition, leasing and financing.