Capital Market Scoreboard: Selected Topics from the CMSA January Conference
As noted in my lengthy postings summarizing the recent 2010 CMSA January Conference in DC [Day 1 link; Day 2 link], over 1,000 commercial real estate professionals attended the conference – roughly 2X more than expected.
Why this unexpected attendance? Answer: All of us are looking for answers amidst the continuing liquidity problems in the CRE Capital Markets. This topic was the sole focus at this conference. (And it even shows in the number of people "visiting" TTL blog since the Tuesday [Day 1] posting: we show over 1,000 total "hits", of which over 550 are "unique", as of this blog posting.)
I've received feedback asking for a summary covering a specified set of topics from the two (much, much longer) blogs covering days 1 and 2. (Keep that feedback coming!)
So, here is that subset of information from the 2010 CMSA January Conference:
INVESTORS FORUM
This forum is for a broad band of CRE debt investors (such as B note holders, mezzanine lenders).
The meeting time was devoted to a survey of the 250+ people in the room. Here are some of the responses:
- 45% of the voters believe that CRE values will continue to fall in 2010 with no recovery in CRE values until 2011 (this fall is in addition to the 44% fall from 2007 CRE pricing)
- with respect to the 2005-2008 CMBS pools, 37% of the voters believe that the average losses will be in the 11%-15% range (these loses will wipe out bond holder through the "AJ" class)
- 43% of the voters believe that for CMBS loans liquidated in 2010, the average loss severity will be 40%-50% (and 27% believe that the average loss severity will be 50%-60%)
- 69% of the voters believe that annual new CMBS issuances will not exceed $100B until 2013
- for new CMBS issuances in 2010: 50% of the voters believe that issuances will be single borrower transactions; and 33% of the voters believe that issuances will be multi-borrower and large loan structures (with only a few assets); and
- 58% of the voters believe that "old-school" multi-borrower, fixed rate deals will return no sooner than 2012 (or later)
REAL ESTATE FUNDAMENTALS: "THE FACTS OF LIFE"
If the focus on "CMBS 2.0" (which is the "hot" phrase used to describe the "new" CMBS model and market) is a bit too out of touch for me, this session just hammered on the current picture of the CRE market:
- unemployment at historical highs (and still rising)
- retail sales still stumbling
- consumer confidence falling
- "asking" commercial rents falling
- commercial leasing activity (absorption) falling
- CRE sales activity: stagnant
- CRE values -43% from the high in 2007
- huge amount of CRE loan maturities over the next three years, with inadequate sources of credit to pay-off those maturities
- huge shortfall in CRE equity (such that it will not fill gap between the credit available and the looming CRE maturities)
- over 75 funds have been formed to buy distressed CRE debt and properties; but little it has been deployed
- very little CRE has been "re-priced" or "re-set" by lenders or servicers foreclosing or disposing of assets
- we're still early in the CRE recover (perhaps only 25% into the process!) (One interesting comment: remember that valuation adjustment occurs early in the CRE recovery process; so we might be 75%-90% into the valuation adjustment process.)
- importantly: no one on the panel, nor else where in the room, foresees an implementation by the Government of an "RTC style" approach (where the Federal government quickly closes large numbers of banks and thrifts, and then quickly sells the loans and assets at steep discounts – resulting in a "harsh pain" but quick re-pricing of CRE
- unlike the late 80s & early 90s: this time there is no new industry (such at technology) to lead the recovery by increasing employment
BORROWER PANEL: "SURVIVOR"
This panel focused on "how" a borrower could make it through until CRE liquidity returns.
The panel has some advice for borrowers:
- show up with $ if you want to restructure your debt
- if you're in a good city, with good tenants and with DSC (get it?
- Use $ to right-size the loan), then you'll probably survive
It was interesting that while reference was made to splitting up a CMBS loan into an A Note (with good DSC & LTV) and a B Note (representing the "bad" part of the original loan), no one gave any details on the structure (such as the terms of the B Note, the proceeds waterfall between the lender [under the B Note] and the "new" equity [that injected capital needed, in part, to right-size the Note A], the rate of return on the new equity, etc.)
SURVEILLANCE & WORKOUTS: "LET'S MAKE A DEAL'
This panel didn't give any real guidance on terms of workouts, other than to list some basic rules of the game:
Do This:
- be nice
- send all information in; be open and transparent
- sign a pre-negotiations agreement
- keep paying cash flow
- have a reasonable, cogent plan BEFORE you contact the lender or servicer
Do NOT Do This:
- tell lender or servicer that you're "partners"
- tell lender or servicer that you're a good borrower
- "fish" for information or for terms of a plan that will be acceptable
- cry
- hold lender or servicer hostage
- ask for any of the cash flow (nor a cash flow mortgage)
- fly in on a private jet
- offer a bribe
- rob Peter to pay Paul
- launch off on a religious sermon (caveat: "the special servicer knows that it is going to Hell – every day is Hell")
- ask for any return on the new equity infusion made in borrower
It was an interesting day. Much like our experience in Munich – very little clapping at the end of any session (yes, it reminded me a little of the sessions at the EU conference that we attended in October 2008) [link]
In a future posting, I'll cover comments made to us by several elected and appointed Federal officials.
If you have any questions, comments or observations, please post them below.
