Saturday, October 3, 2009

Bureau of Misinformation

The OCRegister posted an article today reflecting an interview with Taylor B. Grant, that was generally negative (read correct) on the CRE market, but was also chock full of errors and inconsistencies. So, I intend to sit here in anonymity and pick it a part a little - I'm prepared for the feedback and willing to be called names:

Taylor: $393 billion worth of commercial mortgages will mature by the end of 2010.

Studies indicate that between $1.3 trillion and $1.7 trillion in commercial debt (including apartments) exists, and construction and development loans total about $535.8 billion.

Total debt from commercial mortgage backed securities (or CMBS, which are sold to investors on Wall Street) is approximately $700 billion.

Seems a little high on both numbers - I count about $160 billion in maturities in 2010 (less in 2009, but its almost over and just has about $8.3 billion left to go). Goldman agrees. The total commercial real estate debt outstanding (including apartments) is about $3.48 trillion - you can derive this information from the Fed Flow of Funds report tables 219 and 220. Total CMBS debt, same source, is about $900 billion. Verdict: WRONG, get new studies.

Taylor: Richard Parkus, Deutsche Bank’s director of research for CMBS, said as much as 65% of commercial mortgages maturing over the next few years, or $100 billion, will not qualify for refinancing because of the drop in property values and stricter underwriting. Building values have declined by as much as 50% around the U.S. and even more in Manhattan where values increased the most.

Currently, CMBS default rates are around 3.64% (six times what it was time last year) and have risen much faster than vacancy rates. They are expected to rise dramatically.

Fitch Ratings reported that $36.1 billion in securitized debt (CMBS) has been transferred to Special Servicing (transfer from Master Servicer occurs in the event of a bankruptcy, 60-day delinquency, public notice by borrower that a default is pending, or the prospect of an imminent default).

Other reports say that 3,100 loans representing $49.1 billion (6.1% of total CMBS) is in Special Servicing. That amount is expected to grow to $100 billion by the end of 2009.

$6.3 billion in 281 CMBS loans could not refinance during a 3-month period in 2009, even though 173 of the loans were in positive cash flow.

The concern by many economists is that high default rates in CMBS and subsequent fire-sale pricing of loan collateral will push the value of commercial loans down further.

CRE property values have declined 30% since the peak, not 50%. CMBS 30+ day delinquency rates are at 3.64%. Typically we define a default as something 60+ days or more delinquent (and various studies have various definitions), but within the very next paragraph a default is implied to be a property that has become lender-owned and not just delinquent. Either way, this is a 30 day delinquency rate.

Back to the size of the market - "$49.1 billion - 6.1% of the CMBS market" implies a market size of $800+ billion, not $700 billion, the size quoted in the article.

Taylor: No one seems to have this number [size of the Orange County mortgage debt]. Recent high profile cases such as Opus (Irvine condos) have involved a number of CMBS loans, along with office building owners such as Maguire.

Yeah they do. Admittedly, I don't have it on hand, but I could put pretty good numbers on that with some work. If someone *really* wants it, let me know.

Taylor: Las Vegas and Florida will be worse, and areas without a run up in value will be less.

With the concentration of high-value assets and the abundance of money available, Orange County will have its share, but it will be somewhat tempered by long-time owners such as the Irvine Co.

Las Vegas and Florida might be worse, but I wouldn't just assume that - especially based on the Irvine Co. Office in the OC has already, and will continue to get slaughtered because it was home to so many home mortgage servicers and back offices, on TOP of the general economic slump. You could even argue that a long-time owner, such as the Irvine Co (or Maguire, say), is more likely to realize losses quickly, given their superior real estate investing skills.

Taylor: According to the speakers at RealShare in Dallas on Sept. 15, and I agree, hotels and retail will be the worst offenders.


Taylor: As commercial real estate defaults and foreclosures follow an economic downturn of this nature, they will be like a bad hangover.

The property taxes collected by municipalities will be hindered for years to come. Surplus, outdated properties will need to be repositioned and or replaced, further delaying their potential positive impact on the economy. Some properties are still economically extinct and have been since the mid 1990’s.


Taylor: Any properties that were financed either with CMBS debt near the height of property values (from 2004-2007).

Any property that has a loan up for renewal is at risk, whether bank, CMBS, life insurance or other lender. Most banks are willing to recast debt if the borrower will contribute 30% additional equity based on the reduced value (value today) of the collateral. Some of the CMBS loan documents do not allow this type of transaction.

Hard money lenders (private) are the most likely parties to help borrowers meet that difference. Hard money lenders will charge high interest rates and will be selective as to borrower’s credit, asset design and location. But there is a shortage of risk capital at a time of declining rent, increased vacancy, less demand, fewer tenants, higher interest rates and more stringent loan underwriting criteria.

All of these factors contribute to a dramatic decrease in commercial property value from a lending and borrowing viewpoint. I have seen some very viable scenarios that when you take into account all of these factors in a second tier market with an older property, the loan available can be half of what it was in 2007.

No matter what the “value” of the building is, the loan amount has been significantly reduced, maybe more than 50%.

I agree some. Just because it is CMBS doesn't make it more likely to default. From a credit perspective, construction and development loans are much more likely to default - they have no cashflow. From a maturity perspective, construction and development loans were the shortest term, and are most likely to default. Next in line on the maturity front are all the other short-term loans used for buyouts (CMBS played a part here), transitions, and generally loans made by banks and thrifts. Overall, I'll refer you again to the maturity schedule care of Goldman - maturity risk in CMBS is a small time player compared to the other lenders.

Regarding loan prices. If you mark to market, we're not seeing performing whole loans price at 50% - I wish we were, but those deals are not here in any big way. You can pick up a distressed whole loan that cheap, and you can pick up the lowest-quality AAA (originally - they've been downgraded now) off of a CMBS deal for 50%. DebtX uses a fairly useless algorithm to price individual CMBS loans, and they're rarely below 80 (although I don't support that as accurate in favor of either direction.

I thought I'd just pick a part some of the details and make a few corrections when I started typing this, but that is actually the entire article (in fairness, blame likely lies with Mr. Taylor more than the author), and its more wrong than right. I'm open to feedback or corrections, but articles like this support all the recent blogger-bashing back and forth that has been going on between mainstream media and bloggers. The media is unwilling to do its homework and will put out any nonsense that supports their predefined notions of what is going on in the world and sell it to anyone who's willing to drink their koolaid. no thanks.


Dark Space said...

BTW, I did leave the following comment on the news story, but it was blocked. Can't take the heat, get out of the kitchen:

Dark Space says:
Your comment is awaiting moderation.
October 3, 2009 at 12 pm

I agree with the general vibe of your conclusions - the CRE market is already over the edge of the cliff, and should be in a free fall in 2010. However, the vast majority of the numbers quoted are just flat wrong, many of the particulars are incorrect, and at points the numbers/comments contradict other parts of the interview. I hesitated to reply at all, but egregious errors should be called out when the uninformed may read this and take it all at face value. A more detailed rebuttal, with sources, is here:

Dark Space said...

After a day of reflection, they finally allowed my comment.

The more I stalked, er, researched, the author and the speaker, I formed a loose conclusion that the blame fr this shoddy journalism lies with the speaker more so than the author. The speaker could be a complete hack based on the limited amount of information I found.

T Grant said...

by Taylor Grant
I agree with Dark Space many of the numbers are wrong, and I gave the Register the numbers. I have read many well researched positions and summaries. All economists are wrong in their predictions, 50% are too high and 50% are too low. If we can agree that the loan defaults are big numbers and a big mess, and disagree on how much of a mess, we can a least start to address the issues. I appreciate Dark Spaces insights and comments