Archive for the ‘Financing’ Category
Wednesday, September 1st, 2010
Goldman Sachs and Citigroup are in the process of trying to sell their fourth CMBS package in 2010 with $788 million of debt from 48 properties as investor interest in these vehicles rekindles. Although the Federal Reserve noted that commercial real estate is still slowing economic growth, bond investors believe that growth is strong enough for borrowers to meet debt payments. According to Dan Castro, chief of structured finance analytics and strategy at BTIG LLC, “CMBS is an avenue that’s going to provide better returns. There’s a lot of guys clamoring for these returns.”
Consider that corporate bond yields are only 177 basis points over Treasury, while CMBS yields are 100 bps higher. According to Business Week, “The difference between the rate to exchange floating for fixed-interest payments and Treasury yields for two years, known as the swap spread, is a measure of investor perception of credit risk. It serves as a benchmark for investors in many types of debt, including mortgage-backed and auto-loan securities. The two-year swap spread narrowed 1.43 basis point to 15.88 basis points, the lowest level since April 20,” indicating increased confidence. So while CMBS still has a ways to go to get back to previous levels, the market is in recovery which is great news for the rest of the industry which relies on CMBS for refinancing.
Tags: auto-loan securities, cititgroup, CMBS, Dan Castro, Federal Reserve, Ford, Goldman Sachs, leveraged loans, mortgage-backed securities, quality of credit, treasury yields
Posted in Economics, Financing | No Comments »
Tuesday, August 31st, 2010
The nation’s financial system needs significantly more regulation than exists now. The lack of tough regulatory powers strongly impacted the recent financial crash and the Great Recession that ensued. The good news is that the Obama administration is moving firmly in this direction with financial reform legislation a critical item on its agenda. This is the opinion of Anthony Downs, a senior fellow with the Brookings Institution and former President of the Real Estate Research Corporation. In a recent interview for the Alter NOW Podcasts, Downs said that between 1980 and 2007, the value of international capital markets - including bank deposits, assets, equities, public and private debt - quadrupled relative to the world’s GDP, lifting millions of people out of poverty. Although unprecedented, this growth relied heavily on borrowed money to finance higher living standards and highly leveraged loans with limited reserves backing them. In the end, the growth was unable to be sustained.
The financial reform legislation currently undergoing reconciliation by a Senate-House conference committee is not a reinstatement of the 1933 Glass-Steagall Act - which separated investment and commercial banking — because banks will still be allowed to deal with securities. Under the new law, banks will have to register derivatives with some type of formal exchange and maintain records on who is borrowing money and under what terms. This marks a significant change from before the Great Recession, when derivatives were traded with virtually no oversight.
Downs believes that former Federal Reserve Chairman Alan Greenspan contributed to the financial crisis in two ways. In 2001, when Greenspan was informed that there was fraud in the subprime housing market and that he should do something about it, he refused to take action because he didn’t believe in regulation. According to Downs, “that was a terrible mistake and meant that all the horrible loans made in the subprime market could continue unchecked.” Greenspan’s second error was to maintain low interest rates for as long as he did at a time when an enormous amount of capital was coming into the United States economy from overseas. Because investors were avoiding the stock market, they put their money into real estate. That drove the price of properties sky high and destroyed the concept of intelligent underwriting and evaluating the risk before approving the loan.
Anthony Downs On Financial Reform:
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Tags: Alan Greenspan, Anthony Downs, Ben Bernanke, Brookings Institution, derivatives, Federal Reserve, financial crash, financial reform, financial regulation, GDP, Glass-Steagall Act, Great Recession, Obama administration, reconciliation, securities, subprime
Posted in Development, Economics, Financing, Industrial, Office | 1 Comment »
Wednesday, August 25th, 2010
Curiosity is growing about which Wall Street banks will be the first to get out of proprietary trading or the private equity business as they restructure to come into compliance with new financial regulatory reform legislation. The Volcker Rule - named for former Federal Reserve chairman Paul Volcker - limits banks from these practices and sets new levels on the size of private equity or hedge fund investments. In other words, the banks are not allowed to hold more than three percent of their Tier 1 capital - a measure of their financial strength — in private equity or hedge fund investments.
Bank of America is almost in compliance, though Goldman Sachs must act more aggressively and is reported to be weighing several options to comply with the increased regulation. The good news for the Wall Street banks is that they have several years in which they can reduce their holdings. “They have time to adjust,” said Mark Nuccio, partner at Boston-based Ropes & Gray. “I don’t think there’s any intention on behalf of the regulators to create economic dislocation at financial institutions.”
The new rules are driving certain banks to rethink their business, while others see the new law as a welcome excuse to distance themselves from unwanted hedge or private-equity funds. “If you were leaning toward a strategic change anyway then now is a good time to re-evaluate the business because you have a regulator saying you shouldn’t be in this business anyway,” said Thomas Whelan, chief executive of Greenwich Alternative Investments. This is particularly true for banks that quickly acquired hedge fund operations during the boom years. At that time, having a hedge fund was essential to the strategic mix. Since 2008, however, when hedge funds posted their worst-ever returns and clients tried to cash in assets, the math changed for many banks.
Tags: Bank of America, banking, derivatives, Federal Reserve, Goldman Sachs, hedge funds, Morgan Stanley, Paul Volcker, President Barack Obama, private-equity firms, Volcker Rule, Wall Street
Posted in Economics, Financing | No Comments »
Wednesday, August 18th, 2010
Although property investment - especially for trophy buildings - is coming back more strongly than industry analysts had anticipated, mid-tier properties are not yet enjoying a similar rebound. According to Real Capital Analytics (RCA), properties valued at $20.6 billion were sold during the 2nd quarter of 2010, an 86 percent increase over last year.
According to Dan Fasulo, an RCA analyst, owners of mid-tier properties are having more difficulty finding buyers. “Eventually the bidders who keep losing out on these competitions are going to readjust their expectations and will start to try other strategies, whether it’s investing in lower-quality property or going into a secondary market. It’s inevitable.”
Declining vacancy rates also could create renewed interest in mid-tier properties, said Ryan Severino, an economist with Reis, which believes that national office vacancy rate will fall from its 17.7 percent peak this year. “A lot depends on what happens to the office sector overall, but we are beginning to see the first glimmer of stabilization,” Severino said. Still, financing for smaller transactions is difficult to obtain - a stark contrast with trophy property deals.
Some smaller community banks are willing to provide capital to owners of mid-tier properties. In the 1st quarter of 2010, approximately 80 percent of mortgage originations refinanced existing projects, according to Randy Fuchs, a principal of Boxwood Means, a real estate analysis firm. In contrast, refinancing comprised just 50 to 60 percent of loan originations in 2006 and 2007.
Tags: Boxwood Means, commercial real estate, Dan Fasulo, mortgage originations, Randy Ruchs, Real Capital Analytics, Reis, Reis Inc, Ryan Severino
Posted in Development, Financing, Office | No Comments »
Wednesday, August 11th, 2010
There’s good news and bad news about the health of European banks. Of the 91 financial institutions that recently underwent stress tests, only seven outright failed. Those seven who did not perform well were ordered to raise their capital by €3.5 billion (approximately $4.5 billion). The number of failures were far less than what was expected, though the results confirmed fears that the stress test was too easy.
The results indicate that 91 banks in 21 European nations would be able to cope with a second recession, even though investor confidence has been shaken by the Greek debt crisis. “I see nothing stressful about this test. It’s like sending the banks away for a weekend of R&R,” said Stephen Pope, chief global equity strategist at Cantor Fitzgerald. “There is little evidence that the tests have been applied consistently and there is a distinct lack of credibility, making it a wasted opportunity,” said Richard Cranfield of the international law firm Allen & Overy. Even though the modest findings cast doubt on how credible the bank tests were, it may not matter because the European economy is recovering quickly.
Five small regional Spanish lenders who failed the test will require recapitalization that will accomplish a state-funded drive to unite the nation’s network of unlisted savings banks. They included the Banca Civica, Diada, Espiga, Unnim and Cajasur. All told, these small banks need €1.8 billion, according to the Bank of Spain. Several German and Greek banks also were perceived as weak and in need of restructuring, although the state-owned Hypo Real Estate was the only German lender to flunk, as was the Greek owned ATEbank. Banks that nearly failed with a Tier 1 ratio of less than seven percent under the most stressed scenario included Germany’s Deutsche Postbank, Greece’s Piraeus, Allied Irish Banks, Italy’s Banca and Spain’s Bankinter. According to Cranfield, “The banks that have scraped through may have more of a challenge on their hands and they may be the ones the market focuses on,” Cranfield concluded.
Tags: Allied Irish Banks, ATEBank, Banca Civica, Bank of Spain, bankinter, Cajasur, Deutsche Postbank, Diada, Espiga, european banks, European Union, Greek debt crisis, Hypo Real Estate, Piraeus, Richard Cranfield, stress tests, UBI Banca, Unnim
Posted in Economics, Financing | No Comments »
Thursday, August 5th, 2010
The next item on President Barack Obama’s ambitious agenda is likely to be overhauling Fannie Mae and Freddie Mac, the government-backed mortgage firms that so far have cost American taxpayers $145 billion to keep afloat. The two firms, which own more than half of the nation’s $11 trillion in home mortgages, collapsed along with the housing market and were taken over by the federal government in September of 2008.
Many Congressional Republicans believe that scrapping Fannie and Freddie is mandatory; Democrats disagree and President Obama is expected to support reforms backed by consumer, real estate and banking groups. The core of the emerging consensus is to preserve the 30-year, fixed-rate mortgage. Susan Woodward, former chief economist at the Department of Housing and Urban Development (HUD) and a founder of Sand Hill Econometrics, said “People regard it as a right as Americans to get a 30-year, fixed-rate loan.”
Banks and builders agree with consumer advocates representing homebuyers that it’s good for the government to promote residential lending by supporting what Fannie and Freddie have done for years - purchasing mortgages and bundle them into securities that they sell to investors. When the system works as intended, the MBS market creates additional money that is funneled back into the market to make new affordable loans. The task is to determine how to accomplish this without the lax practices that the taxpayers had to pay for when catastrophic losses occurred in 2008.
The Obama Administration and leading Democrats strongly believe that the federal government should have a role in promoting homeownership. Shaun Donovan, HUD Secretary, said “We should not compromise any of our core policy goals in the decisions we make in structuring our house financing system.”
Tags: Barack Obama, Barney Frank, CMBS, congress, Consumer Federation of America, Department of Housing and Urband Development, Fannie Mae, Federal Deposit Inusrance Corporation, Federal Housing Finance Agency, Freddie Mac, George W. Bush, lobbyists, Mortgage Bankers Association, Sand Hill Econometrics, Shaun Donovan, taxpayer money, Treasury Department, Wall Street
Posted in Economics, Financing, Residential | No Comments »
Wednesday, August 4th, 2010
As the nation gradually recovers from the Great Recession, several years are likely to pass before lending returns to pre-crisis levels, according to Federal Reserve Governor Elizabeth Duke. The return of credit growth is far slower than during any business cycle of the last four decades with the sole exception of the 1990 - 1991 recession. At that time, consumer credit required three years and commercial real estate nearly nine years to recover, Duke said in a recent speech.
Since December of 2008, the Fed has kept its target interest rate at zero to 0.25 percent in an effort to reduce the cost of borrowing and help the economy recover from the Great Recession. Even so, loans held by commercial banks slid by approximately five percent in 2009. “Just as the causes for the decline in lending are multifaceted and complex and took time to evolve, the solutions will likely be equally difficult and will take time to fully work,” Duke said. She is the sole former commercial banker to serve on the Fed’s Board of Governors. “We at the Federal Reserve, meanwhile, will continue to do everything we can to encourage a return to a healthy credit environment.”
According to data released by the Federal Reserve, consumer borrowing increased in April for the first time in three months. The Fed’s Open Market Committee notes that household spending is restrained by “high unemployment, modest income growth, lower housing wealth and tight credit.” Duke said that “Just looking at the statistics, it is not hard to construct a scenario in which consumer demand for credit remains sluggish for quite a while. Household net worth dropped about 25 percent during the crisis, about 20 percent of mortgage borrowers lack equity in their homes and consumers are quite burdened by debt payments.”
Tags: Ben Bernanke, Conference Board, Department of Commerce, Elizabeth Duke, Fed, Federal Reserve, George W. Bush, Great Recession, Gulf of Mexico, household spending, interest rates, lending, National Fedearaton of Independent Business, oil spill, unemployment
Posted in Economics, Financing | No Comments »
Thursday, July 15th, 2010
Banks are starting to hire again as they return to structuring CMBS, a sign that the financial markets are gradually returning to normal. “I see lots of friends who used to be employed, and weren’t for a while, and are now being rehired by institutions,” said Jonathan Strain, debt capital markets director at JPMorgan Chase’s CMBS division.
This industry-wide hiring is evidence of the banking sector’s effort to recover from the depths of the Great Recession and rebuild the capability of providing liquidity to refinance commercial real estate owners who need to recapitalize their portfolios. Industry leaders believe that CMBS may never recover to its 2007 origination peak of $237 billion. So far this year, CMBS originations total just over $1 billion. According to one banker, the CMBS market may eke out $10 billion in 2010; that could ultimately grow to a total of $100 billion annually several years down the road.
According to Lisa Pendergast, managing director with Jeffries Group, Inc., “Supply will be far less than what we were accustomed to.” Pendergast also is president of the CRE Finance Council, the industry’s leading trade group.
Tags: Bank of America, banks, CMBS, CRE Financial Council, Great Recession, hiring, Jeffries Group, JP Morgan Chase, Wachovia, Wells Fargo
Posted in Economics, Financing | No Comments »
Thursday, July 8th, 2010
A new accounting standard could alter the way tenants lease space, a move that carries serious implications for commercial real estate. The Financial Accounting Standards Board (FASB) has been cooperating with the International Accounting Standards Board to combine its generally accepted accounting principles (GAAP) with international standards.
According to Russell G. Golden, the FASB’s technical director, the change is intended to put a halt to “significant off-balance-sheet activity for leases.” Barry M. Gosin of Newmark Knight Frank notes that “We are busy preparing clients to make them aware of the changes and help them analyze how it might impact them. There are so many complicating factors that will make this an administrative nightmare”. Because the new standards remove many of the differences in the way companies account for buildings that they own and lease, firms may move towards purchasing properties rather than leasing them. Shorter leases could be another byproduct. “If you have a 10-year lease, it will mean putting twice as much debt on the balance sheet as a five-year lease, so some companies may want to go short term,” said Dale F. Schlather, executive vice president of Cushman & Wakefield and chairman of CoreNet Global’s New York chapter.
Office and industrial building owners will see new accounting treatments as well. Golden notes that as the new rules were written, landlords would record the obligation to provide space as a liability and record the rents they receive as an asset. Because landlords currently book all of their revenue as rental income, the rents will be recorded partly as interest income and partly as a reduction in the obligation to provide space under the new standard.
Tags: CoreNet Global, Cresa Partners, Cushman & Wakefield, Financial Accounting Standards Board, GAAP, Grant Thornton, International Accounting Standards Board, Jones Lang LaSalle, Newmark Knight Frank
Posted in Development, Economics, Financing, Industrial, Office | No Comments »
Wednesday, June 30th, 2010
After nearly two years of waiting, watching and hoping, American commercial real estate is finally regaining strength. This is one conclusion of the Reuters Global Real Estate and Infrastructure Summit held recently in New York City. Starting in the fall of 2008, real estate investors feared there would be a wide-ranging sell-off of debt-laden commercial properties after Lehman Brothers collapsed. And while office building and other commercial property values have fallen since the capital markets froze, the anticipated spate of foreclosures has not come to pass. According to James Koster, president of Jones Lang LaSalle’s capital markets group, that is now unlikely to happen.
“We should be in a relatively good position to not have this other shoe drop,” according to Koster. Banks have extended, restructured and modified loans to give the real estate industry the opportunity to regroup. Values also are on the rise once again, although some properties whose loans were securitized are troubled. The percentage of CMBS loans that are a month late in making payments climbed to 8.42 percent in May, according to Trepp, which follows CMBS performance. Koster notes that special servicers who oversee troubled loans are not selling the properties at bargain basement prices. Rather, they are holding onto them and being paid for managing them.
Institutional investors and REITs have the money to purchase good but debt-laden real estate. When those properties hit the market, their price tags will be higher than two years ago. “There is fresh capital coming in. It’s a better market now,” Koster concluded.
Tags: capital, CMBS, commercial real estate, financial crisis, Jones Lang LaSalle, Lehman Brothers, REITS, special services
Posted in Development, Economics, Financing, Industrial, Office | No Comments »