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Prudential CRE US Quarterly Update

November 2, 2009

Prudential has recently put out its quarterly update on US real estate. On debt markets:

  • At commercial banks…
    • Commercial banks, which represent about half of the $3.5 trillion commercial-mortgage market, remain largely stuck in the “extend-and-pretend” mode. Some banks are originating loans for balance sheets, but the capacity and appetite for such deals is limited. Many banks are working through issues emanating from distressed loans that they wrote or inherited through mergers and thus most of their mortgage business encompasses extending existing loans.
  • At regional banks…
    • On the other end of the spectrum are regional banks with between $100 million and $10 billion of assets. These banks own a smaller portion of total commercial mortgages outstanding, but those holdings represent about 45% of their loan books on average, according to the FDIC. The commercial bank delinquency rate climbed to 7.9% at the end of the second quarter, up from 6.4% as of March 31 and 1.4% in 1Q07, according to the Federal Reserve. And most likely, the rate has not yet peaked. Because regional banks fund a large portion of local developments, an asset class likely to be hit hard by the recession and lack of demand for space, many are likely headed for failure.
  • At life companies…
    • The biggest improvement in lending activity has come from the life company sector. A few months ago, just about all insurers were out of the market or had cut back activity drastically, largely because they were worried about rising delinquencies in existing portfolios and increasing exposure to an out-of-favor asset class. But those fears have given way to the realization that commercial mortgages offer good relative value, especially when compared to the yields of government bonds or other alternative investments.

But then they put in perspective.

Troublesome for the market is that the increased activity of life companies and the emergence of specialty firms falls far short of filling the void left by the decimated CMBS market. At their peak life insurers wrote slightly more than $40 billion of commercial mortgages annually, compared to peak CMBS issuance of $230 billion in 2007. According to the American Council of Life Insurers, in the second quarter life companies made $4.6 billion of mortgage commitments, up 77% from 1Q09; a vast improvement but a drop in the bucket relative to the amount needed to replace the roughly $400 billion of debt that is scheduled to mature in 2010.

Full report below…



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Categories: Commercial Finance and Lending | Commercial Real Estate Investing
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Comments


As dire as it seems, the end result for the CMBS market renewals is not as simple as insurance cos and banks picking up the slack on the renewals or Armageddon will occur. CMBS note holders will realize that they will probably have 2 choices at renewal:

1. force the properties in to default and take a loss, or
2. Rework, renegotiate and extend terms

If the property is a performing/non-performing asset, my feeling is the CMBS note holders will negotiate a work out situation and roll the loans over rather than force default and a foreclosure. Remember, a rolling loan gathers no loss. The IRS has already cleared the path for this type of negotiated settlement and officials are putting together the infrastructure to allow note holders to more freely communicate.

The situation looks dire, but I think the end result will fall far short of the Armageddon predictions that are being made.

Eric Odum
Net Lease Commercial Advisory

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