Distress Diminishing: 3rd Quarter Market Report
The volume of defaults and special-servicing transfers of commercial real estate loans was cut in half in the third quarter, according to Real Capital Analytics. The total for the three-month period was $5.8 billion. Workout activity also slowed in third quarter to a total of $10.9 billion, and lender sales accounted for just 10 percent of all sales volume during that time. Distressed sales accounted for 12 percent of volume in the first half of the year, down from 15 percent averaged throughout last year.
Most of the newly distressed situations are resulting from maturity defaults of CMBS loans. The CMBS segment accounted for nearly 49 percent of the $167.1 billion distressed total at the end of September ($117.8 billion was in the workout process with $49.3 billion held as REO). The next largest piece of that perturbed pie is domestic lending at 23.7 percent. Throughout the down cycle, a total of $387 billion of property has become distressed and, to date, 57 percent of that total has been resolved.
As of third quarter, the recovery rate on liquidations of defaulted commercial mortgages was 66 percent. Greater recoveries have been available for CBD office property (77 percent) and apartments (75 percent). Land had the lowest recover rate at 57 percent, followed by retail at 62 percent.
CoStar made the following key observations based on lenders’ third quarter earnings reports and analysis of the commercial real estate lending environment. For major banks, the recession is receding further and further away in the rearview mirror. Provisions for loan losses are falling, which means banks have more money available to lend. The disposition values of foreclosed assets are increasing, so banks plan to make more property available for sale. Many banks have cleared through their distressed assets and are ready to start growing again.
“I’m particularly encouraged with the drop in OREO expenses to nearly zero, and while this may not be sustained, there is a positive trend in collateral values within many of our markets, which is leading to gains on sale of some of our foreclosed real estate that are relative to book values,” said Harris Simmons, chairman, president and CEO of Zions Bancorp.
Dale Gibbons, executive vice president and chief financial officer of Western Alliance Bancorp. added the following regarding REO properties: “For the first time since the financial crisis, sales proceeds exceeded book value as we have seen a shift from often receiving lowball offers for real estate holdings to bids above our book balance on occasion. Repossessed land is held at 17 percent of original appraisal and improved property is held at 40 percent.”
Lenders see demand in the marketplace increasing, and, as a result, there is pressure on pricing as competition for loans heats up. “However, lenders view CRE as still inherently risky, but federal banking policies are mitigating the risks, and, conditions will continue to get better, as long as we don’t go over the ‘fiscal cliff,’” CoStar reported.
Directly tied to job growth, the office sector has been viewed as sometimes trending (positively) and sometimes treading (water) in this sluggish economy. Painting a bright picture for 2013 in a recent appearance on America’s Commercial Real Estate Show, PricewaterhouseCoopers’ Mitch Roschelle told Michael Bull, “The office sector is really becoming top of mind, and the reason there is we haven’t overbuilt office.”
“The recovery is only one-third of the way there in the office sector, we still have two-thirds to go,” said Walter Page, PPR director of research, office, who was joined by PPR’s Managing Director Hans Nordby and Aaron Jodka for CoStar’s third-quarter analysis.
Peter Ho, chairman, president and CEO of Bank of Hawaii Corp. had a hospitable take: “There remains a big segment of resort and hotel inventory that was moved to problem loan status through the crisis that will represent future opportunity as we move forward as those assets re-price. We think that commercial lending represents a pretty good opportunity for us.”
Bull Realty, Inc., Research