Distressed Commercial Real Estate Journal

Distressed Commercial Real Estate Journal Distressed Commercial Real Estate Volume Doubles Every 3 Months Since December 2008 Nationally, the total value of distressed commercial real estate in June 2009 was $97.4 billion, including properties in distress, foreclosure, or lender REO. This is twice the $49 billion of March and four times that of December at $25.6 billion. Retail properties represent the largest segment in June, at $29.7 billion, boosted by General Growth Property’s recent bankruptcy filing and retailing’s sector malaise. U.S. Distressed Commercial Real Estate by Type June 2009 $30 $25 $20 $15 $10 $5 $0 Retail Land/Other Apartment Office Hotel Industrial Property Type $0 Manhattan LA-OC Miam i Chicago Boston Washington Dallas June 2009 Stressed Commercial Real Estate Assets While the volume of distressed assets is significant, also consider the looming volume of stressed commercial real estate assets: These properties have characteristics of concern in the short term – maturing loans, bankrupt tenants, underperformance, financially troubled owner, or other significant obstacles. U.S. Stressed Commercial Real Estate by Market June 2009 $12 Value in Billions of $ $9 $6 $3 Value in Billions of $ Atlanta Houston Baltim ore Restructured Distressed Lender REO Stressed Source: Real Capital Analytics, Delta Associates; June 2009. Source: Real Capital Analytics, Delta Associates; June 2009. Note: Includes properties currently in default or foreclosure, plus lender REO. Every product type recorded an increase. • Retail properties increased the most, up 343%, to $29.7 billion. • Office properties recorded the smallest increase, up 33% to $15.3 billion. Change in U.S. Distressed Commercial Real Estate December 2008 — June 2009 $30 $25 $20 $15 $10 $5 $0 Retail Land/Other Apartment Office Hotel Industrial Note: Includes properties in default or foreclosure, plus lender REO. The Manhattan market has the highest volume of distressed real estate assets (followed by Los Angeles-Orange County), and it also has $4.6 billion in potentially distressed (what we call “stressed”) real estate assets as of June 2009. Turmoil in the financial industry, coupled with the housing slowdown, has threatened the performance of many buildings and potential developments. Miami, with $482 in distressed commercial property per capita, has the highest ratio per capita. The Houston metro, our featured area in this issue, has the fourth lowest at just $112 per capita. Distressed Commercial Real Estate Value Per Capita June 2009 $500 Dec. 2008: $25.6 Billion Feb. 2009: $49.2 Billion June 2009: $97.4 Billion Value in Billions of $ Distressed Value Per Capita $400 $300 $200 $100 $0 Miami LA-OC Chicago Boston Washington Houston Dallas Atlanta Baltimore Source: Real Capital Analytics, Delta Associates; June 2009. Source: Real Capital Analytics, Delta Associates; June 2009. Note: Excludes Manhattan at $3,132 per capita. Includes properties in default or foreclosure, plus lender REO. 1 Distressed Commercial Real Estate Journal Delinquency Rates: Rising in all Sectors Led by problems in the single-family sector, the construction loan delinquency rate has risen sharply in the past year, from 7.2% in the 1st Quarter of 2008 to an estimated 13.5% in the 1st Quarter of 2009, which is the highest rate since 1992. According to Foresight Analytics, the non-accrual rate, which rose from 2.9% to 9.8% during the same period, is largely responsible for the increase in total delinquency. Total Delinquency and Nonaccrual Rates Construction Loans 16% June 2009 The commercial mortgage sector had an estimated 3.2% delinquency rate in the 1st Quarter of 2009, compared to 2.7% at year-end 2008 and 1.8% in the 1st Quarter of 2008. Again, nonaccruals are the main factor, accounting for more than two-thirds of total delinquency. Total Delinquency and Nonaccrual Rates Commercial Mortgages 4% 3.2% 3% Rate 2% 1.1% 13.5% 14% 12% 10% 0% 1% Rate Q3 8% 6% 4% 2006 Q4 Q1 Q2 2007 Q3 Q4 Q1 Q2 2008 Q3 Q4 Q1 2009 * Estimated Source: FDIC, Foresight Analytics; June 2009. Nonaccruals Other 1.3% 2% 0% Q3 2006 Q4 Q1 Q2 2007 Q3 Q4 Q1 Q2 2008 Q3 Q4 Q1* 2009 * Estimated Mortgage Maturities: Peaking In 2012-2013 In addition to delinquencies, a rising tide of mortgage maturities – in excess of $300 billion per year in 2012 and 2013 – must be addressed by industry in the years ahead. Before then, the situation is likely to be made more difficult by a weak economy, tight capital, and lower values. Commercial and Multifamily Mortgage Maturities Loans Maturing by Year Source: FDIC, Foresight Analytics; June 2009. Nonaccruals Other In the single-family mortgage sector, the 1st Quarter 2009 total delinquency rate was 8.6%, including 3.1% for nonaccruals. In comparison, total delinquency was 4.7% in the 1st Quarter of 2008, with 2.0% for nonaccruals. Foresight Analytics reports that 90-day+ delinquencies have swelled during the past two quarters. Total Delinquency and Nonaccrual Rates Residential Mortgages 10% 9% 8% 7% 6% 8.6% 350 300 $ (in billions) 2.4% 250 200 150 Rate 5% 4% 3% 2% 1% 0% 100 50 0 1990 1995 2000 2005 2010 2015 Commercial Q3 2006 Multifamily Q4 Q1 Q2 2007 Q3 Q4 Q1 Q2 2008 Q3 Q4 Q1 2009 * Estimated Source: Federal Reserve, Foresight Analytics; June 2009. Source: FDIC, Foresight Analytics; June 2009. Nonaccruals Other 2 Distressed Commercial Real Estate Journal CMBS Delinquency: True to Form Since September 2008, the 12-month trailing delinquent unpaid balance of commercial mortgage backed securities (CMBS) has risen by $12.5 billion, or 73%, to $17.1 billion in February 2009. The delinquent balance is 2.1% of the total unpaid CMBS balance of $830.1 billion. June 2009 Featured Metro: Houston. Modest Distress, But Apartments Lead The Way Houston area multifamily apartment properties lead in distressed volume, but retail centers are experiencing a high combined volume of distressed and lender REO. Distressed Commercial Real Estate By Severity and Type Houston Metro Area $0.75 Monthly CMBS Delinquency $20.00 $18.00 $16.00 $13.89 $17.15 Volume in Billions of $ $14.00 $0.50 $ (in billions) $11.99 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 $10.79 $8.68 $7.03 $5.39 $3.48 $3.75 $4.00 $4.01 $4.18 $4.64 $4.20 $4.07 $0.25 $0.00 Apartment Lender REO Jan-09 Feb-09 Mar-09 Apr-09 Retail Office Distressed Land/Other Stressed Industrial Source: Real Capital Analytics, Delta Associates; June 2009. Source: Realpoint Research; June 2009. More Bank Failures Ahead The twin problems of rising delinquency rates and maturing mortgages point to a tougher environment ahead for lending institutions. The number of bank failures has risen significantly since mid-2008, and Foresight Analytics projects that more than 90 banks will fail in the 3rd and 4th Quarters of 2009. Bank Failures Current Cycle and Near-term Forecast 55 50 Watch for Volume 3 in this reporting series in September 2009. If you would like to subscribe free of charge, send your request to: David.Parham@DeltaAssociates.Com. Number of Closed Institutions 45 40 35 30 25 20 15 10 5 0 Q3 2007 Q4 Q1 Q2 2008 Q3 Q4 Q1 Q2 2009 Actual Q3 Q4 Source: FDIC, Foresight Analytics; June 2009. Projected 3 Distressed Commercial Real Estate Journal June 2009 Delta Associates, the research affiliate of Transwestern, is a firm of experienced professionals offering, consulting, valuation, and data services to the commercial real estate industry for over 25 years. The firm’s practice is organized in three related areas: 1. Valuation services for partial interests in commercial real estate assets. 2. Consulting, research and advisory services for commercial real estate projects, including market studies, market entry strategies, asset performance enhancement studies, pre-acquisition due diligence, and financial and fiscal impact analyses. 3. Distressed asset recovery services to include property performance analyses and enhancement studies, debt structuring evaluation and note valuations, portfolio assembly due diligence, valuations, and litigation support. 4. Subscription data for selected metro regions for office, industrial, retail, condominium, and apartment markets. For further information about Delta Associates and to see all of our publications, please browse our web site at: DeltaAssociates.com Consulting and Advisory Services Gregory H. Leisch,CRE Chief Executive 500 Montgomery Street, Suite 600 Alexandria, VA 22314 (703) 836-5700; Fax (703) 836-5765 Greg.Leisch@DeltaAssociates.com Government Services Craig Powell 2101 Wilson Blvd., Suite 200 Arlington, VA 22201 (703) 516-2263; Fax (703) 516-2299 Craig.Powell@DeltaAssociates.com General email: Info@DeltaAssociates.com Market Publications Group Alexander (Sandy) Paul National Research Director 500 Montgomery Street, Suite 600 Alexandria, VA 22314 (703)299-6373; Fax (703) 836-5765 Alexander.Paul@DeltaAssociates.com Distressed Asset Recovery Team Delta Associates has partnered with Beers+Cutler, Fore Consulting, and Blackwell Advisors to form the Distressed Asset Recovery Team (DART). This partnership offers services to government entities as well as borrowers and lenders to assist with the resolution of stressed real estate matters during this time of economic turmoil. These workout services include: 1. 2. 3. 4. 5. 6. 7. Property performance analysis Debt restructuring analysis and note valuations Investment advisory and portfolio assembly due diligence Asset performance enhancement analysis Valuation services Forensic accounting and tax impact analysis Litigation support and dispute resolution services For more information, please contact Greg Leisch, Delta’s CEO, at: Greg.Leisch@DeltaAssociates.com 4