Distressed Commercial Real Estate Journal March 2009

Distressed Commercial Real Estate Journal Distressed Commercial Real Estate Volume: Doubles in Two Months Nationally, the total value of distressed commercial real estate in February 2009 was $49.2 billion, including properties in distress, foreclosure, or lender REO. Land and development properties represented the largest segment, at $14.4 billion. U.S. Distressed Commercial Real Estate by Type February 2009 $15 $18 March 2009 Stressed Today, Distressed Tomorrow! 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 March 2009 Value in Billions of $ $10 Value in Billions of $ Land/Other Office Apartment Retail Hotel Industrial Property Type $15 $12 $5 $9 $6 $0 $3 $0 Manh Source: Real Capital Analytics, Delta Associates; March 2009. Note: Includes properties currently in default or foreclosure, plus lender REO. LA-OC Bos Chi Wash Hou Mia Dal Atl Balt Lender REO Source: Real Capital Analytics, Delta Associates; March 2009. Distressed Stressed The national volume of distressed commercial real estate grew by 92% from December 2008, when the total was $25.6 billion. Every product type recorded an increase in distressed real estate asset volume. • Hotel properties increased the most: 154%, or $6.1 billion. • Retail properties recorded the smallest increase, up 43% to $6.7 billion. Change in U.S. Distressed Commercial Real Estate December 2008 — February 2009 $15 The Manhattan market has the second-highest volume of distressed real estate assets (after Los Angeles-Orange County), but it has $13.7 billion in potentially distressed real estate assets as of March 2009. Turmoil in the financial industry, coupled with the housing slowdown, has threatened the performance of many buildings and potential developments. Miami, which has $387 in distressed commercial real estate per capita, has the highest ratio per capita. The Washington metro area has the lowest at just $63 per capita. Dec. 2008: $25.6 Billion Value in Billions of $ Feb. 2009: $49.2 Billion $10 $5 $0 Land/Other Office Apartment Retail Hotel Industrial Note: Includes properties in default or foreclosure, plus lender REO. Source: Real Capital Analytics, Delta Associates; March 2009. 1 Distressed Commercial Real Estate Journal March 2009 Total Delinquency and Nonaccrual Rates Commercial Mortgages 3% 2.6% Distressed Commercial Real Estate Value Per Capita March 2009 $400 Distressed Value Per Capita $300 2% Rate $200 1.1% 1% $100 0% $0 Q3 Mia Bos LA-OC Hou Balt Dal Chi Atl Wash 2006 Q4 Q1 Q2 2007 Q3 Q4 Q1 Q2 2008 Q3 Q4 * Source: Real Capital Analytics, Delta Associates; March 2009. Note: Excludes Manhattan at $2,380 per capita. Includes properties in default or foreclosure, plus lender REO. Source: FDIC, Foresight Analytics; March 2009. Nonaccruals Other * Estimated Delinquency Rates: On the Rise Led by problems in the single-family sector, the construction loan delinquency rate rose sharply from 9.6% in the 3rd Quarter of 2008 to an estimated 11.2% at year-end 2008 – the highest rate since the early 1990s. According to Foresight Research, the non-accrual rate, which rose from 2.9% to 8.2% during 2008, is largely responsible for the increase in total delinquency. Mortgage Maturities: Peaking In 2012-2013 In addition to delinquencies, a rising tide of mortgage maturities – in excess of $300 billion in 2012 and 2013 – must be addressed by the commercial mortgage market in the years ahead. The situation is likely to be made more difficult by a weak economy, tight capital, and lower values. Total Delinquency and Nonaccrual Rates Construction Loans 14% Commercial and Multifamily Mortgage Maturities Loans Maturing by Year 350 12% 11.2% 300 10% $ (in billions) 1.3% 250 200 Rate 8% 150 6% 100 4% 50 2% 0 0% 1990 1995 2000 2005 2010 2015 Q3 2006 Q4 Q1 Q2 2007 Q3 Q4 Q1 Q2 2008 Q3 Q4 * Commercial * Estimated Source: Federal Reserve, Foresight Analytics; March 2009. Multifamily Source: FDIC, Foresight Analytics; March 2009. Nonaccruals Other CMBS Delinquency: A Similar Pattern The commercial mortgage sector had an estimated 2.6% delinquency rate at year-end 2008, compared to 2.1% in the 3rd Quarter and 1.6% at year-end 2007. Again, nonaccruals are the main factor, accounting for about 60 percent of delinquency. The 12-month trailing delinquent unpaid balance of commercial mortgage backed securities (CMBS) has risen for six consecutive months to $12 billion in February 2009. The delinquent balance is 1.43% of the total unpaid CMBS balance of $837.8 billion. 2 Distressed Commercial Real Estate Journal March 2009 Distressed Commercial Real Estate By Severity and Type Washington Metro Area $2.0 Monthly CMBS Delinquency $14.00 $11.99 $12.00 Volume in Billions of $ $10.79 $10.00 $ (in billions) $8.68 $1.5 $8.00 $6.00 $4.00 $2.00 $3.48 $3.75 $4.00 $4.01 $4.18 $4.20 $4.07 $4.64 $5.39 $7.03 $1.0 $0.5 $0.0 $0.00 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Office Apartment Lender REO Retail Distressed Land/Other Stressed Industrial Source: Realpoint Research; March 2009. Source: Real Capital Analytics, Delta Associates; March 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 the 2nd Quarter of 2008, and Foresight Analytics projects that almost 75 banks will fail in the 2nd and 3rd Quarters of 2009. Bank Failures Current Cycle and Near-term Forecast 45 40 35 30 25 20 15 10 5 0 Distress Is Focused on Northern Virginia In the Washington area, Northern Virginia has the highest volume of distressed commercial real estate – $210 million – and the highest volume of potentially distressed assets, $2.2 billion. Both the District and Suburban Maryland face looming volumes of potentially distressed assets as well. Distressed Commercial Real Estate By Substate Area Washington Metro Area $2.5 Number of Closed Institutions Value in Billions of $ Q3 2007 $2.0 $1.5 $1.0 $0.5 Q4 Q1 Q2 2008 Q3 Q4 Q1 Q2 2009 Q3 $0.0 District Suburban Maryland Northern Virginia Source: FDIC, Foresight Analytics; March 2009. Actual Projected Distressed Source: Real Capital Analytics, Delta Associates; March 2009. Stressed Note: Distressed includes properties in default or foreclosure, plus lender REO. Washington Has Few Distressed Commercial Assets, But Office Properties Lead the Way Washington area office properties lead in distressed volume, but apartment complexes are experiencing a high combined volume of distressed and lender REO properties. The volume of potentially distressed office assets in the Washington area exceeds $1.8 billion. Watch for Volume 2 in this reporting series in May 2009. If you would like to subscribe free of charge, send your request to: David.Parham@DeltaAssociates.Com 3 Distressed Commercial Real Estate Journal March 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 four 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