CRE Finance Update: Part II – The Road To Recovery?

This week, MortgageOrb continues its special series of reports addressing the commercial real estate (CRE) market's unique struggles during the economic downturn and industry leaders' latest ideas for sparking a recovery.

We begin with a few positive signs: Last week, Summit Capital, a Carlsbad, Calif., finance broker, announced it had begun ‘analyzing the feasibility of financing transactions’ to place a $380 million pool of capital.

The capital is expected to be used in up to 17 or 18 deals, with a minimum debt-coverage ratio of 1.25 on a 25-year or 30-year amortization with a five-year or a 10-year term.

Perhaps most notably, Summit Capital focuses on hospitality properties, which have been commonly regarded as the worst-faring of all CRE sectors.

‘We believe this is the first capital of its kind to come out,’ John Stueber, president of Summit Capital, stated in the company's announcement. ‘This move signals the new beginning of [commercial mortgage-backed securities (CMBS)] with regard to the hotel real estate sector.’

Meanwhile, in the industrial sector, the critical New York/New Jersey port market may have reached bottom and begun to stabilize – potentially an early sign of similarly upbeat trends elsewhere for the sector.

According to a new report from Colliers International, several positive trends have appeared in this large shipping hub. With a key benchmark that tracks global shipping activity on the rise and global exports increasing, the New York/New Jersey industrial market could be protected against future occupancy declines.

Industrial markets in the U.S.' major port cities remain in the early stages of recovery. However, job-creation initiatives from the federal government and a possible program that would double the total volume of U.S. exports in the next five years could ‘ultimately fill vacant seaport buildings,’ the report says.

Finally, as you may have read last week on MortgageOrb, two recent reports offered glimmers of hope alongside their more somber findings.

The latest CMBS delinquency report from Trepp showed that although CMBS delinquencies continued to climb and, in fact, reached a new high in February, they registered their smallest month-to-month growth in six months.

DebtX reported that capital-markets improvements helped raise the aggregate value of CRE loans (priced by DebtX that collateralize CMBS) 76.7% as of Jan. 29, 2010 – up from 75.9% as of Dec. 31, 2009. However, loan values are down 81.3% from January 2009's numbers.

Given the latest numbers and news items, what still needs to be done for a sector that is still clearly troubled?

Commercial Mortgage Securities Association (CMSA) presented a new version of its plan of action last week, reiterating some crucial warnings and updating earlier suggestions.

Titled ‘A Framework For A Sustainable Commercial Real Estate Recovery,’ the five-point proposal acknowledged ‘significant hurdles to recovery in the near term’ but recommended certain key public-policy initiatives for creating a true recovery with wide-reaching benefits to the U.S.

The association once again expressed concern with the House's ‘unprecedented and retroactive accounting standards (FAS 166/167), risk-based capital changes and 'retention' (or 'skin-in-the-game') proposals’ now being pursued and urged policy-makers to consider CMBS' unique attributes and acute need for revival.

According to CMSA, these risk-retention reforms must permit customization for different asset types (such as CMBS), allowing appropriate flexibility to accommodate creditors, securitizers and third-party investors who purchase first-loss positions and retain the corresponding risk.

In addition, CMSA spoke out against proposed ratings-differentiation measures and real estate mortgage investment conduit (REMIC) reforms that might drive away investors due to tax consequences when a commercial mortgage in imminent default is modified.

Two programs that have proven at least somewhat useful in stimulating the market – the Term Asset-Backed Securities Loan Facility (TALF) and the Public-Private Investment Fund – must be structured to continue to facilitate liquidity and promote a transition to private-market activity, CMSA added.

‘To date, TALFâ�¦ has helped to reduce credit spreads on CMBS secondary trading and helped produce the first private-label CMBS loan in over a year in the form of a single-borrower securitization,’ the association pointed out.

Finally, two new financial weapons may need to be deployed to support CRE finance recovery.

‘As the Resolution Trust Corp. pioneered, the securitization of commercial mortgages can be used as an effective exit strategy for the government after an institution has failed and its assets (including CRE loans that were not securitized) are seized by the FDIC,’ CMSA explained. ‘Such a proven mechanism can minimize government and taxpayer exposure, while providing liquidity and capacity to the CRE market.’

In addition, CMSA once again recommended that policy-makers implement a regulatory framework to support a viable covered-bond market. As many industry executives have noted, covered bonds have proven successful in the European market and may help generate new capital in the U.S.


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