Despite credit gurus who are proclaiming that tight credit may soon be easing up , the commercial real estate lenders we work with at Financial Management Group and respect still don’t see any reason to get excited at this time . When you put a microscope to the current market , you see all kinds of danger flags still out there in the marketplace .
Granted, fresh capital may still be pouring into the sector, but you have to remember that massive amounts of debt scheduled to mature over the next several years will dwarf that . The degree of deleveraging the market needs to kickstart a strong lending market is being slowed down by other factors that cannot be ignored .
In other words, we may have a long way to go before full recovery, and that should give you pause .
Recently a report from Commercial Mortgage Alert included an interview with a dozen debt market specialists about where this economy may be headed , especially as it affects real estate. The participants generally agreed on a gradual recovery of originations as market-clearing prices are put into place across asset types, and as worked out properties finally qualify for loans in this new time of stricter than ever underwriting.
According to these specialists, the main concern are those mountains of debt that can’t be refinanced. One participant, Jack Tailor of Prudential Real Estate Investors, said “The magnitude of this maturing debt is unprecedented…much larger than we experienced in volume or systemically in the RTC days.”
See now why we may be looking at a long haul ahead ?
Granted, there IS money available for loans. However, if you’re underwater, those funds may not be timely or large enough to help you . Lots of investors saw their equity disappear over the past few months, especially those who highly leveraged real estate purchases since 2006. If you bought back then on the premise that rents and occupancy would continue to rise , then you now see that reality and expectations don’t always come together as you might have thought they would . Not only that, but in the future , loan underwriting standards have tightened so much that the gap between existing mortgages and takeout financing just gets wider and wider .
Deutsche Bank estimates that maturing portfolio and commercial MBS loans will increase at the following pace:
$204 Billion this year
$207 Billion in 2010
$296 Billion in 2111
$338 Billion in 2012
Granted , some new capital is being seen in various geographic areas and markets . It’s been reported that around 350 property and debt funds have raised an estimated $135 billion of equity since 2008. In addition, REITs have sold $15.6 billion in stock during 2009 and floated over $9 billion of secured debt. Finally, just since late summer of 2009 four mortgage REIT’s lined up $1.5 billion through IPOs.
The problem is we may need a lot more money than that if we’re to get the market back on the road to robust health . A recent report from Pru Real Estate Research stated that if the $2.8 trillion in mortgages taken out between 2005 and 2008 had to be refinanced in the current economy, the underlying properties would qualify for only $2 trillion in debt. That leaves a serious funding shortfall of $825 billion that would have to filled by new money or writedowns.
How’s this going to impact you and your portfolio ? What may be your best course of action going forward ?
The answers of course will vary for just about everyone. It is only by sitting down with a well qualified, experienced and market-savvy investment manager or consultant who can help you determine your best path for going forward. Your challenges are naturally different from the next guy .
Fortunately, we are able to find solutions that help our real estate investment clients weather these dangerous times and to preserve their capital as much as possible, or even to grow it larger. With every challenge, we’ve learned time and again , comes an equal or even larger opportunity.
