Don’t Celebrate The End of The Recession Just Yet.

Despite credit gurus who are proclaiming that better times are just ahead for investors seeking credit, the commercial real estate lenders we work with at Financial Management Group and respect still don’t see any reason to celebrate just yet. When you put a microscope to the current market, you see all kinds of reasons for continued caution.

We’ve read the various articles about new money pouring into the market. But you must not overlook the fact  that massive amounts of debt scheduled to mature over the next several years will dwarf any new investment dollars. The degree of deleveraging the market needs to launch a strong lending market is being slowed down by any number of factors.

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 the true state of the economy , 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 tighter 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 bigger than we experienced in volume or systemically in the RTC days.”

See now why the party may not have begun yet?

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 diminish severely over the past few months, especially those who highly leveraged real estate purchases since 2006. If you invested in the hope that rents and occupancy would be increasing, then you now see that reality and expectations aren’t always the same. Not only that, but in the ensuing months, loan underwriting standards have tightened so much that the gap between existing mortgages and takeout financing continues to widen. 

Deutsche Bank estimates that maturing portfolio and commercial MBS loans will increase at the following pace:
$204 Billion in 2009 
$207 Billion in 2010
$296 Billion in 2111
$338 Billion in 2012

In spite of all that,  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 need a whole lot more capital than this.  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 does this impact your current situation? What are the solutions and opportunities that may be at your disposal?

The answers of course will vary for just about everyone. We highly recommend  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 investor down the street . 

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, history teaches us , comes an equal or even larger opportunity.