Tuesday, March 8, 2011

Real Estate Tidbits


CMBS (Commercial Mortgage-Backed Securities) posted the highest delinquency rate in history in January. CMBSs are bonds, sold on Wall Street, which are backed by mortgage income from commercial real estate. According to Trepp, LLC, 9.34% of loans in all CMBS are 30 or more days delinquent; the value of these delinquent loans is $61.4 billion. Although the rate of increase of delinquent loans has slowed over the last few months, the rate of delinquency continues to climb despite considerable new issues which should be stable at least n the near term.

The credit profile of most Americans improved substantially in 2010. According to TransUnion, its Credit Risk Index (CRI) was 3.13 % lower at the end of 2010 than the reading in 2009; all states except Wisconsin improved its CRI. Wisconsin already has a CRI substantially blow the national average. Officials note that this change is a very positive sign regarding the housing industry and consumer spending.

Home ownership is still the dream of 70% of Americans according to Trulia.com. Despite the housing morass, 78% of homeowners think that their home was the best investment they ever made. Interestingly, 88% of renters 18-34 years old plan to be homeowners. One in four of these young people has become more positive about homeownership in the last 6 months. This is a very positive sign for housing in the years ahead.   

Developer’s Risk and the Art of Flying


I think the media and the community at large should stop vilifying developers. That sort of behavior parallels calling all UT football payers thugs, which is ridiculous. (I recently met Inky Johnson, the former defensive back at Tennessee whose career was cut short by injury. If there is a more thoughtful, thankful, and caring individual in Knoxville, I do not know who it is.) In fact, developing real estate is a lot like playing football. There is the hard work, the cachet of the activity, the benefits, and just as real, are the risks – of injury or loss or failure.

Jump out of a 50 story window sometime. For 45 stories you might convince yourself you can fly. Certainly by the 5th floor, you start to rethink your invulnerability, particularly if you made no plan for anything other than flying. Developers routinely take these types of financial risks. They hope and expect that that their plan “takes off and flies” just the way you hope your next putt goes in or your lottery ticket pays off. The difference is that in most endeavors the risk is known and limited. This is not always the case in real estate development. When a developer suffers loss or setback, it can be quite dramatic and public. And it can bring out the worst in people.

The truth is that most developers are really good people who support the community in a number of ways both publicly and privately. I have personally seen these folks delivering food at Christmas and teaching developmentally disabled children how to play softball, as well as many other selfless acts. So, I am a little discouraged when the community takes too much delight in the failures of real estate developers because they are perceived to be undeserving of their successes. There. I feel better now.

The Tale of the Baskets


 These days, just about every banker I know needs to talk about their difficulties in responding to requests for loans. I call this their Tale of the Baskets. It goes like this: a bank regulator visits the local bank and proceeds to separate the bank’s loan portfolio into different baskets. Commercial real estate loans get placed in one; inventory loans in another; receivable loans in a third; commercial and industrial loans in a fourth and on and on until all the bank’s loans are separated into categories. The loans in each basket are totaled, and then… and then, the bank examiner tells the banker which baskets are too full and, therefore, limiting the banker’s ability to make further loans in that category. Guess which kind of loan nearly every bank in Knoxville has too many of – commercial real estate loans. Congratulations if you are able to figure out which banks in the area are not overloaded with commercial real estate loans. The simple truth of the matter is that real estate lending has been very very profitable, and lenders were eager to make the loans. Now, the bank regulators have determined that the banks made too many risky real estate loans even though the regulators were complicit by relaxing their oversight during the good times and encouraged excessive lending with a wink and a nod.  

We’re Still Lending

Despite what you might think, bankers desperately want to loan their money. I’ve heard people claim otherwise, and that contrary view is almost believable. I make .2% interest on my savings account; the bank can invest my money in Treasury Notes at up to 4.5% (if they buy 30 year notes). The fact is that the banks need to work their deposits more vigorously, actively and profitably to pay for their operations and return money to investors. That’s where loans are important. Unfortunately, many of their baskets are full. However, just about every bank in town is looking to place loans for owner/user transactions. These are real estate loans for acquisition or construction of buildings to be occupied by their owners. If you are a doctor or a dentist or other professional looking to own your own facility, call me. We’ve got choices. If you are an investor looking to build speculative office or industrial space, just have a seat on the bench. Your time will come………..Bring a sandwich; it will be a while.

Knoxville’s Newest Cottage Industry

Aristotle’s observation that “Nature abhors a vacuum was rooted in scientific observation, but it is true also of the marketplace. There is currently a critical and unfilled need for commercial real estate lending. Lots of loans were cast in 2005, 2006 and 2007; many of these loans are current but cannot be renewed by the original lender because of a given bank’s basket (see above). Not all of these loans are good ones, but some good loans will be called for additional equity or full payment (or foreclosed on) because there are few banks that can accept them. The banks with capacity for real estate loans are taking care of their best customers or seeking the absolute best properties. In this vacuum, there is a growing market for private lending where individuals or investment groups place loans where bank lending is unavailable. These individuals are selective, they are conservative in their underwriting and they charge slightly higher rates than a bank might, but they do loan. I know of a couple of people who are very happy and relieved that this alternative was available to them. I do not know how large this cottage industry will get in Knoxville, but I believe that the opportunity for this type of lending will flourish until the banks are able to resume their normal function of providing funding for real estate acquisition and development.