The Real Estate Capital Scoreboard® – October 2009
Chicago, Illinois, October 1, 2009 – The Fed announced that the recession is starting to fade away. The real estate capital markets remain in the doldrums, with more news of increasing delinquencies and foreclosures, looming loan maturities with limited refinancing prospects, declining occupancies, tenant bankruptcies, oversupply and contracting space demand well into the foreseeable future.
Yet fresh transactions are trickling into the markets, filling value data points. As financial markets are recovering and lenders shore up their balance sheets, deals are repriced, sometimes at levels of 20% to 40% lower than the peak era of 2006-07. This fall’s positive signs shining on the capital markets include the following:
- Substantial amounts of capital funds are flowing into the public markets, mainly into mortgage and equity REITs. However, finding qualified investments at “distressed” pricing remains the biggest challenge.
- Life companies trickling back into the mortgage market, as overall bond pricing has improved. As a result, pricing is tightening by at least 25 basis points. However, many life companies still feel minimal pressure to originate new loans, continuing to adhere to minimum loan floor rates.
- For high-quality assets with conservative leverage, no “cash out” rules are relaxed as funding sources vie for the premium properties.
- As equity positions vanish in newer legacy ventures, mezzanine and other subordinate lenders busily work to maximize their ownership positions, hoping to protect their investments as markets gradually recover. In many instances, some of the same lenders converting into ownership positions as also raising additional funds for buying other properties to profit from the currently distressed environment.
Randal Dawson, a member of the Real Estate Capital Institute’s research notes, “Valuation driven by lower-leverage debt pricing and higher equity yields offers the most effective methodology for understanding values in today’s illiquid markets.” Adding, “Equity yields continue climbing, as commercial property values show more signs of stress.”