Citi-JPM Deal: Investors Can Access CRE, CMBS Opportunities

by: Judy Weil

Many seem to think that commercial real estate and thereby commercial real estate mortgages are following the residential sector's playbook. North County Times reports soaring office vacancies in San Diego. Regional banks are expecting a wave of CRE defaults says Bloomberg:

Synovus Financial Corp. (NYSE:SNV), Comerica Inc. (NYSE:CMA) and Huntington Bancshares Inc. (NASDAQ:HBAN) are among regional banks that may face a second wave of real-estate loan losses, this time for shopping centers and residential construction projects.

From regional bank Independent Bank Corp.'s Q308 conference call: (NASDAQ:IBCP)

Approximately 95% of our nonaccruals are some form of commercial real estate which often takes a significant amount of time for revolution. About 49% are in the higher risk category of land, land development, and construction.

NY Times:

Nearly $5 billion in development projects in New York City have been delayed or canceled because of the economic crisis. FDIC: The growth rate for construction and land development loans shrunk drastically this year — to 0.08 percent through September, compared with 11.3% for all of 2007 and 25.7% in 2006… Research company Reis: The percentage of loans in default nationwide jumped to 7.3% through September 2008, compared with 1% in 2007.

NYT: Commercial brokers large and small, little-known developers and prominent families like the Wilpons and Rechlers all lost money to Bernard L. Madoff, industry executives say. Across [NYC], industry executives said deals had been scuttled or jeopardized because of the Madoff scandal… Many developers had pledged their investments with Mr. Madoff as collateral for projects, and are now worried that their banks will call in their loans.

Even Texas:

NYT: Newmark Knight Frank, a real estate broker, expects the vacancy rate in Dallas, Texas to rise to 19% this year, from 16.3%… Job growth and the brisk business of oil and gas exploration have come to an abrupt halt… Among the 8.4 million square feet of office space under construction or recently completed in the metropolitan area, 80 percent has not been leased. The vacancy rate is 11% and rising.

Financials to get hit again?


Vacancy rates in office buildings exceed 10% in virtually every major city in the country and are rising rapidly… The prospect [of rising defaults] bodes ill for banks, along with pension funds, insurance companies, hedge funds and others holding [commercial] loans or pieces of them that were packaged and sold as securities... Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM) and Morgan Stanley (NYSE:MS) — each hold tens of billions of dollars in commercial real estate securities. The banks also invested directly in properties.

The proportion of regional bank lending that is in commercial real estate has nearly doubled in the last six years, according to government data.

Commercial mortgage defaults are rising. NYC's Tarrragon Corp. filed for bankruptcy on Tuesday


Deutsche Bank: Delinquencies on commercial mortgages packaged and sold as bonds, which represent nearly a third of the commercial real-estate debt market, nearly doubled during the past three months, to about 1.2%... Research firm Foresight Analytics: Soured commercial mortgages on banks' and thrifts books jumped to 2.2% as of the third quarter of last year, from 1.5% at the end of 2007.

Brian Kelly in Seeking Alpha:

Realpoint Research: Through November the delinquent unpaid balance for CMBS increased by $1.63b to $7.026b… Banks still hold large portfolios of CMBS (in November Citi (NYSE:C) received TARP funds for its bad CMBS portfolio) and REITS have a record amount of refinancing to complete in 2009.

The nature of commercial real estate loans require REITS (and other borrowers) to finance for shorter periods of time (5-10 years) with a balloon payment often attached. Foresight Analytics and the Real Estate Roundtable estimate that between $160 -$400b needs to be refinanced in 2009.

Yet lending goes on:

A candy manufacturer leases the largest spec warehouse ever built in Texas; ProLogis (NYSE:PLD) has signed new lease agreements in Charlotte, N.C. totaling approximately 283,000 square feet; McCollister’s Transportation Group, a third-party logistics firm, leased 66,500 square feet in Bordentown, N.J.; The joint venture owners of Austin’s Bank of America Building have successfully lined up up a $44 million refinancing for the property.

And there are funds stepping in to take advantage already:

Morgan Stanley (MS) has always been heavily involved in real estate, especially global real estate funds such as those set up in 2006. The deal between Citigroup and Morgan Stanley will give Smith Barney clients access to alternative investments such as derivatives, real estate and private equity funds.

Housing Wire:

Private National Mortgage Acceptance Company, LLC (PennyMac) said Wednesday morning that investment funds managed by its affiliate, PNMAC Capital Management, LLC, had recently completed the purchase of $558 million in residential mortgage loans from the FDIC. PennyMac was formed in March 2008 by BlackRock, Inc. (NYSE:BLK), Highfields Capital, and mortgage industry veterans... to address the ongoing dislocations in the U.S. mortgage market. The company has a $2 billion war chest to use towards buying distressed residential mortgage assets.

Investors Business Daily:

Investment firms and funds have been accumulating capital to invest in distressed real estate... Billions of dollars in commercial loans made at the height of the boom will come due this year... The most distressed or potentially troubled markets are New York City, Los Angeles, Las Vegas, South Florida and Washington, D.C..

Globe St.:

Within the next 30 days the Carlton Group will be rolling out a new $300-million facility aimed at financing or recapping first mortgages. The company is partnering with the principal transaction group of a major investment bank. The name of the fund will be CSV Mortgage Capital. The fund will complement CSV’s line up funds, which includes a $400 million JV with Prudential Insurance Co. for mezzanine lending and an opportunistic fund through which CSV has acquired $500 million in loans from Wachovia and Merrill Lynch, among other banks.

Even foreign buyers are primed to buy.