"It's going to get very, very messy in the next couple of years," said Ethan Penner, executive managing director of CBRE, Los Angeles.
Distressed loans constitute 2.4% of the market today, a percentage figure in line with historical levels. But as a total number of loans, 2.4% is twice the total number of problem transactions as 2000, said R. William Ohlsen, senior vice president, real estate finance and servicing group of LNR Partners, Miami Beach, FL. No new vehicle has emerged to sell distressed product, he said.
The problem arose with the shutdown of the CMBS market in spring 2007, compounded by a lack of trust in rating agencies. "This is not a crisis of liquidity, it's a crisis of debt," Penner said. "We now live with the aftermath of this horrid period."
The result is a dramatic increase in the distress market, with retail emerging as one of the largest sectors. Some of the troubled assets are just 30% occupied, Ohlsen said. The US government intervention has tried to stem the crisis, and TALF (Term Asset-Backed Securities Loan Facility) will help, Penner said, as will a more realistic structure, in which amortization will be a requirement.
"You'll see loans being launched at conservative levels," Penner said. "I call it normal."
But more conservative lending won't be a quick fix. Another problem arises with the conflicting priorities of different CMBS investors: Investors at the lower end of the capital structure will lose money when a loan goes bad. Those investors want loans to be extended. Those at the top end of the structure are protected and want their money back, Penner said. Extensions and modifications, therefore, will be unique to each loan.
"[Extensions and modifications] are market specific," Ohlsen said. "How is the center performing? [What is] the occupancy? What is the strength of the borrower? Does he have a plan? Is there some reason to modify the loan?"
Extensions are the result of a loan maturing, and a large number of loans are scheduled to do so in 2009 through 2011. Modifications, on the other hand, will only occur when additional equity is put into a transaction.
Another question is exactly what retail categories will succeed to help fill the vacancies in troubled assets. "Value retail is clearly what's functioning today," said Naveen Jaggi, senior managing director of CBRE. Discounters that had been frowned upon are now being welcomed in neighborhoods. "That's the world we're living in."
Banks, which had been a favored pad tenant, are no longer in the market. The aspirational shopper is gone, and the Hispanic demographic is growing, providing new challenges for retailers. But there are reasons for optimism. Half of operating retail chains are looking to open new stores, though at a more measured pace. Some answers, Jaggi said, may be clearer this fall.
"If there are not a lot of closures, if people are spending a little bit of money," Jaggi said. "We will be able to say we made it through a big one."
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
