The Credit Crisis in Commercial Real Estate

Transcription

1 The Credit Crisis in Commercial Real Estate 1

2 Summary Commercial real estate accounts for a meaningful 6% of GDP Commercial real estate entered the downturn reasonably well balanced However, $400 billion of CRE debt matures by the end of 2009, and another $800 billion matures in 2010 and 2011 According to S&P, another $800 billion of corporate debt matures on 2009 Two largest sources of CRE debt are banks and CMBS Banks are not lending, and the CMBS market is closed Lending terms, when available, are ruinous and assets cannot be sold Performing loans must be refinanced to avoid asset price deflation Super-senior AAA-rated debt trades at 15% yields to maturity AAA-rated debt requires Treasury support to establish price discovery 2 2

3 Commercial Real Estate Debt and Equity Investment-grade, income-producing real estate $6.5 trillion as of December 2007 Total Debt $3.3 trillion Total Equity $3.2 trillion Source: JPMorgan Asset Management 3 3

4 Commercial Real Estate Debt and Equity Public and Private Ownership as of December 2007 Private Ownership Public Ownership Debt $3.0 trillion Equity $2.9 trillion Debt $255 billion Equity $345 billion $5.9 trillion $0.6 trillion Source: JPMorgan Asset Management, NAREIT 4 4

5 Commercial Mortgage Debt Outstanding By source of funds $3,440 billion $1,041 billion $1,217 billion CMBS Banks 1988-Q Q Q2 Banks Thrifts Insurance Government CMBS Other Source: Federal Reserve Flow of Funds Accounts of the United States 5 5

6 Publicly Traded Real Estate Equity (REITs) A window on commercial real estate equity finance 101 companies listed on the NYSE 74% investment grade by equity market capitalization $600 billion of property owned at year-end 2007 Leverage ratio of 60% compared with 40% at the end of 2007 Fixed charge ratio of 2.6 $19.5 billion of dividends paid to shareholders in 2007 Average daily trading volume of $5 billion Share returns lead measured returns in property markets by 6-18 months Share returns peaked early in 2007 and have since declined 62.8% Note: Data as of November 30, 2008 Source: NAREIT 6 6

7 Commercial Real Estate Debt Maturities Including secured and unsecured debt Debt Maturities by Year $2,000 $1,800 Billions of dollars Public companies Total commercial real estate $1,800 $1,600 $ of Maturity per Year $1,400 $1,200 $1,000 $800 $600 $400 $200 $410 $310 $500 $0 Source: Goldman Sachs and REIT filings 2008/

8 Public Company Debt Maturities Investment grade unsecured debt Unsecured Investment Grade Bond Maturities (BAA1/BAA2) $ % $38 Billions of dollars) $32 $24 $16 $8 $6 Current Yield-to-Worst: 14.7% (Right-hand scale) Weighted average coupon: 5.8% (Right-hand scale) $10 $10 $10 $ % 11.0% 9.0% 7.0% Weighted average coupon $ % Source: Goldman Sachs, Advantage Data, Barclays and Bloomberg as of November 30,

9 Publicly Traded Real Estate Debt (CMBS) A window on commercial real estate debt finance Annual maturity schedule $160 Billions of dollars Overall U.S. CMBS Maturities by Year $120 $131 $136 CMBS Maturity Amount $80 $40 $40 $45 $52 $65 $46 $54 $100 $60 $ Source: Goldman Sachs and Trepp 9 9

10 Commercial Real Estate Loans at Banks CRE credit standards: Net percent A record tightening of credit standards Net % Reporting Tighter Standards Source: Federal Reserve Board Senior Loan Office Opinion Survey on Bank Lending Practices (October 2008) 10 10

11 Commercial Real Estate Loans at Banks CRE lending volume: Billions of dollars $ Difference from Previous Quarte Note: Data through November 19, 2008 Source: Federal Reserve Board

12 Securitized Commercial Real Estate Loans CMBS issuance volume: Billions of dollars CMBS Issuances Sources: Commercial Mortgage Alert Q 2Q 3Q 4Q

13 CMBS Credit Spreads CMBS yield less 10-year Treasury yield 5,000 4,500 Basis points CMBS with 10-year average life 4,000 3,500 3,000 2,500 2,000 1,500 1, AAA-Monthly AAA-Sup. Senior AAA-Junior AAA-Mezz BBB Note: Data through November 30, 2008 Source: Morgan Stanley 13 13

14 Commercial Real Estate Transactions Transaction volume: ,000 Number of transactions 18,323 16,027 15,000 13,965 10,000 10,165 Asset sales an unlikely source of liquidity; neither buyers nor sellers have access to credit 5,000 4,888 4,979 6,357 Indicative of bid-ask spreads too wide to clear the market 2,558 1,973 1, Source: Real Capital Analytics NA 1Q 2Q 3Q 4Q

15 CMBS and Residential Mortgage Delinquencies :Q2 7% CMBS Delinquencies MBA NDS 6% 5% 4% 3% 2% 1% 0% Note: Delinquency rates are for fixed-rate, conduit CMBS transactions. 60+ excludes 30-day delinquencies. Source: Trepp, CMSA, and Mortgage Bankers Association National Delinquency Survey 15 15

16 Nationwide Core Property Vacancy Rates :Q3 15% 10% 5% 0% Source: NCREIF 16 16

17 Securities Offerings by Public Companies 50 Billions of dollars 40 Equity Debt Date as of November 30, 2008 Source: NAREIT and SNL Financial 1Q 2Q 3Q 4Q

18 Policy Actions to Stabilize Financial Markets Banks must be encouraged or required, as a condition for Treasury or Fed liquidity assistance, to refinance performing commercial mortgages and unsecured credit facilities reaching maturity The Treasury should allocate a portion of the remaining funds under TARP as equity to capitalize a Federal Reserve liquidity facility for new commercial mortgages and unsecured commercial real estate loans, permitting credit markets to restart and clear in an orderly fashion Foreign equity capital should be encouraged and barriers to such investment (such as the Foreign Investment in Real Property Tax Act or FIRPTA) should be revised Real estate mortgage investment conduit (REMIC) rules should be amended to facilitate reasonable modifications to the terms of loans securitized through CMBS Accounting rules for mark-to-market and consolidation must adapt to the current capital markets crisis 18 18