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 6.5% of GDP Commercial real estate entered the recession in reasonable balance The credit crisis creates a downward spiral of property valuations, placing the financial system at risk Approximately $400 billion of CRE debt matures in 2009, and another $800 billion matures in 2010 and 2011 Two largest sources of CRE debt have been banks and CMBS Banks are not lending, and the CMBS market is closed Bid-ask spreads remain large, and property assets cannot be sold Performing loans must be refinanced to avoid asset price deflation AAA-rated debt requires Treasury support to facilitate price discovery 2 2

3 Commercial Real Estate Debt and Equity Investment-grade, income-producing real estate $6.4 trillion as of December 2008 Total Debt $3.5 trillion Total Equity $2.9 trillion Source: JPMorgan Asset Management 3 3

4 Commercial Real Estate Debt and Equity Public and Private Ownership as of December 2008 Private Ownership Public Ownership Debt $3.2 trillion Equity $2.7 trillion Debt $260 billion Equity $240 billion $5.9 trillion $0.5 trillion Sources: JPMorgan Asset Management and NAREIT 4 4

5 Commercial Mortgage Debt Outstanding By source of funds $3,499 billion $1,041 billion $1,253 billion CMBS Banks 1988-Q Q Q4 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 93 companies listed on the NYSE 71% investment grade by equity market capitalization $500 billion of property owned as of December 31, 2008 Current leverage ratio of 51% compared with 43% at the end of 2007 Fixed charge ratio of 2.0 compared with 2.7 at the end of 2007 $17.7 billion of dividends paid to shareholders in 2008 Average daily trading volume of $4 billion to $5 billion Share prices lead measured property valuations by 5-6 quarters Share prices peaked early in 2007 and may have bottomed early in 2009 Source: NAREIT 6 6

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

8 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 $ $40 $45 $52 $65 $46 $54 $ Sources: Goldman Sachs and Trepp 8 8

9 Commercial Real Estate Loans at Banks CRE credit standards: 1997:Q1 2009:Q Net percent reporting tighter standards Bank credit standards still tightening Source: Federal Reserve Board Senior Loan Officer Opinion Survey on Bank Lending Practices (July 2009) 9 9

10 Commercial Real Estate Loans at Banks CRE lending volume: Billions of dollars as of September 23, Change in Outstandings Source: Federal Reserve Board (H.8 Statistical Release) Bank lending still contracting

11 Securitized Commercial Real Estate Loans CMBS issuance volume: Billions of dollars as of September 29, Source: Commercial Mortgage Alert st Half 2 nd Half

12 CMBS Credit Spreads CMBS yield less 10-year Treasury yield 8,000 7,000 Basis points as of August 31, 2009 CMBS with 10-year average life 6,000 5,000 4,000 3,000 2,000 1, AAA-Sup. Senior AAA-Junior BBB Source: Morgan Stanley 12 12

13 Commercial Real Estate Transactions Transaction volume: ,000 Number of transactions as of August 31, 2009 Asset sales an unlikely source of liquidity; neither buyers nor sellers have access to credit 16,135 17,995 15,000 13,972 Indicative of bid-ask spreads too wide to clear the market 10,000 10,203 6,450 7,349 5,000 4,784 4,988 1, Source: Real Capital Analytics 13 13

14 CMBS and Residential Mortgage Delinquencies % 9% Percent as of September 30, 2009 CMBS Delinquencies CMBS Delinquencies - All 30+ MBA NDS 2009Q2 8% 7% 6% 5% 4% 3% 2009July 2% 1% 0% Sources: Trepp LLC, CMSA, MBA 14 14

15 Delinquency Rates on CRE Loans at Banks :Q2 14 Percent as of June 30, Mar-91 Mar-93 Mar-95 Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Sources: Federal Reserve Board 15 15

16 Nationwide Core Property Vacancy Rates 1983:Q1 2009:Q2 15% Percent as of June 30, % 5% 0% Source: NCREIF 16 16

17 Securities Offerings by Public Companies Initial and secondary equity plus unsecured debt 50 Billions of dollars as of September 30, Debt Equity Public capital offerings in secondary equity offerings totaling $20.7 billion 8 initial public equity offerings totaling $2.6 billion 22 unsecured debt offerings totaling $6.7 billion Sources: NAREIT and SNL Financial 17 17

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 Term Asset-Backed Securities Loan Facility (TALF) should remain operational until the CMBS market is restored Foreign equity capital should be encouraged and barriers to such investment, such as the Foreign Investment in Real Property Tax Act (FIRPTA), should be revised Provisions to encourage workouts of distressed commercial real estate debt should be extended to REITs Continuation of the long-time role of Fannie Mae and Freddie Mac in providing an appropriate level of credit to the multifamily and senior housing sectors Accounting rules for mark-to-market and consolidation must adapt to the current capital markets crisis 18 18