DISTRESSED COMMERCIAL REAL ESTATE JOURNAL

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1 DISTRESSED COMMERCIAL REAL ESTATE JOURNAL 500 Montgomery Street, Suite 600 Alexandria, VA / DeltaAssociates.com

2 U.S. Distressed Commercial Real Estate Volume March 2009 October $180 $160 $140 $120 0 $80 $60 Distress: In Retreat? Distressed commercial real estate in the United States totals $171.6 billion in October 2011 down $9.5 billion since June and may be slowly retreating from the plateau for this cycle, which was reached in March The level of distress began to plateau in spring 2010, and it has stayed in the $175 billion to $190 billion range until now. The volume of distress peaked at $191.5 billion in October 2010, according to data from Real Capital Analytics. Distressed real estate includes properties in default or foreclosure and lender REO. Note: Includes properties in default or foreclosure, plus lender REO. The plateau has been sustained as lenders have continued to extend debt obligations, and commercial property values are stabilizing in many markets and even rising in some. With property values rising in select metro markets, some deals are no longer under water. U.S. Distressed Commercial Real Estate by Type October 2011 $50 $45 $35 $30 $25 $15 $5 Office Apartment Land/Other Retail Hotel Industrial Property Type Note: Includes properties in default or foreclosure, plus lender REO. Change in U.S. Distressed Commercial Real Estate April 2011 October 2011 $50 $45 $35 $30 $25 $15 $5 Oct $171.6 Billion Jun. 2011: $181.1 Billion Apr. 2011: $180.6 Billion Office Apartment Land/Other Retail Hotel Industrial Note: Includes properties in default or foreclosure, plus lender REO. Watch for Volume 15 in this reporting series in January If you want a free subscription, send your request to: David.Parham@DeltaAssociates.com We think the decline in distress has begun and will continue in a meaningful way in 2012 and beyond if interest rates continue to cooperate and economic expansion picks up pace. The real test of the distress plateau will be seen in 2012 and 2013, though, with about $300 billion in loans coming due each year. The office sector still represents the largest share of distressed real estate at $41.9 billion. This is a decrease of $1.6 billion, or 3.7%, since June Apartments continue in second place, with $35.6 billion of distress a.4 billion, or 1.1%, drop since June. Hotels dropped from third place in June to fifth currently, falling.7 billion, or 30.7%, since June to $24.2 billion. Land/Other has moved into third place with $29.8 billion, losing.3 billion since June The largest property sector Office fell 3.7%, the second largest drop by percentage. Hotels showed the largest decline at 30.7%. Retail properties posted the largest increase at $2.5 billion, or 9.7%. Industrial rose 9., or $975 million. Apartments decreased 1., or $418 million. Stressed Commercial Real Estate While the volume of distressed commercial real estate properties is significant, also consider the looming volume of stressed property. These properties have characteristics of concern in the short term maturing loans, bankrupt tenants, under-performance, financially troubled owners, or other significant obstacles that could potentially lead to distress in the future. Distressed Commercial Real Estate Journal 1

3 Stressed Commercial Real Estate by Market October 2011 $12 $8 $6 $4 $2 Restructured Distressed Lender REO Stressed Note: Value based on loan amount. LA-Orange County has the highest total volume of distress with $11.8 billion, followed by Manhattan with.0 billion. However, Manhattan now has the highest volume of potentially distressed (what we call stressed ) real estate at $4.1 billion. South Florida has $971 in distressed property value per capita, the largest amount per capita after Manhattan. Houston has the lowest amount among the markets we track at $111 per capita. Dallas had the largest increase since June 2011, rising from $356 to $382 per capita. Besides Manhattan, LA-Orange County had the greatest decrease in distressed property value per capita from $583 to $442. Distressed Commercial Real Estate Value Per Capita October 2011 Distressed Value Per Capita $1,000 $800 $ Rate 2 18% % S. Florida Atlanta Chicago LA-OC DFW DC Metro Boston Baltimore Houston Note: Excludes Manhattan at $2,388 per capita. Includes properties in default or foreclosure, and lender REO. Value based on loan amount. Population is from 2010 U.S. Census. Total Delinquency and Nonaccrual Rates Construction Loans 1.3% Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2* Source: FDIC, Trepp, LLC; graphic Nonaccruals Other % * Estimate Total Delinquency and Nonaccrual Rates Residential Mortgages Bank Delinquency Rates: Loan Delinquencies Easing Preliminary 2 nd Quarter 2011 data from Trepp, LLC indicate that a continued drop in construction loan delinquencies is likely, after declining each quarter in Total delinquency declined from 18.3% in the 1st Quarter of 2011 to an estimated 17.1% in the 2 nd Quarter. The nonaccrual rate has led the way during this cycle, and it is the main factor behind the current drop, as it fell from 14.5% in the 1st Quarter of 2011 to 12.7% in the 2 nd Quarter. The delinquency rate for first-lien single-family mortgages fell slightly in the 1 st Quarter of 2011 to a total of 12., with the nonaccrual rate dropping to 4.. In comparison, total delinquency was 10. in the 2 nd Quarter of 2009, with 3.8% for nonaccruals. Trepp attributes the residential sector s slow improvement to a continuing high volume of foreclosures and weak price trends. The commercial mortgage sector s total delinquency rate dropped to 5. in the 2 nd Quarter of 2011, compared to 5.3% in the 1 st Quarter and 5. one year before. The preliminary nonaccrual rate in this sector dropped to 3. during the 2 nd Quarter, after hitting a cyclical high of 4. in the 1st Quarter. In comparison, the 2 nd Quarter 2009 non-accrual rate was Rate 8% 2. Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2* Source: FDIC, Trepp, LLC; graphic Nonaccruals Other * Estimate Distressed Commercial Real Estate Journal 2

4 Rate Total Delinquency and Nonaccrual Rates Commercial Mortgages 5% 3% 1% 1.1% Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2* 5. Mortgage Defaults Falling and Maturities Peaking The bank-held commercial mortgage default rate continues to fall, from a 4. peak in the 3 rd Quarter of 2010 to 4.1% in the 2 nd Quarter of 2011, according to FDIC data reported by Real Capital Analytics and Chandan. The multifamily sector default rate is falling as well from 3.7% in the 4 th Quarter of 2010 to 3.3% at midyear 2011, which is attributed to improvement in cashflow fundamentals Source: FDIC, Trepp, LLC; graphic Default Rate 5% 3% Nonaccruals Other Quarterly Default Rate Commercial Real Estate Mortgages * Estimate 4.1% 3.3% Trepp has reported that the volume of commercial mortgage maturities continues to edge up to about $295 billion in 2011 and peaking at more than $300 billion per year in 2012 and Maturities will remain elevated thereafter, as the prior growth in securitization will give the CMBS sector a majority share of mortgage maturities by Refinancing maturing mortgages remains difficult because of tepid growth in the economy, tight capital, property value challenges in many markets, and new mortgage origination standards. 1% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Source: FDIC, Real Capital Analytics, Chandan, graphic $ (in billions) Commercial Multifamily Commercial and Multifamily Mortgage Maturities Loans Maturing by Year 2011 CMBS Delinquency: Another Plateau Morningstar reports that, from September 2010 to September 2011, the delinquent unpaid balance of commercial mortgage-backed securities (CMBS) fell $2.0 billion (3.) to $60.2 billion. The delinquency is now 8. of the $735 billion total unpaid balance. Due to loan workouts and liquidations, it has remained generally in the $60 to $62 billion range since June 2010, the most significant exception being a decline to $58.9 billion in August Loan workouts and liquidations totaled $7.8 billion in all of 2010 and $9.2 billion through September Commercial Multifamily Source: Federal Reserve, Trepp LLC; October $65 $60 $55 $50 $45 Monthly CMBS Delinquency $60.22 Because of possible problem loans and potential defaults, though, the delinquency ratio may exceed 9% in 2011 or 2012, according to Morningstar. Under certain scenarios, the delinquent unpaid balance could reach $66 billion by December Multifamily loans make up 26. of total CMBS delinquency, followed by office at 25., retail at 24.1%, and hotel at 13.. The $16.0 billion multifamily delinquency represents 9. of multifamily collateral. $ (in billions) $35 $30 $25 $15 $4.64 $5 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Source: Morningstar; October New York has by far the largest share of the national CMBS delinquency total among metro areas. Its 12. share is followed by Las Vegas with 3.7% and Phoenix with a 3. share of the total. Together, the top 10 metros by delinquent unpaid balance represent 37.8% of the national CMBS delinquency total. Distressed Commercial Real Estate Journal 3

5 13% 1 11% 1 9% 8% 7% 5% 3% 1% % 3. Top 10 MSAs By % of Total CMBS Delinquency 3.3% 2.8% % % NY Las Vegas Phx ATL Phil DC Chi DFW R-SB* LA Source: Morningstar, October U.S. Bank Failures *Riverside-San Bernardino Banking: Mixed Signals There have been 74 bank failures in the first three quarters of 2011, compared to 157 failures in 2010 and 140 failures in The 2010 total was the most since 1992, when 181 banks failed. The pace at which banks are failing has been dropping since the 3 rd Quarter of 2009, when 50 banks failed, but it remains volatile. The failure rate dropped to 22 banks in the 2 nd Quarter of 2011, but it rose to 26 banks during the 3 rd Quarter. The FDIC s Problem Bank List fell to 865 institutions, with total assets of $372 billion, in the 2 nd Quarter of 2011, the first decline since the 3 rd Quarter of Likewise, the FDIC Deposit Insurance Fund is still improving. It grew to $3.9 billion at the end of the 2 nd Quarter of 2011 the first positive quarterly balance since the 2 nd Quarter of With mortgage maturities still rising, however, we expect the banking environment to remain challenging. Number of Closed Institutions Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q Source: FDIC, graphic Distressed Commercial Real Estate By Severity and Property Type Houston Featured Metro: Houston Distress up, Led by Office The volume of distressed and stressed real estate in Houston has risen from $1.7 billion in January 2010 to $3.9 billion in October This remains the third lowest volume among the ten markets that we survey. At $1.6 billion, office properties represent 4 of the distressed and stressed volume in Houston. Apartment properties have the second highest level and retail properties the third highest at $1.2 billion and.9 billion, respectively. Industrial and land/other are small factors, with $165 million and $37 million, respectively. $2.0 Volume in Billions of $ $1.5 $ Office Apt. Retail Indus. Land/Other Restructured Distressed Stressed Greg Leisch of delivered the keynote address in September 2010 at the second-annual RealShare DISTRESSED ASSETS networking conference in Dallas, Texas. Click here for a file with the presentation slides and here for an interview that Greg gave after his presentation. Distressed Commercial Real Estate Journal 4

6 , the research affiliate of Transwestern, is a firm of experienced professionals offering, consulting, valuation, and data services to the commercial real estate industry for over 30 years. The firm s practice is organized in four related areas: 1. Valuation services for partial interests in commercial real estate assets. 2. Consulting, research and advisory services for commercial real estate projects, including market studies, market entry strategies, asset performance enhancement studies, pre-acquisition due diligence, and financial and fiscal impact analyses. 3. Distressed asset recovery services to include property performance analyses and enhancement studies, debt structuring evaluation and note valuations, portfolio assembly due diligence, valuations, and litigation support. 4. Subscription data for selected metro regions for office, industrial, retail, condominium, and apartment markets. For further information about and to see all of our publications, please browse our web site at: Consulting and Advisory Services Gregory H. Leisch, CRE Chief Executive 500 Montgomery Street, Suite 600 Alexandria, VA (703) ; Fax (703) Greg.Leisch@DeltaAssociates.com Market Publications Group Alexander (Sandy) Paul National Research Director 500 Montgomery Street, Suite 600 Alexandria, VA (703) ; Fax (703) Alexander.Paul@DeltaAssociates.com Distressed Asset Recovery Team has partnered with Fore Consulting and Appian Corporation to form the Distressed Asset Recovery Team (DART). This partnership offers services to government entities as well as borrowers and lenders to assist with the resolution of stressed real estate matters during this time of economic turmoil. These workout services include: 1. Property performance analysis 2. Note valuations 3. Investment advisory and portfolio assembly due diligence 4. Asset performance enhancement analysis 5. Valuation services 6. Litigation support and dispute resolution services For more information, please contact Greg Leisch, Delta s CEO, at: Greg.Leisch@DeltaAssociates.com Distressed Commercial Real Estate Journal 5