Hanasab & Zolekhian, LLP - Blog » commercial real estate

Pension Funds Investing in Retail Properties

Raymond Zolekhian — Thu, 06 Aug 2009 17:17:23 +0000

Pension funds who had been hit hard by the downturn in real estate are apparently venturing back into the asset class. The Wall Street Journal reported today that Cadillac Fairview Corp., which is owned by Ontario Teachers’ Pension Plan, bought a 49% stake in Queens Center Mall from Macerich Co., a client that I have represented in the past in connection with debt offerings. Cadillac paid $150 million in equity and assumed $167 million in debt.

This is fairly significant news in that pension funds are major players in the real estate market and getting them back into the game will be a major boost for commercial real estate. Also noteworthy is the fact that they invested in retail properties which is an asset class that has been and will continue to be hit very hard by the current recession. This purchase, along with a $463 million investment made by California Public Employees’ Retirement System in a portfolio of 86 shopping centers, is a very positive indication. These could very well be anomalies, but with the market the way it currently is any sign of hope is good. I’m going to keep monitoring these developments and keep you posted of any new positive signs.

Commercial Defaults Rising Faster Than Projected

Raymond Zolekhian — Wed, 05 Aug 2009 17:04:01 +0000

The Business Insider posted an interesting chart today showing the rapid rate at which commercial real estate loans are going into default. Deutsche Bank, a company that I have represented in the past on several deals, which has been generally very pessimistic about the condition of the real estate markets had to revise its projections even further downward as a result of this latest quarter. Deutsche Bank is now projecting that the delinquency rate for commercial loans will now reach somewhere between 6-7% by the end of 2009, up from their previous estimate of 3.5%.

Interestingly enough, the worsening problems on the commercial side seem to have more to do with the fledgling economy that has reduced rents and caused many business to break leases and less to do with the lack of liquidity that most analysts believed would be the root of the problem. As a result, defaults are occurring sooner than expected because the defaults are now a result of inability of borrowers to make mortgage payments and not the inability of borrowers to refinance upon maturity which was the original concern.

Regardless, lenders are going to have to start addressing the commercial real estate market and are going to have to do it soon. It will be interesting to see if they learn from the residential meltdown or if they will make the same mistakes before they begin further embracing the loan modification concept that salvaged what was left of the residential market. Many banks have already seen the light, now it’s time for the rest to follow suit.

Commercial Real Estate Posts Record Decline

Raymond Zolekhian — Tue, 04 Aug 2009 16:58:43 +0000

Another report by Reuters today states that commercial real estate prices dropped a record amount in the second quarter of 2009. According to a study by the Massachusetts Institute of Technology Center for Real Estate, commercial real estate prices fell 18.1% in the second quarter, off nearly 39% from the markets peak in mid-2007. Although the new for the most part seemed fairly pessimistic, there was a sign of hope. The index measuring prices that current commercial property owners would be willing to sell their properties at fell a record 18.5%. This may be an indication that the market is reaching its bottom.
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Whether or not this potential bottom is a silver lining for lenders is a different question. If this actually is a bottom, what type of bottom is it? Is it a V-shaped bottom which would mean a near term increase in property prices? Or is it a U-shaped bottom which would mean that these highly depressed prices are here to stay for some time? In the case of a U-shaped bottom, these depressed prices would basically prohibit any refinancing of commercial loans that were made between 2005 and 2007. The price decline would be too great and the value of most of these properties would be far below the amount of principal owed on their loans. Without the possibility of refinancing, the number of maturity defaults will increase dramatically leaving banks with the options of foreclosing, selling the note at a discount or negotiating for a loan modification.

Write-downs on Commercial Real Estate to Continue

Raymond Zolekhian — Mon, 03 Aug 2009 21:26:31 +0000

Another day and another article sounding the alarm of the impending collapse of the commercial real estate markets. Reuters reported today that the worst is yet to come for real estate loans. Analysts estimate that banks will likely continue to take write-downs on commercial loans for the next two years and the number of such loans in default will continue to rise. Although the article doesn’t propose or discuss solutions to this problem, there seem to be only a couple of options. Lenders can begin to foreclose on defaulted properties. That, however, is costly and forces banks to go into the business of owning real estate which is not what a bank is in the business of doing. Also, in all likelihood banks will suffer a loss on the sale of the property. Lenders can also sell notes that they hold at a discount. This also, however, ensures that the bank will take a loss on their investment but it provides them the comfort of knowing that another bad loan is off their books. Another option is to negotiate a commercial loan modification. This allows the bank to save on the cost and expense of a foreclosure and gives them the opportunity to recoup their principal, something not possible when they sell the note.