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The Credit Crisis in Commercial Real Estate
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The Credit Crisis in Commercial Real Estate


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  • 1.
    • The Credit Crisis in
    • Commercial Real Estate
  • 2.
    • Commercial real estate accounts for a meaningful 6% of GDP
    • Commercial real estate entered the recession reasonably well balanced
    • However, approximately $400 billion of CRE debt matures in 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 have been 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-duper AAA-rated debt trades at 12.5% yields to maturity
    • AAA-rated debt requires Treasury support to establish price discovery
  • 3. Source: JPMorgan Asset Management 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
  • 4. Sources: JPMorgan Asset Management and NAREIT ® Commercial Real Estate Debt and Equity Public and Private Ownership as of December 2008 Debt $3.2 trillion Equity $2.7 trillion Debt $260 billion Equity $240 billion $5.9 trillion $0.5 trillion Private Ownership Public Ownership
  • 5. Source: Federal Reserve Flow of Funds Accounts of the United States Commercial Mortgage Debt Outstanding By source of funds CMBS Banks ■ Banks ■ Thrifts ■ Insurance ■ Government ■ CMBS ■ Other $1,041 billion $1,253 billion $3,499 billion 1988-Q4 1998-Q4 2008-Q4
  • 6.
    • 93 companies listed on the NYSE
    • 72% investment grade by equity market capitalization
    • $500 billion of property owned as of December 31, 2008
    • Current leverage ratio of 65% compared with 40% at the end of 2007
    • Fixed charge ratio of 1.7 compared with 2.5 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 returns lead measured returns in property markets by 6-18 months
      • Share returns peaked early in 2007 and have since declined 68%
    Note: Data as of March 31, 2009 Source: NAREIT ® Publicly Traded Real Estate Equity (REITs) A window on commercial real estate equity finance
  • 7. Commercial Real Estate Debt Maturities Including secured and unsecured debt Sources: Goldman Sachs and REIT filings Billions of dollars
  • 8. Public Company Debt Maturities Investment grade unsecured debt Note: Data as of March 31, 2009 Sources: Goldman Sachs, Advantage Data, Barclays and Bloomberg as of March 31, 2009 Weighted average coupon: 6.0% (Right-hand scale) Current Yield-to-Worst: 12.9% (Right-hand scale)
  • 9. Publicly Traded Real Estate Debt (CMBS) A window on commercial real estate debt finance Annual maturity schedule Sources: Goldman Sachs and Trepp Billions of dollars
  • 10. Commercial Real Estate Loans at Banks CRE credit standards: 1997:Q1 – 2009:Q1 Source: Federal Reserve Board Senior Loan Officer Opinion Survey on Bank Lending Practices (January 2009) A record tightening of credit standards Net percent
  • 11. Commercial Real Estate Loans at Banks CRE lending volume: 1989 - 2009 Note: Data through April 15, 2009 Source: Federal Reserve Board Billions of dollars
  • 12. Securitized Commercial Real Estate Loans CMBS issuance volume: 1999 - 2009 Note: Data as of April 30, 2009 Source: Commercial Mortgage Alert Billions of dollars 1 st Half 2 nd Half 2008 2009
  • 13. CMBS Credit Spreads CMBS yield less 10-year Treasury yield Note: Data through April 24, 2009 Source: Morgan Stanley CMBS with 10-year average life Basis points
  • 14. Commercial Real Estate Transactions Transaction volume: 2001 – 2009 Note: Data as of March 31, 2009. Source: Real Capital Analytics Number of transactions Indicative of bid-ask spreads too wide to clear the market Asset sales an unlikely source of liquidity; neither buyers nor sellers have access to credit
  • 15. CMBS and Residential Mortgage Delinquencies 1999 – 2008:Q4 Note: Delinquency rates are for fixed-rate, conduit CMBS transactions. 60+ excludes 30-day delinquencies. Sources: Trepp, CMSA, and Mortgage Bankers Association National Delinquency Survey
  • 16. Nationwide Core Property Vacancy Rates 1983:Q1 – 2008:Q4 Note: Data as of December 31, 2008 Source: NCREIF
  • 17. Securities Offerings by Public Companies Note: Data as of April 30, 2009 Sources: NAREIT ® and SNL Financial Billions of dollars
  • 18.
    • 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 (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
    • 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
    Policy Actions to Stabilize Financial Markets