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The Credit Crisis in Commercial Real Estate
The Credit Crisis in Commercial Real Estate
The Credit Crisis in Commercial Real Estate
The Credit Crisis in Commercial Real Estate
The Credit Crisis in Commercial Real Estate
The Credit Crisis in Commercial Real Estate
The Credit Crisis in Commercial Real Estate
The Credit Crisis in Commercial Real Estate
The Credit Crisis in Commercial Real Estate
The Credit Crisis in Commercial Real Estate
The Credit Crisis in Commercial Real Estate
The Credit Crisis in Commercial Real Estate
The Credit Crisis in Commercial Real Estate
The Credit Crisis in Commercial Real Estate
The Credit Crisis in Commercial Real Estate
The Credit Crisis in Commercial Real Estate
The Credit Crisis in Commercial Real Estate
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
    Summary
  • 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

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