Can banks finally afford to be banks again?
As the market shows signs of improvement,
Financial Institutions will need to focus on growing
their business and position themselves to capitalize
on this recovery. While there are signs showing a
recovery that is gaining some momentum, it is still
very tentative. We believe banks will continue to
manage their business with extreme caution and not
grow their workforce much, if any. What banks need
to do is focus less human capital on managing their
non-performing assets, day to day, and more on
growing their business. Banks that have been
holding on to their non-performing assets in hopes
the market would rapidly recover are expected to
begin shifting back into a “sales mode”. Many of
the assets have had significant write downs, thus
giving many banks the ability to trade those non-
Many banks are ready to move forward but are still
in need of a capital infusion and a balance sheet
cleanup before they can get back to doing business
as usual. However, adding capital to a bank without
fully underwriting it’s assets creates a serious risk for
any investor attempting to stabilize a bank. "I think
it's continuing problems. I don't think it's new loans
they're putting on their books, but I think it's banks
that had troubled assets or non-performing assets
that are still a drain on the operations of the banks,"
says Randy Dennis heads DD&F consulting, which
advises troubled banks. Regulators have held out
hope that bad loans might recover some value, but
it's still not happening in some of the hardest-hit
places. "Things are improving somewhat across the
country, but I don't know that I would say we're
having a robust recovery," says Dennis.
The Federal Deposit Insurance Corp. reported 51
bank closures in 2012, compared to 92 in 2011 and
157 in 2010. Fewer bank failures are expected in
2013, however there are 838 banks on Calculated
Risk's unofficial problem bank list. Some banks have
been able to correct their problems and get the
regulators to terminate the enforcement action.
Others have arranged to be acquired by other banks
without help from the FDIC. Regardless there is still
much clean-up to be done and Trax is in great
position to assist banks in this process.
Trax can purchase all of the classified assets from a
bank and provide much needed capital, or debt, to
allow them to begin growing again. By combining
our underwriting expertise with our ability to raise
capital, Trax is positioned to play a significant role in
bank acquisition, mergers and stabilization going
INSIDE TRAX 4th QUARTER 2012
4th Quarter 2012
The overall U.S. commercial real estate market
fundamentals continue to show positive signs. The
majority of the activity is occurring in primary
markets where as secondary and tertiary markets
continue to struggle.
Based on our research, the fourth quarter net
absorption for the U.S. office market was a positive
27.2 million sq. ft., up from 15.5 million sq. ft. in
third quarter. The impact of that positive net
absorption lowered the vacancy rate to 11.9% from
the 12.0% seen in the previous quarter. Lease rates
increased 1.0% in the fourth quarter to $21.63 per
sq. ft. from $21.42 per sq. ft. in the previous
quarter. According to CoStar, the cap rate for U.S.
office properties in 2012 averaged 7.91%, a
decrease of 20 basis points for the same period in
2011. As business leaders gain more confidence,
economic-driven employment decision are
expected to positively impact market
One of the largest sales of the fourth quarter
occurred in Seattle
at 1201 Third Ave.
The 87% occupied
1.19 million SF
class A office
building, sold in
late October at a
4.25% cap rate to
MetLife Real Estate
for $548.8 million
($461 per sq. ft.).
As investors seek to increase returns, investment
activity is expected to increase in the secondary
and tertiary office markets.
Vacancy rates for the U.S. industrial market
continued to decline in the fourth quarter of 2012
to 8.8% from 9.1% in the previous quarter,
continuing a declining trend from 9.5% in the
fourth quarter of 2011. Net absorption was a
positive 70.4 million sq. ft., increasing from a
positive 28.9 million sq. ft. in the previous quarter.
Compared to the previous quarter, lease rates
increased by $0.04 to $5.18 per sq. ft. in the fourth
quarter. The average cap rate for U.S. industrial
properties in 2012 is 8.21%, down 9 basis points
from 8.3% for the same period a year ago.
One of the largest transactions of the fourth
quarter in the industrial real estate market
occurred in southeast Metro Atlanta. A USAA Real
Estate Co. affiliate paid $106.88 million ($38 per sq.
ft.) for the fully-leased 1.2 million sq. ft. Home
Depot distribution center. According to CoStar,
Prologis sold the building as part of a larger 2.8
million sq. ft. portfolio. As manufacturing continues
to drive the economic recovery, market
fundamentals for the industrial sector are expected
to continue to strengthen.
For retail properties the third quarter net
absorption was a positive 27 million sq. ft., up from
11 million sq. ft. in the third quarter of 2012.
However, the impact of the positive net absorption
was not enough to impact the national vacancy
rate which for the past year remained unchanged
at 6.8%. Quoted rents ended the fourth quarter
2012 at $14.43 per sq. ft. per year. That compares
to $14.48 per sq. ft. in the third quarter 2012, and
$14.55 per sq. ft. at the end of the first quarter
2012. This represents a 0.3% decrease in rental
rates in the current quarter, and a 0.83% decrease
from four quarters ago. Cap rates for U.S. retail
properties in 2012 averaged 8.01%, a decline of 16
basis points from for the same period in 2011.
As demand for class A retail space increases, credit
retailers are expected to continue to pay premium
rents instead of relocating to secondary markets.
Real Estate Outlook
INSIDE TRAX 4th QUARTER 2012
According to the Marcus & Millichap Fourth
Quarter 2012 Hospitality Report, cap rates for
quality limited-service and select-service flags start
in the mid-8% range. Economic growth is expected
to stimulate demand in 2013. U.S. GDP is expected
to grow 2% in 2013 –providing an estimated 2.5
million jobs. Flagged economy hotels led the hotel
investment market in Q4, with deal flow rising
more than 40% along with 10% more upscale flags
sold during 2012 than 2011. Demand growth is
projected to increase 1.9% where as supply growth
is expected to increase at .8%, in 2013.
Multifamily continues to be the best performing
property type with
it’s low vacancies
According to the
Realtors, the U.S.
multifamily saw a
vacancy rate of 4%
during Q4 of 2012.
The rental growth rate closed Q4 2012 at 1.2%,
making a 4.1% growth for the year.
As noted in the Emerging Trends in Real Estate
2013 survey, cap rates for U.S. high-income
apartments and moderate-income apartments are
expected to decline to 6.3% and 5.9% respectively,
by December 2013. The end of Q4 in 2012 held cap
rates at 6.1%. The Midwest had the lowest average
price per unit at $71,085 and the Northeast had
the highest average price per unit at $179,416.
As 2012 came to an end, we have seen a decline in
foreclosures and foreclosure sales, which are
driving up prices for single family residences.
According to the most recent Foreclosure Sales
Report by RealtyTrac the total number of
foreclosure-related sales in the fourth quarter of
2012 decreased 9.8% from the 3rd quarter and 6%
from the prior-year.
While foreclosure-related sales accounted for 21%
of all sales in 2012 (down from 23% in 2011), Non-
foreclosure short sales accounted for an estimated
22% of residential sales. The average selling price
of properties in foreclosure was $171,704 up 1%
from the prior quarter and 4% from the same
quarter of 2011.
According to Daren Blomquist, a vice president at
RealtyTrac, “while distressed properties —
whether bank-owned, pre-foreclosure or short
INSIDE TRAX 4th QUARTER 2012
INSIDE TRAX 4th QUARTER 2012
sales not in foreclosure — are still selling at a
significant discount compared to non-distressed
properties, average distressed property prices are
increasing in many markets thanks to strong
demand and limited inventory.” With fewer
distressed homes on the market, distress house
prices are increasing, and causing a higher demand
for non-distressed homes. Blomquist continued by
pointing out that distressed homes are still a
disproportionately high portion of the overall
Relative to the overall market, the average price of
a foreclosure sale was a 36% discount to the
average price of non-foreclosure homes,
RealtyTrac said. A discount for bank-owned homes
was 40% for the year. Furthermore, the overall
share of distressed sales was 43% including non-
foreclosure short sales. Despite a large percentage
of distressed homes, the average discount found by
buying a distressed house is weakening, which will
create a higher demand for normal single family
Third parties purchased a total of 449,873 pre-
foreclosure residential properties in 2012, up 6
percent from 2011 and up 1 percent from 2010.
REOs sold for an average price of $151,998 in the
second quarter, up 1% from the third quarter and
up 3% from the fourth quarter of 2011.
In review of the statistics, we can conclude there is
an improving housing market with fewer
foreclosures and strengthening prices. Additionally,
we see an increase in demand for non-distressed