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Ernst & Young’s Transaction Real Estate group Distressed Debt - Commercial Real Estate California & Southwest market update
Distressed debt – a market update  The current state?  <ul><li>“ From recent data,” he said, “one can infer the beginnings...
Distressed debt – a market update Recovery? Source: Delinquencies – Federal Reserve – Commercial Banks Delinquency Data, U...
Distressed debt – a market update Today’s delinquency rates <ul><li>CMBS delinquencies top 6% in December 2009, the first ...
Distressed debt – a market update Who is holding the bag? Total Secured Commercial Real Estate Debt = $3.4T
Distressed debt – a market update  Approx. 41% of total CRE debt matures in the next 3 years…. Source: CMSA, Deutsche Bank...
Distressed debt – a market update  Where is the stress? Source: Real Capital Analytics All US Markets LA Metro Las Vegas P...
Distressed debt – a market update  Key statistics in certain metro areas Source: TWR office trends reports Note 1: Differe...
Distressed debt – a market update  Notable Transactions <ul><li>Colony Capital bid wins $1B FDIC portfolio of which 70% we...
Distressed debt – a market update  Notable Offerings  <ul><li>CBRE is taking bids on a $40.4 million mostly distressed com...
Distressed debt – a market update  Recovery Rates on Defaulted Mortgages Source: Real Capital Analytics
Distressed debt – a market update  Recovery Rates on Defaulted Mortgages by Property Type Source: Real Capital Analytics
Distressed debt – a market update  Recovery Rates on Defaulted Mortgages by Location Source: Real Capital Analytics
Distressed debt – a market update  Recovery Rates on Defaulted Mortgages by Lender Type Source: Real Capital Analytics
Distressed debt – a market update  Summary of Trends <ul><li>While there have been signals of hope from the broader econom...
Distressed debt – a market update Survey of distressed debt players  What is your activity level related to NPL portfolios...
Distressed debt – a market update Survey of distressed debt players  How would you describe the current state of the US NP...
Distressed debt – a market update Survey of distressed debt players  What NPL loan type best meets your investment criteri...
Distressed debt – a market update Survey of distressed debt players  When do you anticipate market conditions will be favo...
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California and Southwest Distressed Real Estate: How Much Debt is in Distress, Where, and Involving What Property Types?

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Eric Entringer, Senior Manager, Distressed Real Estate Group, ERNST & YOUNG

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California and Southwest Distressed Real Estate: How Much Debt is in Distress, Where, and Involving What Property Types?

  1. 1. Ernst & Young’s Transaction Real Estate group Distressed Debt - Commercial Real Estate California & Southwest market update
  2. 2. Distressed debt – a market update The current state? <ul><li>“ From recent data,” he said, “one can infer the beginnings of a modest firming in economic activity.” He added, “While we cannot be certain we are as yet out of the recessionary woods, such evidence warrants at least guarded optimism.” </li></ul><ul><li>Greenspan quote February 21, 1990, The New York Times </li></ul>
  3. 3. Distressed debt – a market update Recovery? Source: Delinquencies – Federal Reserve – Commercial Banks Delinquency Data, Unemployment – Moody’s %
  4. 4. Distressed debt – a market update Today’s delinquency rates <ul><li>CMBS delinquencies top 6% in December 2009, the first time delinquencies breached 6%. 6 January 2010 SNL </li></ul><ul><li>US CRE loan CDO delinquencies rose to 12.3% in December 2009. Accounting for previously delinquent loans written down or disposed of at a loss the rate would have been close to 15%. 19 January 2010 SNL </li></ul><ul><li>Top 100 Banking Companies in CRE loan holdings have an average non-performing loan rate of 7.7%. 15 January 2010 CMA </li></ul>
  5. 5. Distressed debt – a market update Who is holding the bag? Total Secured Commercial Real Estate Debt = $3.4T
  6. 6. Distressed debt – a market update Approx. 41% of total CRE debt matures in the next 3 years…. Source: CMSA, Deutsche Bank research, MBA Maturities by Major Holder (billions) Year CMBS Ins. Co. Bank/ Thrift Total 2009 19 17 168 $204 2010 38 20 188 247 2011 62 23 211 296 2012 75 26 236 338 2013 42 25 265 331 Total 236 111 1,068 $1,415
  7. 7. Distressed debt – a market update Where is the stress? Source: Real Capital Analytics All US Markets LA Metro Las Vegas Phoenix San Diego San Francisco Metro
  8. 8. Distressed debt – a market update Key statistics in certain metro areas Source: TWR office trends reports Note 1: Difference is between CBRE peak forecast vacancy and peak vacancy in the last cycle. Note in most regions this peak has been forecasted by CBRE in 2010/11. Metro area Peak vacancy (’90s) 2009 YTD TWR Forecast peak Difference (Note 1) (favorable) Los Angeles office 22% 16% 19% (300 bp) Las Vegas 25% 22% 22% (300 bp) Phoenix 27% 27% 27% 0 bp San Diego 25% 21% 22% (300 bp) San Francisco 18% 14% 14% (400 bp) Total national office 19% 17% 20% 100 bp
  9. 9. Distressed debt – a market update Notable Transactions <ul><li>Colony Capital bid wins $1B FDIC portfolio of which 70% were delinquent. Price was 44% of UPB. 8 January 2010 FDIC </li></ul><ul><li>Starwood Capital Group et al acquires a $4.5B portfolio of performing and non-performing construction loans and REO. Price was 60% of UPB. 6 October 2009 FDIC </li></ul><ul><li>OneWest acquires First Federal’s assets from the FDIC at a 6.6% premium or $401 million. 28 December 2009 WSJ </li></ul><ul><li>Winthrop acquires interests in 4 loans with an outstanding balance of $34.8 million secured by class A office building in NYC, LA metro, Beverly Hills Hilton Hotel and a retail condo in NYC. Price was 45% of UPB. 4 January 2010 SNL </li></ul><ul><li>CIM Group and Harry Macklowe team up to try to control of the old Drake Hotel in NY. Blackstone Group is making a grab for Highland Hospitality. Both are trying to gain control through debt acquisitions. </li></ul><ul><li>CB Richard Ellis Investors bought 12 defaulted mortgages on San Francisco apartment properties owned by the Lembi family. 15 January 2010 CMA </li></ul>
  10. 10. Distressed debt – a market update Notable Offerings <ul><li>CBRE is taking bids on a $40.4 million mostly distressed commercial mortgages originated by Wachovia and Synovus Financial. 15 January 2010 CMA </li></ul><ul><li>CWCapital via Mission Capital Advisors is offering a $135.8 million portfolio encompassing 8 loans on a mix of property types in 7 states 15 January 2010 CMA </li></ul><ul><li>Carlton is marketing $307 million CMBS loans in one of the largest sales by a nongovernmental agency. 6 January 2010 WSJ </li></ul><ul><li>An international bank is marketing $273 million portfolio which includes a 100 unit multifamily loan located in California. </li></ul><ul><li>FDIC has roughly $30 billion in real estate debt that was previously held by failed banks. 6 January 2010 WSJ </li></ul>
  11. 11. Distressed debt – a market update Recovery Rates on Defaulted Mortgages Source: Real Capital Analytics
  12. 12. Distressed debt – a market update Recovery Rates on Defaulted Mortgages by Property Type Source: Real Capital Analytics
  13. 13. Distressed debt – a market update Recovery Rates on Defaulted Mortgages by Location Source: Real Capital Analytics
  14. 14. Distressed debt – a market update Recovery Rates on Defaulted Mortgages by Lender Type Source: Real Capital Analytics
  15. 15. Distressed debt – a market update Summary of Trends <ul><li>While there have been signals of hope from the broader economy, not so for commercial real estate </li></ul><ul><li>Financial institutions continue to impose tightened restrictions and standards on lending with the levels of permissible leverage still low </li></ul><ul><li>Rising default rates and declining property values are impacting the commercial real estate market. The wave of borrowers handing back the keys appears to have started. </li></ul><ul><li>Distressed loan market is becoming active, but not compared to the magnitude of the problem. Banks are holding back so the FDIC is still the only major game in town. </li></ul><ul><li>We are seeing increasing activity by PE firms looking at failed bank opportunities. Only two have closed so far (IndyMac and Bank United), but more are sure to come. To be sure, the former IndyMac, now OneWest paid a 6.6% premium for failed bank First Federal. </li></ul>
  16. 16. Distressed debt – a market update Survey of distressed debt players What is your activity level related to NPL portfolios compared to 6 months ago? 95% of the respondents were more or at the same level of activity as 6 months ago.
  17. 17. Distressed debt – a market update Survey of distressed debt players How would you describe the current state of the US NPL market?
  18. 18. Distressed debt – a market update Survey of distressed debt players What NPL loan type best meets your investment criteria? Land Commercial (office, retail, industrial, multi-family, A&D) Hospitality CMBS RMBS
  19. 19. Distressed debt – a market update Survey of distressed debt players When do you anticipate market conditions will be favorable enough for you to enter the market?
  20. 20. Ernst & Young Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. www.ey.com © 20010EYLLP. All Rights Reserved. 0901-1021922 Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. This publication contains information in summary form and is therefore intended for general guidance only It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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