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The Raub Blog

The Raub Report October/November 2009 Commercial Real Estate Newsletter for San Antonio

by admin on October 1, 2009

“Forgive us our debts, as we forgive our debtors” This may be the mantra of many commercial real estate owners believing they are facing disaster of Biblical proportions because they have loans on their properties known as Collateralized Mortgage Backed Security (CMBS).  An enormous number of commercial loans were made through this Wall Street creation, fueling in large measure the property boom from 2004 to 2007.  At least, I would call $211 Billion “enormous” but these days that seem so relative. The universe of Commercial real estate debt is about $2.5 Trillion.  The Wall Street CMBS originators are pretty much “toast” so there is no mechanism to refinance these loan pools.  This is a $20 Billion a year problem for the next 5 years, then, there is a spike in maturities in 2015 of $54 Billion!

Let me try to explain the issue with an illustration.  You have a home.  Your loan matures due this coming December 31st and you still have a balance owing of $250,000.  You need to refinance the loan because you don’t have the money to payoff the balloon amount.  But there are no mortgage companies or banks anymore. So there is no one to talk to about refinancing.  Your current lender doesn’t really care about that, he just wants his money.  Ah, but the IRS rules won’t allow you to discuss this problem with your lender.  And the folks at the servicing company that take your monthly payments don’t have any authority anyway to modify your loan because it is held by 10 different investors who don’t really talk or get along.  Some are more senior and some more junior — you know unequal partners have different viewpoints.  Oh, and by the way, you lost your job and are presently a lousy credit risk. 

 This simple example tries to illustrate the problem — but now multiply this by a billion.

But wait, there’s more.  Banks are being forced to reduce their exposure to real estate by as much as fifty percent.  Consider that 115 or more banks have been closed this year, with 9 being closed the last week of October, the largest one week total.  Trillions of dollars have left the banking system – poof it’s gone.  And the regulators want banks to get real estate off their balance sheets because it is considered too risky.  This is creating a vacuum for new development.  Frankly, very little new development is likely to occur in the next two to three years.  Prices of properties are falling because investors are on the sidelines waiting for a bottom in the commercial real estate market in mid 2010. But with very little financing available from banks and the demise of the CMBS market, vulture opportunity buys may need to be mostly cash.  In summary, debt is hard to find; new development will be scarce; cash-rich investors are on the sidelines waiting.

We will not see a return to the boom days of 2006 and 2007. Those values were not realistic and real estate has cycled out of favor.  Nor will we see RTC, Jr. What we will see is a great buying opportunity. Yes, property values have fallen, but they will level off in the next 6 months. Market activity is actually starting to pick up — a little.  Since there is little new development with which to compete, buying good properties now at attractive prices will pay big dividends in three to five years.  Occupancies will increase and rent rates along with them.  The market place will find its own new stability in the New Normal and things will move on.  So, I believe, we are entering the best time in a number of years to carefully select new acquisitions.  Buying the right property at a reasonable discount now, will pay you big dividends in 3 to 5 years.

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