Bad news, good news - Posted by ray@lcorn

Posted by ray@lcorn on August 05, 2011 at 09:38:49:


Sounds contradictory, but the transaction stats showing major percentage increases and your intuition that deal volume is still depressed are both right.

The MBA percentage increases are real. However, be aware that this is really a ratio of year over year transactions. The ratio is produced with a numerator (current transactions, YTD 2011) and a denominator (last year’s transactions, equal YTD 2010).

When the previous period is at more than one standard deviation from the mean it begins to skew the ratio. This is known as the denominator effect, and the triple-digit increases are due to the severely depressed transaction volumes of the past two years.

In periods like this the only way to get a real read on conditions is to look at nominal values. For example, CMBS loan volume peaked in 2007 at $240bn, then dropped to a low of about $10bn in 2010. This year CMBS issues are expected to be about $40bn, a percentage increase of 400% over 2010, but the nominal value compared to the 2007 peak is 17%.

Same goes for almost every data set. One of my pet peeves is the government’s insistence on using quarter over quarter GDP ratio, which guarantees a positive number after a downturn and obscures weakness in nominal growth/contraction. Same for expressing debt and deficits as a percentage of GDP. That’s like saying I owe only 10% of all the income in my neighborhood, even though it isn’t mine. (Of course the current gov’t considers all income theirs, eh?)

There’s a rant starting here… let’s move on. :wink:

On a nominal basis transaction volumes are increasing, however you are correct that a lot of money is still on the sidelines. In the past six months I’ve read of over $400bn being returned to investors from blank-check vulture funds targeting distressed CRE property and debt. The 50%-75% discounts need to make their model viable did not materialize.

One of the benefits to CRE of extreme stock market volatility (like the past two weeks) is that after the initial flight to safety in treasuries, once the storm passes that cash will be out looking for yield. We’ve seen this scenario before… most recently in 2001 and 2008. CRE is positioned perfectly to capture that capital. Stable cash flow, low interest rates used to boost leveraged returns, tax advantaged, and readily available nationwide.

Bank lending for CRE is also picking up. My firm has received financing commitments for over $4mm in the past 3 months. All in all the current financial market chaos is a net plus to CRE.


p.s. I can’t help tooting my own horn just a bit… those of yo that have my 2011 Forecast (see, look on page 20, the projection for 5 & 10 yr. treasury rates falling to 1.5% and 2.5% respectively by Q3 2011, which were within a few basis points of yesterday’s close.

Bad news, good news - Posted by ray@lcorn

Posted by ray@lcorn on July 30, 2011 at 10:52:29:


The June Architecture Billings Index (ABI) shows that demand for architectural services declined for the third consecutive month. The ABI is a leading indicator of construction nine to twelve months in the future.

?This seems to be a case of not thinking it can get any worse ? and then it does,? said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. ?While a modest turn around appeared to be on the way earlier in the year, the overall concern about both domestic and global economies is seeping into design and construction industry and adding yet another element that is preventing recovery."
(See for charts:

That’s the bad news.

The good news is that fewer new projects means better fundamentals (i.e. rents and occupancy rates) for existing properties. As I wrote in my forecast earlier this year, it is looking more and more likely that this cycle will see an extended period of rent and occupancy growth without the normal effect of new supply.

For example, the multi-family cycle usually runs abut 7 years… it takes about 18-24 months from a cycle trough for new supply to be planned, built and come online. During this time existing properties enjoy rising fundamentals. As new construction comes online, fundamentals begin to flatten. Building usually continues for about two years past the peak, then oversupply conditions set in around the sixth year, falling to form the next trough. Then the cycle starts all over again.

My view is that the existing properties will not have the normal new supply to compete with for 2-3 years due to the lack of development funding in the capital markets.

Metros and coastal markets will likely get the attention of private equity groups who do not rely on debt capital, and stick closer to the normal cycle. But micro-politans and tertiary markets will benefit from inattention until the larger markets become crowded.


Another plus - Posted by John Merchant

Posted by John Merchant on August 03, 2011 at 22:25:40:

10 years from now it’ll be interesting to see the impact of the Feds’
heavy hand on all things residential and how that has driven the REIs’
money more & more into the comm’l, un-fed-regulated market.

Whereas 10-5 years back developers and builders were planting a
condo on every sq " of dirt, today those unsold or repoed condos are
bringing in substantial $ in rent.

I can name a dozen or so BIG name contractors here in Seattle-
Tacoma area who’ve lost everything and had to start over because
they, just like the rest of us, got suckered into believing the sky had
no ceiling.

Re: Another plus - Posted by ray@lcorn

Posted by ray@lcorn on August 04, 2011 at 12:34:38:

Hi John,

I don’t think we have to wait ten years. The effects are being seen now. A glut of housing inventory, tight-as-a-tick loan underwriting (res and comm), severely depressed construction market, slow/no growth and hundreds of new government regulations that do nothing but make it worse.

As for CRE being unregulated, don’t count on it. New ADA regs, bank lending restrictions, multi-family financing dominated by subsidized agency loans… all are deal-killers and the list grows every month.

The immediate result is to move from a debt-dependent model to equity. The rise of equity capital in various forms of private equity, hedge funds, syndications and partnerships is a direct result of the chaos in the capital markets. Today’s WSJ has a great article “Big Funds Get Into Landlord Game With Foreclosed Properties” that is a perfect example.

See (link good for seven days for non-subscribers)

Always follow the money! :wink:


Re: Another plus - Posted by jimi

Posted by jimi on August 05, 2011 at 06:59:22:

Right now there’s more equity funds than supply of “for sale” commercial properties at prices that make sense. Seems that lenders are re-structuring debt rather than liquidating. So far, not a notable stream of actual transactions. Your thoughts?

Great insight here - Posted by John Merchant

Posted by John Merchant on August 04, 2011 at 14:50:33:


This forum is indeed fortunate to have you on hand to read the tea-
leaves and you know the omens and vibes to watch and listen for.

Thanks for your comments here.


Re: Another plus - Posted by jimi

Posted by jimi on August 05, 2011 at 07:23:14:

of course, as soon as i post something like that I find an article like this:

"According to the MBA, the 107% year-over-year increase was fueled by origination activity for all property types, including a 141% increase in loans for healthcare properties, a 125% spike in loans for hotel properties, a 116% increase in loans for retail properties and a 114% ascension in loans for multifamily properties.

The MBA adds that among investor types, the quarterly increase in loans for conduits for commercial mortgage-backed securities was 210% compared to the first quarter, while loans for commercial bank portfolios saw an increase in loan volume of 41%. The quarterly level in originations for life insurance companies increased 37%, and loans for government-sponsored enterprises were up 20%."

Still, it doesn’t seem like the “killer deal” volume is high … and much smart money is still on the sidelines.

Re: Great insight here - Posted by ray@lcorn

Posted by ray@lcorn on August 05, 2011 at 16:39:12:


Thanks for the kind words, and I return the sentiment.

Your expertise is legend with all of us who have been here over the years and I’m grateful for the benefit of your experience.

In fact one of your posts on the legal forum a few years ago saved me from a $50,000 mistake. Given that I’m a very bad loser, that’s priceless!