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CRE Prices Decline 2.6% in February

The Moody’s/REAL All Property Type Aggregate Index declined 2.6% in February. Commercial real estate values are now down 25.8% over the last year, and down 41.8% from the peak in August 2007. Distressed sales have increased sharply. In 2008 distressed sales were only 4% of all sales, in 2009 nearly 20% of all the repeat sales transaction were classified as distressed. In February 2010, the percent of distressed sales jumped to a record 32%.

Financial Fraud For Dummies

Refinancing CRE - Don’t Wait Until It’s Too Late

Consider the following:

• Don’t expect your loan to roll over easily. "Extend and pretend" is much more easily said than done from a lender's perspective.
• Expect to come up with additional equity to qualify for any extension of maturity. Most lenders simply will not refinance or extend a loan balance without some kind of pay down.
• Expect to pay an extension fee.
  
• Some lenders may demand additional collateral. Consider letters of credit, partnership or LLC interests, personal guaranties, or other real estate collateral even if already encumbered.
• Have a good understanding of what your property’s value is today. Appraisals are of little value in a fast-declining market. Focus on improving cash flow and reduce operating expenses.
• Loan-to-value (LTV) ratios will be less than your original loan. Current maximum LTVs are often between 60% and 65%.
• Underwriting criteria are much more stringent than during the boom. For example, debt service coverage ratio requirements might be no less than 1.3x based on a 10-year fixed-rate loan with a 25-year amortization schedule and an 8% mortgage rate - if you're lucky.
• Engage a professional adviser to help you negotiate a loan modification. Workout professionals know what is currently acceptable to different types of lenders (banks, CMBS special servicers, agencies, life companies) and know how to prepare your proposal in terms the lenders understand. This builds your credibility and enhances your outcome.
  

Don’t cling to the belief that the market will turn around before the time to refinance arrives. Commercial real estate is significantly overbuilt in many markets and cash flows are not likely to rebound quickly as the broader economy begins to improve.

Now is the time to think strategically and act accordingly.

Appraisal Institute: Making Sense of the Nonsense

Guidance from the Appraisal Institute to it's members regarding the proper approach to valuation in a down trending market:

Providing Credible Appraisals in a Declining Market

Appraisers have been accused of prolonging the nation’s real estate downturn by developing value opinions that are below proposed sale prices. Specifically, they’ve been criticized for including foreclosure sales and so-called short sales among the comparable sales used in the valuation process. But foreclosures and short sales can provide important information for appraisers, who develop valuations based on market data and market forces. Here are some of the basics:

Appraisers exercise sound judgment when gathering and analyzing information.

• The appraiser must consider all relevant transactions that have occurred in the market area and then determine which of those transactions should be used in the analysis to arrive at a credible value opinion for the subject property.
• The best comparable sales (“comps”) are those that are most similar to the subject property in terms of location, size, condition and other features that buyers and sellers believe make a difference to price.
• A property or a property feature (such as a kitchen remodel) might cost X, but that doesn’t mean it’s worth X or adds X to the value. Especially in distressed markets, cost may be higher than value.

Appraisers make adjustments based on market research and analysis.

• The appraiser must analyze each comp to ascertain what adjustments are needed.
• After selecting the best comps, the appraiser adjusts for material differences between each comp and the subject property. Factors that may require such adjustments include atypical buyer/seller motivations and sales concessions.

Appraisers adhere to basic principles when analyzing distressed sales.

• An appraiser should not ignore foreclosure sales and short sales if consideration of such sales is necessary to develop a credible value opinion.
• As is always the case in selecting sales to use as comparables, the appraiser must investigate the circumstances of each transaction … including whether atypical motivations or sales concessions were involved, or whether the property condition was compromised.
• A short sale or a sale of a property that occurred prior to a foreclosure might have involved atypical seller motivations (e.g., a highly motivated seller) and so might not be an ideal comp.
• A sale of a bank-owned property might have involved typical motivations, so the fact that it was a foreclosed property would not render it ineligible as a comp.
• Some foreclosed properties are in inferior condition. An adjustment for condition may be needed.

Retail Slips

Average lease rates at shopping malls during the first quarter were $38.79 a square foot annually, down 3% from a year earlier, according to real-estate research company Reis Inc. That was the sixth consecutive quarterly decline.

Lease rates at shopping centers, which are smaller than malls, declined to $16.62 in the first quarter, down 1% from the prior quarter and down 3.4% from a year earlier. It marked the seventh consecutive quarter in which shopping-center lease rates have declined.

Vacancy rates, meanwhile, continued to rise. Vacancy rates at malls in the top 77 U.S. markets rose to 8.9% in the January-to-March period, up one tenth of a percent from the previous quarter, according to Reis.

Still, the first-quarter increase was slight in comparison to earlier increases, suggesting that a bottom could be near.

The fallout is slightly more severe for U.S. shopping centers, which are often anchored by a grocery store and built so that all stores are directly accessible from a common parking lot. Shopping centers tend to have more local tenants, while malls have more national tenants like Gap Inc. and Foot Locker Inc. Thus, downturns tend to hit shopping centers harder as more of those less-sturdy local tenants miss rent payments or close.

Vacancies at shopping centers in the top 77 U.S. markets increased to 10.8% in the first quarter, up two tenths of a percent from the previous quarter and up 1.3 percentage points from a year earlier, according to Reis.

It is the highest vacancy rate since 1991, when vacancies reached 11%.