Leaderboard 9/30/2013

CMBS Issuance Leaderboard, only a month-and-a-half late.

The Cranes of Miami

Summary: From the Calculated Risk blog, cranes in Miami evidencing development.

http://www.calculatedriskblog.com/2013/11/the-cranes-of-miami.html

Multifamily Boom Slows

The multifamily industry is on an ascending path, with trendlines pointing to a steady, albeit slow, recovery of the housing market all throughout the U.S metro areas.

The construction pipeline remains active in most markets, with 1,400 properties, 316,010 units, currently under construction, according to the latest data from Pierce-Eislen. The company’s services monitor the 50+ unit apartment universe from the property level to the submarket/market level within 59 United States markets, extending in geography from the Pacific Northwest to the Mid-Atlantic.

Denver, L.A. Metro, Seattle and the Carolina Triangle lead the charts in terms of new apartment development, followed closely by Washington D.C., Northern Virginia, Urban Boston, and three of Texas’s economic hubs, North Dallas, Austin and West Houston.

Common Characteristics

Pierce-Eislen research shows that more than 90 percent of the units under construction possess two characteristics in common: the developments are located in urban environments, and they are positioned so as to serve the two, “renters-by-choice” lifestyle rental categories: wealthy empty nesters (55+), and young professional, double-income-no-kids-households.

The capital source, lender, developer, investor universe all seem to point to the same conclusion: urban, cutting-edge development, fully dressed up, with all the amenities is the one configuration that actually works in the current economic context.

On the other hand, when conducting quarterly comparisons of market data, the apartment industry conditions seem to be weakening. All four indexes of the National Multi Housing Council’s (NMHC) October Survey of Apartment Market Conditions dropped below 50 for the first time since July 2009. Market Tightness (46), Sales Volume (46), Equity Financing (39) and Debt Financing (41) all showed declining conditions from the previous quarter.

“After four years of almost continuous improvement across all indicators, apartment markets have taken a small step back,” said Mark Obrinsky, NMHC’s Vice President of Research and Chief Economist, in a statement. “Conditions cannot continue to improve indefinitely and new development is at least somewhat constrained by available capital – though more on the equity than the debt side. Even so, both the Market Tightness and Sales Volume Index are within hailing distance of the breakeven level and the Debt Financing Index rose despite some rise in interest rates. This bodes well for the apartment industry going forward.”

Key findings of the NMHC survey include:

Mixed sentiments regarding the availability of capital for new development. More than three quarters of the respondents regarded construction debt financing as widely available – 34 percent think both equity and debt financing are widely available, while 43 percent think construction loans are widely available but equity capital for new development is constrained. Only 36 percent think equity capital is widely available.

Market Tightness Index fell to 46 from 55. Conditions vary greatly from place to place, but on balance, most respondents (67 percent) said they saw no change in market tightness (higher rents and/or occupancy rates) compared with three months ago. One-fifth of respondents felt that markets were looser than three months ago, while 13 percent saw tighter markets.

The Sales Volume Index remained at 46. Almost one-third (32 percent) of respondents saw a lower number of property sales, compared with almost one-quarter (24 percent) who said sales volume was unchanged. A plurality of 44 percent regarded sales volume as unchanged.

The Equity Financing Index dipped to 39. Sixty percent viewed equity financing as unchanged – this was the tenth consecutive quarter in which the most common response was that equity finance conditions were unchanged from three months ago. By comparison, 27 percent of respondents viewed conditions as less available and only 5 percent viewed equity financing as more available.

Debt Financing Index rose 21 points to 41. Almost one quarter of respondents (22 percent) viewed conditions as better from three months ago, a sizable increase from eight percent last quarter. Forty-one percent of respondents believed now is a worse time to borrow, down from 67 percent in July.

The survey was conducted October 7-October 16 and included the responses of 64 CEOs and other senior executives of apartment-related firms nationwide.

Need a corporate loan? Forget your bank - tap the shadow banking system instead

New York --(SoberLook.com)--
Here is a simple question: what percentage of US banks' balance sheets is taken up by loans to businesses? The answer may surprise some. It's just under 11.5%, down from about 16% some 10 years back. Banks began preferring real estate loans (particularly commercial real estate) to corporate credit in the early part of last decade. That didn't work out so well (see post). Since the financial crisis, banks' deleveraging sent the number to new lows. The percentage began to rise in 2011 but has stalled again this year.

Source: FRED

The result of Basel-based regulation has been the reliance on corporate ratings for capital requirements. Loans of companies without a strong rating or with no rating at all require significantly more capital to hold on balance sheets. And loans to companies with strong ratings pay such a low rate these days, it eats into banks' profitability. This is especially true for the middle market and lower middle market companies. Outside of basic inventory, equipment, and receivables financing (mostly short-term), banks remain cautious.

It doesn't mean however that credit to companies is not available. In fact multiple lenders have been stepping into banks' domain. BDCs, CLOs, credit/mezzanine funds, bond/loan retail funds, etc. have been providing credit to businesses in the US. That transformation to non-bank lenders over the past decade has been quite spectacular - especially in the middle market.

Source: Aranca (click to enlarge)

When you hear all the pundits talk about "shadow banking", they usually miss the fact that most corporate loans now come from outside the banking system. So the next time your medium-sized business needs some long-term financing, you may get a better answer from your not-so-local BDC than your local bank - particularly while credit markets remain hot.

Kroll Bond Rating Agency’s Structured Finance Investor Forum Featuring Paul Volcker

New York --(Fort Mills Times)--
Kroll Bond Rating Agency held a Structured Finance Investor Forum on November 7, 2013. The event was attended by more than 50 participants, which included buy and hold and total return investors representing firms with portfolio holdings across the capital stack. Opening remarks were made by Jim Nadler, President, and Jules Kroll, CEO, followed by keynote speaker Paul Volcker, former Chairman of the Federal Reserve, who addressed the attendees on the current state of the capital markets and regulation.

The Forum included two break-out sessions that offered interactive dialogue with investors. The first, focused on CMBS, was led by Kim Diamond, who heads KBRA’s Structured Finance effort. Ms. Diamond posed questions to the panelists, members of KBRA’s senior CMBS team, and the audience, to gauge their overall views on the economy and current credit conditions. The audience believed that credit spreads would tighten over the course of the next year as issuance increases to post financial crises highs, as the economy continues along at its current pace or improves. Panelists and investors agreed that credit poses the biggest risk for the CMBS market.

The RMBS breakout session, led by Senior Managing Director Glenn Costello, discussed the state of the RMBS market and REO-to-rental assets. Specific topics included recent collateral trends, Qualified Mortgages (“QM”) and the potential for non-QM transactions in 2014, reps and warranties, home prices, and single-family rental securitizations, in particular the Invitation Homes 2013-SFR1 transaction.

http://www.fortmilltimes.com/2013/11/11/3089075/kroll-bond-rating-agencys-structured.html

RPT-Fitch: Non-traditional properties increasing in U.S. CMBS

MHC and Lodging as a Percent of Collateral

Summary:  There has been an increase in non-tradition (those outside retail, office, multifamily, and industrial) Fitch-rated US CMBS issues, with more manufactured housing communities (MHC) and self-storage properties.  Lodging assets, too, have also grown over the last three years.






New York --(Fitch Rating Agency)--
Traditional property types, including retail, office, multifamily, and industrial, continue to represent the majority of collateral in Fitch-rated U.S. CMBS, though there has been a steady increase in the number of non-traditional properties over the last four years, according to Fitch Ratings in its latest CMBS weekly newsletter.

Manufactured housing communities and self-storage properties in particular have increased of late.

The contribution of manufactured housing communities (MHC) to Fitch-rated CMBS deals has grown every year for the last three years. Representing less than 1% of deals in 2010, the asset class has grown slowly from 2.5% in 2011 to 3.2% in 2012 and 5.9% as of September 2013.

Self-storage assets have also been a growing contributor to deals in 2013 with just over 4% YTD. While not a traditional property type, these have also performed well with a less than 1% default rate. That said, Fitch still views self-storage assets cautiously seeing as many self-storage units are located in areas with limited barriers to entry.

While not necessarily non-traditional, lodging assets have also grown steadily over the last three years. Since 2010, when the hotel contribution was under 5% within Fitch-rated CMBS, the number of hotel assets grew as the market stabilized, to over 10% in 2011, 13.5% in 2012 and 14.5% YTD 2013.

Northern New Jersey Area Fourth Quarter 2013 Office Market Report

Investors Scour Northern New Jersey for Acquisitions

As Manhattan occupancy and rents climb, operators in Northern New Jersey will begin to benefit from the migration of tenants in search of quality space at lower rates. This year started on a high note as Depository Trust & Clearing Corp. relocated 1,600 workers to Jersey City. Most employment sectors in the six-county northern New Jersey region added jobs in the first six months of the year, and local payrolls have increased in four of the past five quarters. Investors throughout the New York metro are keen on the region’s local office properties due to the area’s strengthening economy. At the end of 2012, sales velocity in northern New Jersey accelerated as investors rushed to close deals prior to an increase in capital gains taxes. At that time, buyers were more likely to meet sellers’ price expectations due to the low interest rates. Since the beginning of the year, however, trading has slowed as owners have chosen to hold onto their assets and benefit from strengthening operations. Buyers, meanwhile, are becoming more cautious and re-evaluating asset prices due to uncertainty surrounding the future of interest rates.

Office investors will remain bullish on Class B/C assets in Northern New Jersey this year. Owners who bought during the height of the market are facing a few hurdles when bringing assets to market. Specifically, sellers seeking to capture prices based on pre-recession rents will be disappointed as banks underwrite deals based on current, lower market rents. A few operators will turn to private capital for recapitalization, while those who must divest will be forced to sell at a discount to avoid a potential default. Opportunistic buyers have re-entered the market to target lower- to mid-tier properties near major highways, seeking to perform significant renovations to attract tenants and boost rent rolls. Overall, cap rates averaged in the high-7 percent range through the past 12 months. The best-in-class properties in Northern New Jersey traded just above a 7.5 percent cap rate, while Class B properties were slightly higher just over 8 percent cap rate.

2013 Annual Office Forecast

• Employment: Total employment will expand with the addition of 30,000 new jobs though out the year. Office-using employment sectors will create 12,000 positions, a 2.5 percent increase. In 2012, payrolls increased 1.6 percent with the 29,700 jobs.
• Construction: Approximately 1.8 million square feet of space will be added this year, representing a 1 percent increase in inventory. In 2012, roughly 440,000 square feet came online.
• Vacancy: By year end, office vacancy will tick up 40 basis points to 20 percent; a 60-basis point increase was recorded in 2012.
• Rents: In 2013, asking rents will increase 0.4 percent to $24.59 per square foot. During the previous year, a 2.9 drop was recorded.

New York Area Fourth Quarter 2013 Office Market Report

Expanding Tech Firms Help Boost New York Occupancy

Progressing job growth, particularly in the robust technology sector, together with improving financial markets, will lift the number of new leases in the New York City office market. Recently, Yahoo announced it is consolidating its three sites in Manhattan into 176,000 square feet in the former New York Times space on 43rd Street. Upon inking the new long-term lease, Yahoo announced plans to continue expanding its staff in the coming years. Other expansions include YouTube, which recently announced it will open a new 25,000-square foot creative studio in Chelsea in 2014. Due to limited supply, these large corporations are paying premium rents for quality space. The rise in rents is driving many smaller firms and startups to the Garment District, where developers are repositioning old manufacturing floor plates for traditional office and tech tenants. The finance sector, the former primary driver of significant office space demand, continues to recover from job losses incurred during the recession. As the stock market gains traction and volatility decreases, financial firms are expected to bolster headcounts by 4,000 positions this year. As a result, many financial firms will backfill underutilized space and potentially expand into larger footprints.

After a frenzied investment climate during the last quarter of 2012, the market has entered a period of equilibrium. Many owners who purchased during the downturn are taking profits after a significant gain in the value of their assets, while other investors are divesting to reallocate capital into other strategies. As these assets come to market, they are targeted by high-net-worth individuals, local syndicates, and foreign investors who are competing aggressively to purchase assets located in primary office districts in the city. Value-add plays have also been a prime opportunity to achieve outsized returns for buyers positioned to assume the risk of converting old properties in the Garment District and lifting rents to the current market rate. As properties convert, investors seek to capture the influx of tech tenants who will pen seven- to 10-year leases. Properties repositioned for these tech companies are trading with first-year returns around the high-4 to low-5 percent range.

2013 Annual Office Forecast

• Employment: Robust job growth will continue through year end as 85,000 workers find jobs, lifting payrolls by 2.2 percent. Office-using employment will expand over 29,000 positions in 2013, increasing headcounts by 2.3 percent. Last year, 29,000 office workers were added in the metro.
• Construction: Developers will deliver over 6 million square feet of office space this year, expanding inventory by 1 percent. In 2012, approximately 1.3 million square feet of office space was added to inventory.
• Vacancy: By year end, vacancy will fall to 10.7 percent, an annual decrease of 70 basis points from 2012. Vacancy declined 40 basis points in the previous year.
• Rents: As conditions tighten this year, operators will lift asking rents 4.5 percent to $49.83 per square foot. In the previous 12-month period, asking rents for marketable space increased by 3.2 percent to $47.69 per square foot.

Philadelphia Area Fourth Quarter 2013 Apartment Market Report

Economy on Sound Footing, Driving Apartment Sales

Respectable job growth and the formation of new households reduced vacancy in the Philadelphia metro over the first nine months of 2013 and is supporting a strong multifamily sector. Nearly every private-employment sector added workers during the period, though many industries still have additional hiring to do to recapture all of the positions lost during the downturn. Job opportunities in degreed fields or those requiring specialized training, such as healthcare, are available, but lower-skilled workers continue to face challenges. Specifically, deficits to former peak staffing levels in retail and wholesale trade persist and may be suppressing the performance of apartment buildings on the lower rungs of the quality scale. Economic trends are pointing upward, however, which could hasten the pace of hiring in lagging employment sectors in the quarters ahead. A recent regional survey by the Federal Reserve showed a rise in the index of new orders for goods and services and also signaled improved prospects for hiring.

Although investor demand outweighs the number of properties listed for sale, deal volume continues to surge. Nonetheless, the recent rise in long-term interest rates is motivating additional owners to place properties on the market. Generally, for owners contemplating a sale in the next year or two, the current bidding climate and the relatively modest rise in interest rates improves the probability of executing a transaction. Lenders are competing to provide acquisition loans, with leverage reaching as high as 80 percent. In many instances, local and regional banks have emerged as more competitive sources than the agencies. Cap rates are virtually unchanged from six months ago, and healthy disparities persist between first-year returns on different classes of assets. Class A properties, for example, typically trade in the low- to mid-5 percent range, while Class B properties change hands in the mid-6 to low-7 percent band. Cap rates for Class C or lower-quality properties with working-class tenancies typically start in the mid-8 percent range, though many deals settle closer to 9 percent.

2013 Annual Apartment Forecast

• Employment: Payrolls will swell by 33,000 jobs in 2013 to expand employment in the metro 1.2 percent. Growth in education and health services employment underpinned the creation of 28,700 positions in 2012.
• Construction: Projects containing 3,400 units will come online in 2013, up from 1,278 rentals last year. New stock will be placed in service in 10 of the metro’s 16 submarkets. The greatest impact is in Center City, where 1,429 new rentals will expand stock 4.6 percent.
• Vacancy: Vacancy will decline 30 basis points this year to 4.9 percent, the lowest year-end level in six years. The vacancy rate was unchanged in 2012.
• Rents: Following a 1.1 percent bump in 2012, average rents in the metro will rise 2.6 percent this year to $1,128 per month. With the projected increase, rents will have climbed 10 percent since bottoming four years earlier.

https://www.marcusmillichap.com/services/research/webreports/Philadelphia/Apartment.aspx

 

Northern New Jersey Area Fourth Quarter 2013 Apartment Market Report

New Supply Absorbed as Rents Rise in New Jersey

Apartment demand created by the surge of new jobs generated in Northern New Jersey and in Manhattan is giving local operators more leverage when negotiating leases. This is particularly true as the cost of living in Manhattan rises, forcing tenants to migrate across the Hudson River in search of affordable housing. Now that occupancy in the region is above 96 percent, operators are raising rental rates more aggressively in townships without rent control laws. This is pushing apartment demand further inland and into areas without direct proximity to major transportation corridors. Builders have responded relatively quickly to favorable conditions, activating previously approved multifamily permits. Completions of market-rate apartments have pushed ahead over last year’s deliveries, with most of the units concentrated in Jersey City and Hoboken. As this new space enters the market, strong demand will generate a normal turnover rate, keeping replacement expenses low.

Through the first three quarters of 2013, the number of apartment listings was insufficient to meet buyer demand in Northern New Jersey, a trend that is anticipated to continue through year end. Anticipation of the Fed’s actions resulting in rising interest rates, combined with the competitive buyer market, motivated some investors to list their properties while they retained the most control over the final sale price. Value-add properties in highly desired neighborhoods are trading at cap rates in the mid-4 percent area, though after renovations, the real cap is evaluated to be in the mid-6 percent range. First-year yields in the 8 percent range are sought after in more stable communities in northern Newark. However, high-yield assets are limited and most properties in the $1 million to $10 million range are trading between a mid-4 to mid-5 percent cap rate. Investors searching for a leg up are revaluating previously bank-owned assets or properties disposed by individuals unable to meet previous loan obligations.

2013 Annual Apartment Forecast

• Employment: Job growth will continue to expand in the fourth quarter as 30,000 positions are created in 2013, a 1.6 percent annual increase. In 2012, payrolls reached 29,700 positions.
• Construction: Approximately 2,194 units are scheduled to be completed in 2013. Last year, 1,240 units were brought online. In both years, the majority of the units have been delivered in Hudson County.
• Vacancy: By year end, new supply of apartments and single-family options will tick up vacancy 40 basis points to 3.4 percent. In 2012, vacancy dipped 20 basis points to 3.0 percent as new deliveries were limited.
• Rents: Strong demand for rentals across the region will push overall effective rents up 3.9 percent to $1,820 per month in 2013. In the previous 12 months, rents dropped 7.3 percent.

 

https://www.marcusmillichap.com/services/research/webreports/NewJersey/Apartment.aspx

New York Metro Area Fourth Quarter 2013 Apartment Market Report

Deal Flow Jumps as New York Operations Remain Solid

The pace of job creation in the five boroughs has eased from one year ago, but the rental housing market remains healthy. Strong demand drivers will persist through the end of this year, while supply growth will also accelerate. With employment rising and other economic indicators providing encouragement to builders, the city is in the midst of a development cycle. Groups will continue to push projects through the approval process as 2013 winds down in advance of a change in the Mayor’s office in 2014. Notably, the city council is expected to vote on a massive re-zoning of the 73-block Midtown East area before the end of 2013. In the boroughs, development is booming in Queens, especially in Long Island City, a location that offers residents a relatively short subway ride to Midtown Manhattan employers. Roughly 8,000 units of housing are anticipated to come online in the borough over the next three years.

The investment market continues to flourish as significant gains were recorded in transaction velocity and dollar volume over the past year. A rise in long-term interest rates early in the third quarter had little effect on deals, and a more significant move in long-term interest rates will have to occur to trigger a broader and more profound re-pricing of assets. Until then, a keen bidding climate will persist. More than three-fourths of all transactions in the city over the past year took place in the $1 million to $20 million price tranche, a segment of the market dominated by private investors, including many local parties. Attractively priced acquisition debt and heightened competition among lenders will sustain a robust level of property purchases within this pool of investors in the months ahead. In the midst of a period of solid economic growth, the market remains supple, constantly shifting shape as new neighborhoods come to the fore. An extension of the 7 train to 10th Avenue next year, for example, will open up a new area of the city for developers and investors, while the ongoing development in Queens will also elevate the borough’s appeal.

2013 Annual Apartment Forecast

• Employment: Employment in the five boroughs will expand 1.8 percent in 2013 through the creation of 70,000 jobs, primarily in education and health services, and leisure and hospitality. In 2012, 78,200 positions were created in the city.
• Construction: In 2013, developers will bring online approximately 7,000 rentals in the five boroughs, an increase from more than 5,000 units last year. The building cycle will continue, as more than 15,000 units of multifamily housing are on track to receive permits this year.
• Vacancy: The vacancy rate in the New York metro will rise 10 basis points to 2.6 percent in 2013; a decrease of 10 basis points was recorded last year.
• Rents: Average rents will advance 2.5 percent in 2013 to $3,455 per month. A gain of 11.5 percent was registered during 2012.

http://www.marcusmillichap.com/Services/Research/#1

US CMBS Delinquency Rate Breaks 8% Threshold, More Gains in Store for 2013

The Trepp CMBS delinquency rate continued to race lower 

in October, falling below the 8% level for the first time since early 2010. October marks the fifth consecutive month of rate improvement. Over the course of the month, the rate dropped 16 basis points, bringing the delinquency rate for US commercial real estate loans in CMBS to 7.98%.

The Trepp delinquency rate has dropped 236 basis 

points since the summer of 2012 when it reached an all-time high of 10.34%. While 2013 is almost over, 

there could be more meaningful gains for the rate before year-end. Special servicer CWCapital has noted that it will be looking to sell more than $2.5 billion of distressed assets before the end of the year. Substantial note sales are also expected during this time frame. Assuming the sales close prior to the December remittance cycle, the CMBS delinquency rate could improve even more. Removing over $3 billion of non-performing assets from the delinquent loan bucket would result in a 50-basis-point decrease in the rate. October’s improvement in loan delinquencies can be attributed in part to a modest reduction in newly delinquent loans. New delinquencies totaled $1.7 billion in September, which compares to $1.6 billion in October. These loans pushed the rate up by 29 basis points.

Offsetting these new delinquencies was the 

combination of loans that cured and loan resolutions. Loans that cured totaled $1.2 billion in October, which resulted in 22 basis points of downward pressure on the delinquent loan reading. Loan resolutions totaled almost $1 billion in October, which is an increase from the $873 million in resolutions last month. Removing these distressed loans from the pool of delinquent assets resulted in an additional 18 basis points of improvement in October’s rate. 

The Numbers:

• The overall US CMBS delinquency rate decreased 16 basis points to 7.98%.

• The percentage of loans 30+ days delinquent or in foreclosure: 

 Oct ’13: 7.98% Sept ‘13: 8.14% Aug ‘13: 8.38% 

• The percentage of loans seriously delinquent (60+ days delinquent, in foreclosure, REO, or 

non-performing balloons) is now 7.69%, down 18 basis points for the month.

• If defeased loans were taken out of the equation, the overall 30-day delinquency rate would be 

8.28%—down 16 basis points from September.

• There are currently $43.2 billion in delinquent loans. (This number excludes loans that are past 

their balloon date but are current on their interest payments.)

• There are $52.0 billion in loans with the special servicer. This represents about 2,900 loans.

Historical Perspective:

• One year ago, the US CMBS delinquency rate was 9.69%.

• Six months ago, the US CMBS delinquency rate was 9.03%.

• One year ago, the rate of loans seriously delinquent was 9.16%.

• Six months ago, the rate of loans seriously delinquent was 8.72%.

All Five Major Property Types Improve

• The industrial delinquency rate decreased 28 basis points to 11.31%, but remains the worst 

major property type.

• The lodging delinquency rate fell 21 basis points to 8.94%.

• The multifamily delinquency rate dropped by 11 basis points to 11.02%.

• The office delinquency rate decreased 24 basis points to 9.07%.

• The retail delinquency rate improved by 16 basis points and is now 6.34%. Retail remains the 

best performing major property type.

http://info.trepp.com/Portals/157783/docs/TreppOctober2013CMBSDelinquencyReport.pdf