Real-Estate Funds Needn't Be Riled by Rising Rates

Investors have pulled money out of real-estate funds for two straight months, even though they remain among the year's best performers and pay bigger dividends than many stock funds. The worry is that rising rates will hurt growth for the owners of apartment buildings, offices and other commercial real estate, as well as limit demand for their stocks.

Before joining the crowd, bear in mind that rising rates don't always mean losses for real-estate funds. Many have delivered solid returns even during periods of rising interest rates. The key is how quickly and how high rates rise. Real-estate fund managers say they can still make money for investors, though they acknowledge that the performance won't be as good as this year and the recent past.

"One of the things you have to ask is why are rates rising," says John Wenker, co-portfolio manager of Nuveen's Real Estate Securities fund since 1999. "If rates are moving up moderately because the economy is starting to strengthen, that's fine for commercial real estate."

For real-estate funds, dividends are king. Most invest in real-estate investment trusts, which can avoid income taxes if they pass on 90 percent of their profit to shareholders as dividends. REITs can own shopping centers, self-storage units or senior housing communities.

Because they pay out so much of their income as dividends, REITs attracted income investors who grew tired of the low yields offered by bonds. That demand helped the average real-estate fund return an annualized 17.4 percent over the last five years, according to Morningstar. That beats the 15.6 percent annualized return for the Standard & Poor's 500 index over the same time.

One concern for REITs is that a rise in interest rates, which economists say is inevitable, will push investors to dump them and go back to bonds. Higher interest rates also make it more expensive for REITs to raise money to buy and develop real estate.

Those fears hurt REITs last year, when the Federal Reserve hinted that it may curtail its bond-buying stimulus program. The yield on the 10-year Treasury note quickly jumped from 1.63 percent in early May to nearly 3 percent by the end of the year. That drove the average real-estate fund into the red in the last three quarters of 2013. For the year, the average real-estate fund returned just 1.5 percent, versus 32.4 percent for the S&P 500.

REITs can deliver gains if the increase in rates is more moderate and the result of an improving economy. In such a scenario, fund managers say property owners should be able to charge higher rents and have fewer vacancies for their apartments and office buildings. That would lead to higher dividends.

The economy hasn't been as strong as many had hoped, but it is improving. Many economists believe growth next year will be the strongest since 2005. The unemployment rate is also at its lowest level since 2008, and the job market is strong enough that the Federal Reserve earlier this week announced the end to its bond-buying program. The central bank could begin raising its target for short-term interest rates next year, and many economists expect a measured rise.

Investors have pulled money out of real-estate funds for two straight months, even though they remain among the year's best performers and pay bigger dividends than many stock funds. The worry is that rising rates will hurt growth for the owners of apartment buildings, offices and other commercial real estate, as well as limit demand for their stocks.

Before joining the crowd, bear in mind that rising rates don't always mean losses for real-estate funds. Many have delivered solid returns even during periods of rising interest rates. The key is how quickly and how high rates rise. Real-estate fund managers say they can still make money for investors, though they acknowledge that the performance won't be as good as this year and the recent past.

"One of the things you have to ask is why are rates rising," says John Wenker, co-portfolio manager of Nuveen's Real Estate Securities fund since 1999. "If rates are moving up moderately because the economy is starting to strengthen, that's fine for commercial real estate."

For real-estate funds, dividends are king. Most invest in real-estate investment trusts, which can avoid income taxes if they pass on 90 percent of their profit to shareholders as dividends. REITs can own shopping centers, self-storage units or senior housing communities.

Because they pay out so much of their income as dividends, REITs attracted income investors who grew tired of the low yields offered by bonds. That demand helped the average real-estate fund return an annualized 17.4 percent over the last five years, according to Morningstar. That beats the 15.6 percent annualized return for the Standard & Poor's 500 index over the same time.

One concern for REITs is that a rise in interest rates, which economists say is inevitable, will push investors to dump them and go back to bonds. Higher interest rates also make it more expensive for REITs to raise money to buy and develop real estate.

Those fears hurt REITs last year, when the Federal Reserve hinted that it may curtail its bond-buying stimulus program. The yield on the 10-year Treasury note quickly jumped from 1.63 percent in early May to nearly 3 percent by the end of the year. That drove the average real-estate fund into the red in the last three quarters of 2013. For the year, the average real-estate fund returned just 1.5 percent, versus 32.4 percent for the S&P 500.

REITs can deliver gains if the increase in rates is more moderate and the result of an improving economy. In such a scenario, fund managers say property owners should be able to charge higher rents and have fewer vacancies for their apartments and office buildings. That would lead to higher dividends.

The economy hasn't been as strong as many had hoped, but it is improving. Many economists believe growth next year will be the strongest since 2005. The unemployment rate is also at its lowest level since 2008, and the job market is strong enough that the Federal Reserve earlier this week announced the end to its bond-buying program. The central bank could begin raising its target for short-term interest rates next year, and many economists expect a measured rise.

REITs Surge Ahead in Volatile Oct. Market

October was a volatile month for stocks in general. But REITs fared well, and were driven in part by strong earnings announcements. This month, through Oct. 29, the FTSE NAREIT All REIT Index was up 6.94 percent. That compares with a 0.4 percent drop in the Dow Jones Industrial Average, 0.62 percent increase in the S&P 500 Index and 1.24 percent increase in the Nasdaq Composite Index.

Fueled by strong market fundamentals and a favorable interest rate environment that has facilitated growth, the largest REITs announced strong third-quarter earnings that have met or beat expectations. Boston Properties, for instance, reported $1.46/share of funds from operations, handily beating the $1.37/share it was expected to post. Others that beat expectations include Equity Residential and AvalonBay Communities in the apartment sector, industrial REIT Prologis, Kimco Realty Corp. in
the retail sector and healthcare REIT Ventas Inc.

Meanwhile, REITs in several sectors provided investors with healthy total returns, including dividends and stockprice appreciation, for the month. Those in the manufactured-housing sector, for instance, provided a 10.2 percent return.

Those in the industrial sector provided a 9.79 percent return and those in the healthcare sector provided a 9.77 percent return, while retail REITs provided a 9.43 percent total return. Behind those were hotel REITs, with an 8.93 percent total return; apartment REITs, with an 8.89 percent return; self storage, 8.85 percent, and office, 8.4 percent.

Mortgage REITs, meanwhile, which are highly sensitive to changes in interest rates, posted a 3.7 percent return during the month. For the year so far, REITs have provided investors with a total return of 21.55 percent.

The Fed shrugged off this month’s stock market volatility and voted late in the month to end its bond buying program. The move was widely expected and led to a small drop in stock prices as investors believe that the end of economic stimulus will lead to higher interest rates. REITs were affected more than most other companies.

Although the Fed emphasized its plan to maintain its benchmark short-term interest rate near zero for “a considerable time,” investors are on alert for the first hints that rates will move higher. It is widely thought that the Fed will start allowing rates to increase by the middle of next year, but it has noted that its time-frame will depend on its employment and inflation objectives.

A NY REIT tumbles 30% on accounting ills

Shares of American Realty Capital Properties plunged on Wednesday after the Manhattan-based company, one of several real estate investment companies founded by Chairman Nick Schorsch, announced that it had misrepresented its earnings and had dismissed two top accounting executives.

By midday Wednesday, shares of the publicly traded real estate investment trust had plunged 30%. Among the disclosures the company made was that it had inflated a key earnings measure by about $23 million in the first half of 2014 and that its financial statements from 2013 "should no longer be relied upon."

"The accounting issues are unacceptable, and we are taking the personnel and other actions necessary to ensure that this does not happen again," CEO David Kay said in a statement released with ARCP's disclosure of its accounting trouble.

The firm said it had fired its CFO, Brian Block, and its chief accounting officer, Lisa McAlister, and replaced them.

ARCP is part of a group of real estate investment companies founded by Mr. Schorsch, who acquired a stake in West Side office tower Worldwide Plaza last year in a deal that valued that building at $1.45 billion. Mr. Schorsch made that purchase through another investment trust entity called New York REIT. He is the chairman of both that firm and ARCP.

As that acquisition was being made in 2013, RXR Realty, a major commercial landlord in the city, launched a lawsuit against New York REIT. The suit alleged that Mr. Schorsch’s firm had originally agreed to partner with RXR to buy Worldwide Plaza, but instead used the company’s in-depth financial analysis of the property to make its own bid without RXR. New York REIT won that suit and completed its purchase of the stake alone.

A lawyer who represents shareholders of ARCP said that owners of the company’s stock were considering a lawsuit.

"Reading between the lines, our suspicion is that the two top accounting officers saw the error in the earnings and let it go," said Jeff Block, a lawyer at Block & Levitan, based in Boston. "You have a very profound drop in value any time you have accounting issues like this because it calls into question the credibility and honesty of the company."

According to Forbes, ARCP was created by the merger of two nontraded REITs founded by Mr. Schorsch. This month, he stepped down as CEO of the company, handing over the reins to Mr. Kay in a move that had been done to increase financial transparency, reports suggested.

Is Houston the Next Gateway City?

Institutional investor demand for Houston commercial real estate, coupled with job growth, a less expensive cost of housing and movement of oil and energy industries into the city is leading local players to predict that the most populousmetropolis in Texas could become the next gateway market. "Houston has always been a strong market for institutional investment, but it is now viewed as a gateway city," Kevin Roberts, the southwest president at Transwestern, said. "Today, it is considered one of the top tier investment markets in the U.S."

Las yea, the city was ranked fourth in the U.S. for foreign investment and fifth globally, according to the Association of Foreign Investors in Real Estate. "This was a huge improvement since not all that long ago, Houston was not a primary investment market for foreign capital, because most foreign investors were going toward gateway markets such as Los Angeles, San Francisco, New York, Washington, D.C., and Boston," Tom Fish, executive managing director at JLL, said. "[The city has] recently been perceived as a gateway market in the eyes of foreign investors, and [it] now has a healthy amount of foreign bidders."

Consolidation of the oil and energy industries into Houston has created internationally competitive jobs that draw foreign capital to the region, Kevin Roberts, the southwest president at Transwestern, said. He explained that Houston is predicted to be the number one supplier of oil and gas in teh United States in 2015.

Because of this, there has been a rapid increase in foreign investment from Mexico as well as an in-migration trend, according to Jan Sparks, managing director of structured finance at Transwestern. "There is significant influx of wealthy Mexican nationals into Houston, predominantly in Mexico City and Monterrey. Houston offers a stabilized, safer environment for them to raise their families and conduct their business. Commuting to numerous cities in Mexico from Houston is easy and inexpensive. They can get in and out of Mexico in the same day if they desire," she said.

The city has seen in-migration from the Northeastern, Midwestern and Western parts of the U.S., Roberts said, as people seek to take advantage of low-tax business opportunities. "Our governor has been very aggressive in trying to attract people to those businesses," Fish said. "The one thing that is interesting about the oil business is that it's not just people in hard hats drilling. It also produces an enormous amount of technology jobs, and a lot of people are coming in from places like California to fill those positions."

 

Job growth in Houston, which is seeing 80,000-100,000 new jobs created each year, is close to double the national average, Fish said. This means the office sector has seen a lot of demand, Sparks said, as it has been an efficient way to place large amounts of equity for the past two years. Houston now has more office space under construction than any city in the country, according to Fish, a vast majority of which is already leased.

 

Multifamily is also one of the leading product types in Houston this year, Roberts said, with more than 17,000 multifamily units delivered in 2014 and nearly 15,000 of those units abosorbed. "Many members of Generation Y are coming in and renting these urban, multifamily units," Roberts said. "Sixty percent of Generation Y renters think that they'll move within the next five years, so they're willing to pay up for apartment units because they are renters by choice."

 

With all of the new construction, Fish said that he believes there is enough discipline in the market to limit it to the best products that are able to get capitalized. "We have had a terrific four years of double-digit rent growth, and as long as we continue to experience the job growth that we are now, I think we'll be able to absorb the units that we have coming in," he said. "Even though construction prices are going up because of the heightened labor market, I think the future of Houston looks pretty healthy. There's always a little bit of caution about what will happen in the oil industry, but I'm very optimistic."

 

Although the market in Houston has been favored among investors for a couple of years, according to Roberts, he doesn't believe Houston has seen its peak yet. "Many use baseball analogy that we're in teh middle innings of an extra innings baseball game," Roberts said. "Fundamentals in Houston and the economy's supply and demand equilibrium are very much in check, and I do believe that this current cycle will have a very nice run. I don't think we're close to the end. I think we have several years in the future to enjoy this momentum and continue to build on it."

Risk Retention Rules Approved; Higher Pricing, Less Capacity for CMBS

The credit risk retention rules mandated by the Dodd-Frank Act and then the subject of fierce debate over the last two years by regulators and the industry as they were being written are now finalized. These rules will shape a number of financial products and lending activities, from mortgages to highly-leveraged corporate bonds to commercial mortgage-backed securities going forward.

The changes will be significant for the CMBS market, starting with higher pricing that could range from an additional 25 basis points (according to estimates by regulators) to between 35 to 50 basis points (according to industry associations). The new rules are also expected to limit capacity, as well.

Still, these final rules--adopted by the Office of the Comptroller of the Currency, the Department of Treasury, the Federal Reserve Bank, the Federal Deposit Insurance Corp., the US Securities and Exchange Commission, the Federal Housing Finance Agency and the Department of Housing and Urban Development—are not as bad as the industry originally feared.

"The whole process has been an evolution," says CREFC president and CEO Steve Renna. Over time this 'evolution' moved considerably more in direction that CREFC and other industry associations had advocated, he says.

Briefly, for the CMBS industry, the final rules eliminated the Premium Capture Cash Reserve Account that had been proposed in the earlier risk retention proposal. This onerous requirement, which would have required all issuer profits to be placed in a first-loss position, had been tentatively dismissed about a year ago, but to have it jettisoned from the final rules is a relief. Also gone from the final rules are cumbersome cash flow requirements.

The heart of the rules — a doubling of the amount of risk that has to be retained to 5% stayed in place — but further negotiations with regulators made this rule far more flexible to implement, Renna says.

The bottom line is that B piece buyers have a lot of flexibility in figuring out the best way to raise capital they need for the additional retention. In addition, the retention can be divvied up between the issuer and B piece buyer. "We asked for flexibility and optionality in fulfilling the risk retention rule and the regulators provided that," Renna says. "They also originally said the B piece would have to retain the risk for ten years. We said five and they agreed."

Unfortunately, they wouldn’t budge on the single-asset loan criteria, he says.

CREFC had been lobbying to keep certain loans that were conservatively underwritten—namely securitizations based on a single asset such as one building or a single credit—exempt from the risk retention rules. "No lenders want to keep that big of a loan on its balance sheet and it wasn’t necessary, from an investor protection standpoint, to apply risk retention to these loans," Renna says.

The regulators didn’t agree and Renna believes the consequence will be that these loans will be pushed into the cheaper – and less transparent -- corporate bond market.

"The regulators didn’t make a strong case for why they decided this," he says. "These loans don’t belong under risk retention."

Buffalo, NY commercial real-estate market is on track for a $600 million year

More than $71.7 million in commercial real estate value changed hands in September, led by a Williamsville apartment complex, a bakery warehouse in Lancaster and a senior affordable housing building in Lancaster, according to data from the Erie County Clerk’s Office.

 

Those three deals together amounted to $39.2 million, or more than half of the total deal value in 25 transactions during the month.

 

So far this year, deal activity has surpassed $452 million through the first nine months just in Erie County, putting the market on track for a $600 million year. Last month, the largest deal was the $15.2 million purchase of a pair of apartment complexes at 355 and 395 Evans St. in Williamsville by the Ashley Companies of Rochester, a privately owned real estate investment and management company from Harry and Esther Rosenfeld, through Georgetown Apartments LLC.

 

The first complex, at 355 Evans, consists of seven two-story buildings with 11,520 square feet, built in 1967 on 8.7 acres, and assessed at $5.6 million. The second one, at 395 Evans, has six two-story buildings on 3.4 acres, with 11,714 square feet, built in 1969, and assessed at $3.1 million. Both have pools and parking.

 

In Lancaster, CSM Bakery Products Inc. sold a warehouse facility at 3765 Walden Ave. to AGNL Pastry LLC, a unit of hedge fund sponsor Angelo Gordon & Co. of New York City, for $12.58 million. Located on 8.5 acres, the property is assessed at $3.5 million.

 

Founded in 1988, Angelo Gordon manages $26.5 billion in assets for clients, with almost $13 billion in commercial real estate properties. Its “net-lease” division – AGNL – provides sale-leaseback financing, offering companies that own their own real estate a way to cash out while still leasing their facilities back.

 

CSM Bakery provides bakery ingredients and products such as cakes, cookies, brownies, muffins, mixes, icings, toppings, fillings and pastries to bakeries, consumer food companies, grocers and other retailers. It’s a subsidiary of Amsterdam, Netherlands-based CSM, a global leader in bakery products and natural food preservation, with operations and 9,500 employees in 60 locations.

 

Nearby, Henry Meyer, through Lancaster Towers Associates LP of Pepper Pike, Ohio, sold the Lancaster Towers apartment building for seniors to SRK Caravel Arms Associates LP of Lauderdale Lakes, Fla., for $11.4 million. The 2.3-acre property at 1 Pleasant Ave. is assessed at $6.02 million.

 

SRK also owns the Caravel Arms affordable senior complex in Florida, but the business is managed by Amherst-based Benchmark Group.

 

And Dr. Fadi Dagher, a Buffalo General Medical Center surgeon who has been investing in Western New York real estate, bought a third Waterfront Village office building at 40 LaRiviere Drive. Dagher, through his D&S Capital Real Estate III LLC, paid $6.875 million for the property, adding to two others he bought early this year for $7.2 million.

 

He also bought the Buffalo Tourist Lodge on Main Street near the Buffalo Niagara Medical Campus, with plans to convert it to a new Sleep Inn or similar hotel, and was part of the investment group that purchased the former Holiday Inn Grand Island at a foreclosure auction. That is now the Byblos Niagara Resort & Spa.

 

In other deals:

 

• Independent Health Association paid $5.9 million to buy 300 Essjay Road from Ciminelli Real Estate Corp., which owns the Centerpointe Corporate Park in which the facility is located. The building purchase is part of an office space shuffle that enables the health insurer to consolidate its offices and employees onto one campus.

 

• Salit Specialty Rebar of Niagara Falls, N.Y., through SSR 1050 Military Road Inc., paid $2.7 million to buy 1050 Military Road in Buffalo from Rochester-based Klein Steel Service Inc. The property is an industrial warehouse and manufacturing facility. Salit, part of Myer Salit Ltd. of Niagara Falls, Ont., is a stainless steel rebar supplier and fabricator.

 

• National Gypsum Services Co. paid $2.64 million to buy 1650 Military Road in Tonawanda from 1650 Military Road Associates LLC, which is linked to Robert Nuchereno of Arista Real Estate. The 3.6-acre property has a 54,920-square-foot warehouse, built in 1964.

 

• Nuchereno’s 1650 Military Road Associates, meanwhile, paid $2.525 million on behalf of Len-Co Lumber to buy 8075 and 8095 Sheridan Drive in Clarence from Trinity Place Holdings Inc., the real estate successor to the bankrupt former clothing retailer Syms Corp. The property is a former Syms store, that is now occupied by Len-Co, with the rest available for lease.

 

• William and Carl Paladino’s Ellicott Development Co., through Pearl Group LLC, bought 500 and 512 Pearl St. in Buffalo from Buffalo Christian Center Inc. for $2.525 million. A mixed-use project is planned for the facility.

 

• Rite West Partners LLC, a Long Island investor, bought a property housing a Rite Aid Pharmacy at 350 Niagara St. in Buffalo from WEC 97A-7 Investment Trust of Houston, an investment security managed by Hines Investment, for $2.1 million.

Federal Housing Finance Agency Unveils Plan to Loosen Rules on Mortgages

For years, politicians, housing advocates and potential home buyers have complained that tight credit policies after the housing market crash have kept too many deserving people from qualifying for mortgages.

Now the government is taking steps that it says it hopes will allow more first-time buyers and lower- and middle-income Americans to get home loans at low rates.

On Monday, Melvin L. Watt, the nation’s chief housing regulator, announced a program offering more reassurances to mortgage banks that fear they could suffer unpredictable losses on the loans they sell to the government.

Separately, he disclosed that efforts are underway to allow borrowers to receive government-backed loans with much smaller down payments than are now required. But contrary to early expectations, he offered few details on such plans.

“We know that access to credit remains tight for many borrowers, and we are also working to address this issue in a responsible and thoughtful manner,” said Mr. Watt, director of the Federal Housing Finance Agency, which regulates the mortgage finance giants Fannie Mae and Freddie Mac.

The move in large part is intended to reassure banks that have had to pay tens of billions of dollars to settle legal cases arising from the housing boom and bust and buy back bad loans sold to Fannie and Freddie. To avoid having to make those payments again, many lenders now demand that borrowers meet stricter requirements for loans, known in the industry as overlays.

“We know that this issue has contributed to lenders’ imposing credit overlays that drive up the cost of lending and also restrict lending to borrowers with less-than-perfect credit scores or with less conventional financial situations,” Mr. Watt said in a speech on Monday to the Mortgage Bankers Association convention in Las Vegas.

Some economists, with mortgage bankers, welcomed the new plan, saying that it, with more gains in the job market and a recent dip in mortgage rates, could put the housing recovery back on track. Ben S. Bernanke, the former chairman of the Federal Reserve, recently told an audience that even he could not get a loan to refinance his mortgage.

“Creditworthy borrowers who have been locked out of the housing market will finally have an opportunity to become homeowners,” said Mark Zandi, chief economist at Moody’s Analytics.

But some housing finance analysts contend that tight credit does not sufficiently explain the weakness in the housing market. Instead, they say, an aging population, stagnant wages and a wariness of taking on new debt have all reduced demand for mortgages.

“The reality is that this is as much a demand-driven drought as it is a credit-driven drought,” said Joshua Rosner, of Graham Fisher & Company, a research firm.

With the new plan, the government is trying to strike a balance between the frenzied years of the housing bubble, when mortgages were approved with little regard for the ability of borrowers to repay them, and the tight grip on mortgages after it burst.

“It requires a lot of fine-tuning to get a national mortgage market that achieves all the objectives we want,” said Stan Humphries, chief economist for Zillow, a real estate website.

To reassure mortgage lenders, the housing finance agency intends to further relax the agreements that determine when Fannie and Freddie may require banks to buy back bad loans. The terms that are being loosened involve loans that show evidence of fraud or other flaws in the underwriting process.

Under the new agreements, for instance, Fannie and Freddie would demand buybacks only when there was a pattern of misrepresentations and inaccuracies in the loans. In addition, if problems are later discovered in loans, the deficiencies would have to be significant enough to have made the loans ineligible for purchase by Fannie and Freddie in the first place.

These changes follow other recent adjustments by the housing finance agency to calm mortgage lenders. But mortgage banks did not increase lending to less creditworthy borrowers.

Now, some housing specialists are more hopeful that the overhaul announced on Monday will prompt the banks to lend more. “It will be helpful in moving the needle,” Jim Parrott, a senior fellow at the Urban Institute, said.

Mr. Watt said he would give specifics in a few weeks about a plan for borrowers that could include down payments of as little as 3 percent.

Borrowers can already apply for low down-payment loans that are backed by the Federal Housing Administration. But housing specialists said that some borrowers who qualified for loans backed by Fannie and Freddie were being directed to the F.H.A., which backs loans that have much higher interest rates.

“You want people to get the loan they qualify for,” said Michael D. Calhoun, president of the Center for Responsible Lending.

Financing commercial real estate is getting faster, easier in Detroit

Eight long, grueling years.

That's how long it's been since one of the most complicated redevelopment financing structures in Motown's history was cobbled together for the $180 million renovation of the Westin Book Cadillac Detroit on Washington Boulevard at Michigan Avenue.

Involving 17 layers of financing, the deal was so complex that one real estate financing expert at the time said it could have been the subject of a master's degree thesis.

But the Book Cadillac wasn't an anomaly. Labyrinthine financing plans are what it has taken to get projects done in the Motor City — even in the resurging downtown and Midtown districts.

It took George Stewart and Michael Byrd 15 years and eight funding sources to complete the overhaul of the Woodward Garden block of Woodward Avenue into a $44 million mixed-use development with multifamily residential, retail and office space in Midtown.

Richard Karp is redeveloping three Capitol Park buildings, and the financing for just one of the projects involves 11 different capital stacks.

But the market is starting to shift. These days — post-recession, post-Kwame, soon-to-be post-bankruptcy — the real estate community is noticing smoother paths to securing financing, particularly for in-demand multifamily housing in the booming downtown and Midtown areas.

Richard Hosey III, a former senior vice president for Bank of America who is now the owner of Detroit-based Hosey Development LLC, said there is a sense among developers and lenders that most redevelopment projects are financially feasible, whereas just a few years ago questions were rampant about whether enough demand existed.

"People talk about closing and financing gaps more so than "it's just not possible' or that there won't be demand," said Hosey, who worked on the financing for the $53 million redevelopment of the 35-story Broderick Tower into a 127-unit apartment building, another complex financing project, among others.

"Even if it's nine layers (of financing), it's nine straight-forward and easy to replicate layers so we can pass it along to the next project," he said.

Part of what is helping is that average rental rates are slowly but steadily creeping toward the $2 per square foot levels, which makes traditional lenders more willing to finance projects.

"After we clear that mark and have been doing that for a number of years, I think lenders will say it wasn't a fluke, that there actually is a strong market for this product," said James Van Dyke, vice president of development for the Detroit-based Roxbury Group, which redeveloped the David Whitney Building, the former Globe Trading Co. building for the Michigan Department of Natural Resources, as well as a host of other projects.

The David Whitney Building, which is scheduled to be completed this year after a two-year conversion into 108 multifamily units and a 135-room Aloft boutique hotel, is an $82.5 million project involving funding from the state, Bank of America, the Downtown Development Authority and others.

Earlier this year, the Detroit Economic Growth Corp. received approval from the DDA to negotiate a development agreement for The Griswold apartment development. Roxbury plans on using only three funding sources for the $22 million development, which would have 80 units atop a 10-story parking garage and retail building at Griswold Street and Michigan Avenue.

Increased willingness to finance Motor City redevelopment efforts is welcome news to Joseph Kopietz, a member in the Detroit office of Clark Hill PLC, who advised the College for Creative Studies on financing for the A. Alfred Taubman Center for Design Education project, among many others.

But still, it's not like lenders are frothing at the mouth to take what might still be a gamble on Detroit projects, he said. It remains a complex chess game, oftentimes involving many lenders and tax incentives, such as the U.S. Department of Housing and Urban Development's 221(d)4 Program, Michigan Strategic Fund's Community Revitalization Program, state brownfield tax credits and tax credits at the state and federal level for historic preservation.

"Because of various factors, having seven layers of financing can sometimes be more complex than 12," he said. "Each type of financing has its own complexity, and we still are not at a state here in Detroit, nor in many other major markets, where financing of significant projects is getting any easier."

Yet all told, Kopietz and others remain optimistic.

"We are going to continue to get some questioning and scrutiny from lenders and equity partners, but things have been improving. What people are seeing is the successes in Detroit that we've had here recently, and that's good for the market," he said.

Sub-3% Rate Expected on NY Loan

A Silverstein Properties partnership that’s seeking a $360 million loan on the office building at 1177 Avenue of the Americas in Manhattan is in line for a rock-bottom interest rate.

With Treasury yields plummeting and commercial MBS loan spreads on trophy properties tightening, the partnership will likely end up with a rate well below 3% on a seven-year loan. That would be one of the lowest coupons on a long-term mortgage in the current cycle.

The assignment is being pitched to balance-sheet lenders and CMBS shops via Eastdil Secured. CMBS programs appear to have the edge, one market pro said, because the borrowers are focusing on achieving the best pricing rather than flexibility on loan terms, and securitization platforms are currently willing and able to offer cheaper debt because of the prevailing spreads in the CMBS market.

Lenders in the mix said they are hearing that the loan’s coupon will be pegged to only about 90-95 bp over seven-year Treasurys, thanks to the loan’s low leverage and the strong institutional sponsorship. Since the beginning of this year, the seven-year Treasury yield had hovered between 2% and 2.3%. But a flight to quality this week touched off by plunging stock prices drove down the yield, which briefly hit 1.5% on Wednesday before rebounding to 1.8% yesterday. If that level holds, it would put the loan’s coupon around 2.7%.

New York-based Silverstein currently owns the 47-story tower in partnership with California State Teachers. UBS is buying an unspecified piece of the ownership, and the loan is being sought in conjunction with that recapitalization.

Lenders said the proposed mortgage would equal only about 40% of the property’s value. The debt yield, which measures net operating income as a percentage of the loan amount, would be a solid 10.4%.

The 1 million-square-foot building, which stretches from West 45th to West 46th Streets on the west side of Avenue of the Americas, is 92% leased. Law firm Kramer Levin leases 283,000 sf.

Lenders cite spread compression as an ongoing theme in the market. The loan sought by the Silverstein partnership is viewed as something of an outlier, given the low leverage and strong sponsorship. But it illustrates how competition has driven down pricing on trophy properties.

Only a few giant securitized mortgages on New York office properties have carried coupons in the 3% area over the past two years. In March 2013, a Silverstein-UBS Trumball Property Fund partnership lined up a seven-year loan with a 2.72% coupon on the leasehold interest in the 1.9 million-sf office building at 120 Broadway.

Well Fargo securitized the $310 million interest-only mortgage via a stand-alone deal (WFCM 2013-120B). The loan-to-value ratio was 51.7%. The day the loan closed, the seven-year Treasury yield was 1.4%, indicating that the loan spread was approximately 130 bp.

Market Volatility Drives Down CMBS Prices

Volatility in the stock and Treasury-bond markets put downward pressure on commercial MBS prices this week.

The 10-year Treasury yield finished at 2.16% yesterday, after falling to as low as 1.86% on Wednesday, as a plunge in the stock market touched off a flight to safety. The yield was down by 12 bp from last Friday and 46 bp from the recent high in mid-September.

The decline caused CMBS spreads to widen this week, for two reasons. First, credit spreads in general rose on concerns about the U.S. economic outlook, the European debt markets and spread of the Ebola virus. Also, investors were insisting on a higher spread to compensate for the decline in the Treasury yield.

Many CMBS buyers require a minimum absolute yield to take down new issues. In the last two conduit deals, the benchmark bonds yielded 3.29%. The long-term super-senior class of a $1.3 billion offering led by J.P. Morgan and Barclays (JPMBB 2014-C24) carried a spread of 83 bp over swaps. The comparable tranche of an $842 million issue led by Citigroup and Goldman Sachs (CGCMT 2014-GC25) priced at 87 bp over swaps.

Because of the drop in Treasury yields, the next conduit offering — a $1.2 billion transaction by Deutsche Bank, UBS, Cantor Commercial Real Estate and Natixis (COMM 2014-CCRE20) — will have to carry a wider spread to match that 3.29% yield. With the 10-year swap yield down to 2.328% yesterday, the benchmark spread would have to be 96 bp to reach 3.29%.

"That says it all right there," one CMBS banker said. "The spread will have to be 10-15 bp wider to get it done."

A pullback by some bond buyers is also putting pressure on spreads, according to one CMBS trader. "It’s a tough ride right now," he said. "Any time you have that kind of Treasury volatility, people put their pencils down and say, ‘Let’s think about what we’re doing.’ "

Virtually no bonds from recent conduit issues changed hands in the secondary market this week. But dealers have widened their bid-ask spreads, indicating that they were willing to buy long-term super-seniors from those deals at spreads of 94-96 bp and sell them for 90-91 bp.

Elsewhere in the new-issue market this week, Colony Mortgage Capital continued to market a $320.8 million securitization of seasoned performing mortgages collateralized mostly by multi-family properties. Bookrunners Credit Suisse and J.P. Morgan circulated price talk of 100-bp area over swaps on the only offered class — $220.6 million of bonds with a weighted average life of three years and a triple-A rating from Moody’s.

Meanwhile, RAIT Financial started shopping a $219.4 million offering backed by 22 floating-rate mortgages on various types of commercial properties. The $126.4 million senior class of 2.4-year bonds is rated triple-A by Moody’s and DBRS. The subordinate classes are rated only by DBRS, including a 2.8-year tranche of junior triple-As. UBS structured the transaction and is running the books with Citi.

UBS and Citi were also pitching a $335 million offering backed by the senior portion of a fixed-rate debt package on the 506,000-square-foot office tower at 1500 Broadway in New York’s Times Square. They originated the 10-year package last Friday, including $170 million of mezzanine debt, on a 50-50 basis for Tamares Real Estate of London. The transaction is rated by Moody’s, DBRS and Morningstar.

Freddie to Fund, Securitize Small Apt. Loans

Freddie Mac, which increasingly has relied on the securitization market to fund loans its lender partners originate, has launched a program to fund small-balance multifamily mortgages in much the same way.

So far, the housing-finance agency has approved Greystone Servicing Corp., Hunt Mortgage Group and Arbor Commercial Mortgage to write loans for the program. Its aim is to have its first $100 million securitization in the market by early next year. The agency also plans to add other lenders to the program in the coming months, with the hope of having five to seven lenders in the program by the end of the year. Next year, it plans to open the program up to its Program Plus lenders - those that regularly have been writing small-balance loans.

The overall structure of its small-balance securitizations will be similar to the agency’s existing K-series transactions, in that bonds will be structured according to risk and would include a first-loss, or B-piece. It’s not clear whether the most senior bonds will also be rated.

Each transaction will be secured by loans originated, and sold to Freddie, by a single lender. And that lender would be required to retain the B-piece, which would likely amount to more than 7.5 percent of the entire transaction.

As the program evolves, transactions backed by loans originated by multiple lenders might be floated. The agency is aiming to fund loans with balances of between $1 million and $5 million

against properties that have a minimum of five units each. Loans could be sized up to 80 percent of a collateral property’s value and would require debt-service coverage ratios of at least 1.25x, or 1.2x in the country’s strongest markets. It will offer fixed-rate balloon loans as well as hybrid adjustable-rate loans, which could have terms of up to 30 years and fixed rates for their initial five, seven or 10 years. After that, the loans’ coupons are reset every six months.

While Freddie’s small-balance loans, like its larger-balance offerings, are nonrecourse, save for specific carve-outs, the agency will require originators to collect borrower FICO scores. So a borrower’s credit history, in addition to a property’s performance, will play a role in a loan’s underwriting. That’s because most smallcap properties are held by individuals as opposed to bankruptcy-remote entities, like larger properties are. “We believe our initiative will increase liquidity in the small multifamily loan space and provide stability and facilitate private capital investments in this somewhat fragmented and underserved market segment,” said David Brickman, executive vice president of Freddie’s multifamily business.

The agency estimates that roughly half of the country’s apartment units are in what could be considered small-capitalization properties. And about one-third of the multifamily mortgage market is comprised of small-balance loans.

The small-cap apartment market is highly fragmented and generally has been served by local and regional banks, which often won’t write long-term loans. In addition, because of regulatory pressures, those bank lenders often can move out of certain markets, leaving property owners with few borrowing options.

“The opportunity is ripe” for Freddie to get into the small-balance market in a bigger way, according to Nashwa Moussa, director of conventional structured transactions, who oversees the agency’s small-balance lending initiative. “We’re bringing securitization to the space,” she explained. While other lenders have securitized small-balance loans, none has developed a systematic program to regularly bring deals to market.

Ariz. Hotel Appraised Value Cut by 2/3

The 347-room Phoenix Airport Marriott, whose $63.8 million CMBS loan was transferred to special servicing last April, has been appraised at a value of $29.4 million. According to Barclays Capital, which highlighted the latest appraisal in a recent research note, the loan also became delinquent this month. The property originally was appraised at a value of $94.7 million.

The hotel, at 1101 North 44th St., near Phoenix’s Sky Harbor Airport and the campus of Arizona State University, was constructed in 1999. It is owned by Columbia Sussex of Crestview Hills, Ky., which until this month had kept the loan current, even though the property wasn’t generating sufficient cash flow.

Last year, for instance, the property generated $3.6 million of cash flow. That was 30 percent less than the amount required to fully service its loan, which was securitized through Banc of America

Commercial Mortgage Trust, 2006-3.

Barclays noted that the new, lower appraised value will lead to an appraisal reduction of about $35 million, which could increase interest shortfalls by $184,000. The deal’s A-J class, originally rated AAA by Standard & Poor’s and Fitch, would see an increase in shortfalls.

This month, the class was shorted $108,448 of interest. In addition, Barclays said that if the hotel was liquidated at near its appraised value, the deal’s class B, with a balance of $36.9 million and the most junior remaining in the deal, could be wiped out entirely and the A-J class could see a loss. The team added that the shortfalls, if they occur at that level, would be short-lived.

$278.1Bln of Conduit Loans Mature in ‘15-’17

A total of 22,514 CMBS conduit loans with a balance of $278.1 billion come due in the next three years. While a seemingly massive wall of maturities, the volume has shrunk by nearly 10 percent over the past nine months. And given continued favorable lending market conditions, it’s likely to continue shrinking.

Indeed, just about every major investor group has increased its holdings of commercial mortgages, according to recent data from the Mortgage Bankers Association, which found that the universe of outstanding commercial mortgages increased by 1 percent during the second quarter to $2.6 trillion.

Banks and thrifts, the largest holders of mortgages, saw their inventory of loans increase by a robust 1.8 percent over the first quarter, to $929.9 billion. CMBS and other securitized vehicles saw their inventory decline to $532.9 billion. That’s largely due to the fact that run-off outpaced new originations - at least through the second quarter. Life-insurance companies, meanwhile, saw a 1.3 percent increase in their inventories, to $345.8 billion.

The open lending spigots have led to a steady pace of loan pay-offs - a big chunk of the loans being securitized today were written to refinance existing CMBS loans - as well as a sharp increase in the volume of defeasance, where loan collateral is replaced by government securities.

Wells Fargo Securities noted that so far this year $12.4 billion of CMBS loans have been defeased, or replaced by government securities. That compares with a volume of $11.3 billion for all of last year and amounts to a near doubling of the $6.4 billion of volume recorded during the year’s first half.

Next year, 6,263 conduit loans with a balance of $64.6 billion come due. In 2016, that increases to 8,230 loans with a balance of $104.3 billion and in 2017, 8,021 loans with a balance of $109.2 billion come due. The volume excludes loans that have been defeased. Because those are backed by government securities, they aren’t at risk of defaulting at maturity.

Even though the volume of loans that mature between 2015 and 2017 steadily has been declining, many of the remaining loans could pose challenges. The thinking has been that loans that easily could be refinanced would have been by now, simply because interest rates are lower than they were when the current crop of maturities were written.

A total of 9,482 loans with a balance of $153.8 billion, or 55 percent of the loans that mature during the 2015-2017 period, have debt yields of 10 percent or less, based on the latest available net operating income figures as compiled by Trepp LLC.

A loan’s debt yield is calculated by dividing a collateral property’s NOI by its loan’s balance and is a gauge used to determine how comfortably the property can carry its debt.

Meanwhile, the collateral for 5,351 loans with a balance of $64.9 billion generates less than 10 percent more than what’s needed to fully service their securitized loans. In other words, their debt-service coverage ratios are less than 1.1x. Lenders typically prefer loans whose collateral can generate 120 percent, or 1.2x, the cash flow needed to fully service their borrowings.

Using DSCR as a gauge, office loans could face the biggest challenges in refinancing, as 1,209 of the loans coming due between 2015 and 2017, with a balance of $27.6 billion have DSCRs of less than 1.1x. Of the retail loans that will be coming due between those years, 1,941 with a balance of $22.8 billion have DSCRs of less than 1.1x.

Among those that might face challenges are the $200 million loan, securitized through Banc of America Commercial Mortgage Trust, 2005-3, against the Woolworth Building in Manhattan. The 811,791-square-foot office property last year generated $12.7 million of net cash flow, which is about 20 percent more than that needed to fully service its non-amortizing loan. But the $13.6 million of NOI it produced results in a debt yield of only 6.8 percent. The well-leased property also supports $50 million of additional debt. And its largest tenant, the General Services Administration, occupies its 112,692 sf under a lease that matures next October. It leases its space on behalf of the SEC, which had reduced its footprint in the building when its lease originally matured two years ago.

New Brooklyn Medical Center Refis With $49M CMBS Loan

Meridian Capital Group arranged a $49 million CMBS loan for the refinance of the newly built Calko Medical Center in Brooklyn, Mortgage Observer has first learned.

Calko was built last year and holds 125,000 square feet of office and retail space. The medical center holds an ambulatory surgery center, medical offices and a pharmacy and is located at 6002 Bay Parkway in Brooklyn’s Bensonhurst neighborhood. It cost about $60 million to develop, according to published reports.

The 10-year CMBS loan features a competitive fixed-rate and a three-year interest-only period, a representative for Meridian said.

Meridian declined to provide further information on the loan, but a source close to the deal said the lender was MC Five Mile Commercial Mortgage Finance and the rate was 4.75 percent. A call to MC Five Mile was not returned.

Meridian Senior Managing Director Abe Hirsch and Managing Director Zev Karpel worked on the deal, the Meridian representative said.

Atlanta Apartments to Sell for $80MM

Pollack Shores Real Estate Group has struck a deal to sell the 341-unit Citizen Perimeter apartment property in the Atlanta suburb of Sandy Springs, Ga., for roughly $80.1 million, or $235,000/unit. The Atlanta apartment specialist had offered the property, at 1125 Hammond Drive, through Engler Financial Group. The $235,000/unit price would be the highest for an apartment property in the Central Perimeter submarket in at least a year.

The area has a super-low 3.2 percent vacancy rate and hasn’t seen any new units come on line since 2011. But that’s changing, as Reis Inc. projects that 691 units will be added to the area’s 26,007-unit inventory this year.

Still, fundamentals are strong enough to drive heated demand for properties that are offered. According to area professionals, property deals are being underwritten with the assumption that rents will increase by 4 percent annually for the next several years.

While the supply of units has remained flat, demand should stay healthy. State Farm Insurance, for instance, will be taking some 585,000 square feet of a 2.2 million-sf mixed-use complex that KDC Real Estate Development and Investments is building nearby. That’s expected to translate to demand for apartment units.

Monthly asking rents at Citizen Perimeter range from $1,290 for a one-bedroom unit with 638 sf to $2,915 for a two-bedroom unit with 1,356 sf. Units, which average 859 sf, include stainless-steel appliances, walk-in closets and kitchen islands. The property includes a saltwater swimming pool, walking trails and courtyard with a theater. It also has a parking garage with 478 spaces.

Citizen Perimeter is three blocks from the Perimeter Mall and minutes from the Dunwoody MARTA light-rail station.

While a $235,000/unit price would be high for an Atlanta property, it’s not the highest. Earlier this year, Prudential Real Estate Investors paid $73.15 million, or about $348,333/unit, for 92 West Paces Ferry Road, with 210 units, and MetLife Real Estate Investors paid $106.5 million, or about $285,523/unit, for the 373-unit Elle of Buckhead. But both of those properties are in the Buckhead submarket, where higher rents are the norm.

Bullish CMBS Appraisal Sparks Questions

The appraisal of an extended-stay hotel portfolio collateralizing a $570 million mortgage that was securitized last week has raised the eyebrows of investors.

 

Blackstone acquired the portfolio from Clarion Partners for $800 million in August. But the Cushman & Wakefield appraisal cited by lenders J.P. Morgan and Deutsche Bank valued the properties at almost $100 million more.

 

The valuation gap is unusual. When real estate has just changed hands, the appraised value typically mirrors the purchase price. The issuers of securitizations, in turn, use that value to determine the leverage ratio of the mortgage on the properties. Because the high Cushman valuation increased the denominator, the stated loan-to-value ratio was lower than it would have been if the purchase price was used. Some investors view the higher valuation as an example of an ongoing slide in loan-underwriting standards.

 

The loan was the senior portion of a $675 million floating-rate debt package that J.P. Morgan and Deutsche originated on Aug. 12 in conjunction with Blackstone’s acquisition of the 47-hotel portfolio. The two banks securitized the senior loan last week via a stand-alone deal (BLCP 2014-CLRN), with the investment-grade classes pricing in line with the dealers’ asking prices.

 

In addition to its $800 million purchase, Blackstone incurred $35.1 million of closing costs and funded $10.1 million of upfront reserves, bringing its total outlay at the closing to $845.2 million. Blackstone has also indicated that it plans to spend $63 million on renovations over four years.

 

The securitization documents cite multiple appraised values that Cushman provided on July 1 at the behest of J.P. Morgan and Deutsche. The brokerage supplied valuations based on whether the hotels were appraised individually or were sold to a single buyer willing to pay a premium to buy in bulk. Cushman said the "as-is" value was $833.7 million on a one-by-one basis and $885.1 million on a portfolio basis.

 

The brokerage also supplied "hypothetical" appraised values that factored in "all planned capital dollars" that Blackstone will put in reserve to upgrade the properties. Using that hypothetical standard, Cushman valued the portfolio at $844.8 million on a one-by-one basis and $896.3 million on a portfolio basis.

 

Of the four potential valuations, J.P. Morgan and Deutsche chose the highest. As a result, the loan-to-value ratio highlighted in the deal documents was 63.6% — or $570 million divided by $896.3 million — on the senior debt and 75.3% on the overall debt package. By contrast, had Blackstone’s actual $800 million purchase price been used, the leverage ratios would have been 71.3% and 84.4%.

 

While it’s possible that Clarion left a lot of money on the table by selling the 5,908-room portfolio to Blackstone at a below-market price, real estate pros say that seems highly unlikely, given that both companies are sophisticated institutional investors and that Clarion conducted a broad-based auction via a major brokerage, JLL.

 

Instead, investors contend, the use of the most-optimistic appraisal is another sign that commercial MBS issuers are pushing the envelope on credit quality. They view the use of hypothetical valuations as akin to "pro forma" underwriting, under which lenders make credit decisions based on projected increases in property cashflows, rather than in-place income. The use of pro-forma accounting was widespread as the CMBS market was peaking in 2007 and contributed to the subsequent crash.

 

 "They call it a ‘hypothetical’ appraised value — that in itself should be a red flag," said one investor. "If you want to know what the true LTV is, you might want to use the actual purchase price."

  

J.P. Morgan, Deutsche and Cushman declined to comment on why the appraised value was so much higher than Blackstone’s purchase price. Blackstone and Clarion also had no comment. But the boilerplate fine print in the preliminary prospectus for the securitization effectively warns investors that the cited valuations may have little connection to reality. "Information regarding the appraised values of the Properties is presented in this offering circular for illustrative purposes only and is not intended to be a representation as to the past, present or future market values of any of the properties," the prospectus says.

 

Other recent stand-alone securitizations that financed the acquisitions of properties or portfolios cited appraised values that were equal or close to the purchase prices. Some examples: 

• A Related Cos. partnership bought two office condominiums at Time Warner Center in Manhattan from Time Warner for $1.3 billion (plus $35 million of closing costs). Lead manager Deutsche cited a Cushman appraisal of $1.3 billion (COMM 2014-TWC).

 

• A Mark Karasick partnership bought the leasehold interest in the Mobil Building in Manhattan from Hiro Real Estate of Japan for $900 million (plus $59.5 million of other costs). Lead manager Morgan Stanley cited a Cushman appraisal of $900 million (MSC 2014-150E).

 

• Blackstone acquired two hotel portfolios from separate sellers — an OTO Development partnership and special servicer CWCapital — for a total of $503.6 million, plus $14.7 million of other costs. Lead manager J.P. Morgan cited a combined appraised value of $513.6 million (JPMCC 2014-BXH).

Ranieri Group Puts Situs Holdings Up for Sale

Following persistent rumors that it was in play, Situs Holdings has hired investment bank Raymond James to find a buyer.

Situs will entertain bids for either the whole company or a partial interest, according to people familiar with the matter. Market pros estimate the real estate-services shop is worth $150 million to $200 million.

Situs is owned by Ranieri Partners of Uniondale, N.Y., Brookfield Investment Management of New York, South Carolina Retirement and members of its own management team. After fielding multiple unsolicited offers, the company’s board of directors recently voted to formally seek bids, the sources said.

Houston-based Situs, which was founded in 1988, has an array of business lines, including due diligence, loan underwriting, primary servicing, special servicing and real estate advisory services. It also operates a big outsourcing business, which is the dominant supplier of contract workers to commercial MBS lending shops.

The list of prospective buyers could be long and diverse. Logical candidates include competitors in the due-diligence and special-servicing arenas, as well as broader-based real estate companies looking to add compatible operations. Several companies are seeking to build out full-service national commercial real estate brokerages, including a TPG partnership that has agreed to buy brokerages DTZ and Cassidy & Turley.

Situs could also appeal to firms looking to increase their presence in Europe. The company lays claim to being one of Europe’s largest third-party loan servicers and one of only a few firms that manage loan portfolios in both the U.S. and Europe.

Situs has also been expanding beyond the commercial mortgage sector. In August, the Federal Reserve tapped the firm to conduct a portion of its annual comprehensive capital analysis and review, an exercise to determine whether the largest U.S. bank holding companies have sufficient capital. Situs was awarded a contract to review nearly 7,000 of residential loans totaling $5 billion.

Rumors that Situs would be sold have circulated for more than a year. The speculation, denied by the company, was fueled in part by the fact that Ranieri Partners sold two other pieces of its platform this year: agency lender Berkeley Point Capital and distressed-asset investor RREP Recovery Partners. Cantor Commercial Real Estate acquired Berkeley Point, and affiliate Cantor Fitzgerald purchased RREP.

Ranieri Partners, headed by securitization pioneer Lewis Ranieri, began amassing a commercial real estate advisory, servicing and origination platform several years ago, teaming up with private equity partners. Ranieri gained control of Situs in 2011 and merged it with Helios AMC, a special-servicing firm in which Ranieri owned a stake. The merged company retained the Situs name. In 2012, Ranieri teamed up with billionaire

Wilbur Ross to buy Berkeley Point from Deutsche Bank, which operated the multi-family lender under the name Berkshire Mortgage. Ranieri also operates a registered broker-dealer, Ranieri Real Estate Advisors, which places debt and equity, and advises commercial real estate firms.

Many market pros think that Ranieri and its partners are simply ready to take profits after a big run-up in valuations for real estate companies that provide fee-based services. A spokesperson for Ranieri Partners didn’t return a call seeking comment. 

Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rates

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. (BRK/A), said he was puzzled by the sluggish rebound in U.S. home construction amid near record-low interest rates and a broader recovery in the economy. 

“You would think that people would be lining up now to get mortgages to buy a home,” Buffett said today at a conference hosted by Fortune magazine in Laguna Niguel, California. “It’s a good way to go short the dollar, short interest rates. It is a no-brainer. But so far home construction pickup has been slower than I had anticipated.” 

Housing starts slumped in August from the highest level in almost seven years to a 956,000 annualized rate, Commerce Department data show. Slow wage growth and tighter lending standards have kept some would-be borrowers from buying a home.

Buffett, 84, whose Omaha, Nebraska-based company has units that build houses and make carpet, paint and bricks, reiterated today that he expects home building to pick up as the market rebounds from the deepest slump in more than seven decades.

“Household formation falls off dramatically in a recession, at least initially,” he said. “But that doesn’t last long. Hormones kick in and in-laws get tiresome, too.”

Liquid Apartment Lending Market Sees Conduits Rising

Commercial mortgage-backed securities lenders are gaining market share in the apartment market as Fannie Mae, Freddie Mac and the life insurance companies have been less active  than during the same time last year.  "The agencies have become more active after starting the year slowly," said Faron Thompson, international director in JLL's capital markets group. "Borrowers have more choices than they've had since 2007. There are a number of different programs and a complete smorgasbord of opportunities."

There were about $706 million of new apartment loans in the first half of 2014 - about 2% less than during the same period in 2013. But Fannie Mae, Freddie Mac and the life insurance companies have seen their volumes drop about 13% year-over-year, according to a new report from JLL, citing data from the Mortgage Bankers Association. CMBS Lending volumes are about 19% higher.

Although Fannie Mae and Freddie Mac had a slow start to the year, this changed after Mel Watt to the reins of the Federal Housing Financing Agency in February. Watt succeeded Ed DeMarco, whose tenure was marketed by curtailing lending efforts with the aim of making Fannie Mae and Freddie Mac smaller and smarter. "[Watt] wanted Fannie Mae and Freddie Mac to make smart loans and well underwritten loans. He was not trying to put them in a volume box or keep them from responding to the market's needs," Thompson added.

Market participants have observed that in recent months, the GSEs have worked hard to be more competititve with the conduits. Dan Lisser, principal and senior managing director at Johnson Capital, observed that the GSEs became more aggressive when restrictions under DeMarco, such as reducing portfolios by 10% annually, were lifted. "For borrowers, [the liquidity] will continue to keep cap rates low as they can get attractive financing," Lisser said. "It will be very good for sellers as well, as they will see great pricing."

Peter Donovan, a senior managing director at CBRE, told REFI he is not surprised to see the increase in competition from the agencies. "I think they're doing it in a disciplined way," he said. "I dont like the word 'aggressive,' because I don't see it as a bad thing. This is not 2006 or 2007, where underwriting has seemed to go a little too far. It's always been fairly compeititive, but in a healthy way."

Thompson noted that earlier this year, CMBS pricing was almost in line with the GSEs. "But right now, agency pricing is anywhere from 15 to 35 basis points tighter. The gap has widened again," he added, noting that gSEs offer a product that is more customized that the so-called "cookie cutter" CMBS loans.

Ray Potter, founder of New York-based advisory company R3 Funding, illustrated. In March, the firm was working to arrange a loan on a portfolio of Class B apartments in Gates, NY, that was shopped to CMBS and GSE lenders. At that time, the CMBS lender was the aggressive. But three months later, the same borrower was looking for a loan on six similar properties in the same area. This time, a Freddie Mac lender offered termes that were much more aggressive, including a four-year interest-only period and a spread that was 20 bps tighter. "It was a pretty easy decision to go with the Freddie Mac lender - there was more IO, more proceeds and a tighter spread," he added.

There continues to be a divergence between the type of borrowers that CMBS lenders and GSEs are looking for. CMBS lenders tend to offer higher pricing and pursue smaller borrowers, Donovan noted. Both groups of lenders, however, are similar in terms of client base and execution. That means increased competition from Fannie Mae and Freddie Mac may affect borrowers in small ways, such as providng another year of interest-only or a particular structure that is more effective, he added.

On the syndicated lending side, the GSEs are about 20 basis points cheaper than the bank market right now. "But if you compare teh syndicated loan product to Fannie Mae and Freddie Mac, it's very different. The execution is more like a CMBS loan, whereas we are floating-rate, three- to five-year lender," Galligan said.

Rialto, Eightfold Circle 3 B-Pieces

Rialto Capital has agreed to buy the junior portions of two upcoming conduit offerings, while Eightfold Real Estate Capital has circled the B-piece of a third deal.

Rialto’s purchases involve a $1.25 billion offering led by J.P. Morgan and Ladder Capital, and a similarly sized deal led by Wells Fargo and RBS.
Eightfold, meanwhile, has circled the bottom piece of a $1.25 billion offering by Goldman Sachs, Citigroup, MC-Five Mile, Starwood Mortgage Capital and RAIT.

Two of the three B-piece agreements — Eightfold’s purchase and Rialto’s contract with J.P. Morgan/Ladder — were awarded on a "negotiated" basis. That means the issuers didn’t hold multi-party auctions. Instead, they approached Eightfold and Rialto directly and came to terms.

Issuers often avoid auctions to simplify the sales process. The maneuver can also lead to a better execution, because the buyer might be tempted to pay a little more or accept questionable collateral loans if it means bypassing a bidding contest. On the other hand, the issuer also risks leaving money on the table if it fails to capture a sudden increase in B-piece valuations that an auction would have uncovered.

In any event, negotiated sales enable issuers to shore up their relationships with B-piece investors that may have been crowded out of the market in recent auctions.

Rialto has landed 10 B-pieces so far this year. Eightfold has circled three.

Big Players Look to Acquire, Not Lend On, Asian Real Estate

The Asian distressed market business might be the Godot of real estate finance. Investors and analysts seem to have been waiting endlessly for opportunities in non-performing loans and distressed debt. But waiting in vain, it would seem.

Appetite for Chinese and other Asian troubled assets is booming. So far this year, funds have raised over $2 billion to invest in Asian debt, up from $303 million in 2013, according to London-based researcher Preqin. According to survey from the firm, in February 2014, 17 percent of real estate investors based in North America focused on Asian investments, up from 9 percent in July 2013. Among European investors, 41 percent targeted these investments in February 2014, up from 18 percent the previous year.

But looking specifically at the real estate market, as of September 17th, only four real estate debt-focused funds had closed and raised capital for $800 million, up from $700 million from last year, but far from the $2.1 billion in 2012.

“Be it Japan’s commercial mortgage–based securities tail, cash-starved Chinese developers, or failed REITs, the reality has generally fallen short of expectations,” according to PwC’s report Emerging Trends in Real Estate for 2014. “To some extent, this reflects a cultural reluctance to allow compromised deals to be recycled by the market as they are in the West.”

While international investment in non-performing loans is playing a big part in the recovery story in Europe, rules banning foreign investors from buying real estate debt in some jurisdictions, like China, and aggressive local banks have limited Western investment in the Asian real estate debt market.

“The market has recovered very strongly,” Priyaranjan Kumar, regional director for Capital Markets at Cushman & Wakefield Asia Pacific, told Mortgage Observer. The recovery meant that local banks were able to refinance their loans without selling NPL portfolios—limiting the potential bargains for opportunistic investors. “Prices are at pre-crisis level or higher, the volumes of exchanges are at pre-crisis level or higher… Asian banks are in very good health,” Mr. Kumar said.

Loan-to-value ratios have been growing across Asia. According to PwC, they commonly register 60 to 65 percent across Asian markets and can reach 80 to 85 percent in Japan. The crisis affected mainly foreign banks, which often just opted to leave the real estate debt sector in Asia, while local banks were still clinging to their business. Foreign banks’ share of the real estate lending market in Asia dropped from over 40 percent before the crisis to less than 30 percent now, according to Mr. Kumar.

There are some exceptions, particularly in the Japanese and Australian markets (Australia is frequently grouped in with Asia, despite the fact that it is its own market). For instance, between 2010 and 2012, Fortress Investment Group raised $2.4 billion for two Japan funds targeted to buy real estate debt backed by apartments, retail and hotels. The first fund, Japan Opportunity Fund, which focuses on nonperforming or sub-performing debt from Japanese banks, recorded annualized inception-to-date net IRR of 27.9 percent through June 30, 2014, Fortress said in its latest earnings call.

And between 2011 and 2013, Axa Real Estate Investment Managers raised $390 million for two Japan commercial-property loans funds.

Lately, the most active players among real estate-debt funds were Kotak Realty Fund and Piramal Fund Management, which are both Indian-based and focused on the Indian market. A lack of financing from Indian banks for real estate development has resulted in a funding gap that has created demand for alternative debt. In 2014 Kotak and Piramal have closed a $400 million and $164 million fund, respectively, focused on Indian distressed and opportunistic debt, according to Preqin.

But the largest international opportunistic players right now are looking at acquiring assets, not lending. Among private equity investors, Blackstone Group is expected to close Blackstone Real Estate Partners Asia, the largest private equity real estate fundraise for the region, by the end of the year. The fund had a target of $4 billion and a hard-cap of $5 billion. At July 2014, it had already raised $4.2 billion.