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The Current CRE Lending
Environment – 2012 UConn
CRE Conference
Mark Fitzgerald
PROPERTY AND PORTFOLIO RESEARCH
NORTH AMERICA
March 6,
2012
EUROPE
ASIA-PACIFIC
1
chapter 1
page 2
Excess Leverage
BANKS HAVE CUT EXPOSURE TO REAL ESTATE SINCE 2007
REAL ESTATE LOANS AS A PERCENT OF TOTAL ASSETS, FDIC UNIVERSE
40%
Loans as Percent of Total Assets
35%
30%
25%
20%
15%
10%
5%
0%
Construction
1-4 Family
and
Residential
Development
1980
1990
2000
Sources: PPR; FDIC
page 3
Commercial RE
2007
Multifamily
Total RE
2011Q4
As of 11Q4
REAL ESTATE IMBALANCES REMAIN
CHANGE IN OUTSTANDING BALANCE BY LOAN TYPE, U.S. BANKS
250%
200%
150%
100%
50%
0%
(50%)
(100%)
C&I
2000-2007
Source: PPR, FDIC
page 4
Consumer
2007-2011Q2
Residential
Mortgage
2000-2011Q2
CRE
Construction
REMOVING LEVERAGE FROM THE SYSTEM
CHANGE IN COMMERCIAL REAL ESTATE DEBT OUTSTANDING BY LENDER CATEGORY
300
Change in Debt
Outstanding ($B)
CRE Debt/GDP
25%
250
200
20%
150
100
15%
50
0
10%
(50)
(100)
5%
(150)
(200)
0%
1980
1984
1988
Life Insurers
Sources: Federal Reserve; Moody’s Analytics; PPR
page 5
1992
1996
Depository Institutions
2000
2004
CMBS
2008
Debt/GDP
As of 11Q3
CAN LENDERS HANDLE THE TIDAL WAVE OF MATURING LOANS?
CRE MATURING LOANS BY YEAR
$ (Billions)
900
800
700
600
500
400
300
200
100
0
2011
2012
2013
Bank Income-Producing
Sources: PPR; Federal Reserve; Trepp; ACLI
page 6
2014
Bank Construction
2015
CMBS
2016
2017
Life Insurer
2018
Other
As of 11Q1
THE CAN BEING KICKED CONTINUES TO GROW
FORECAST 2011 CRE MATURITIES, AS OF DECEMBER OF REFERENCED YEAR
900
$ (Billions)
800
700
600
500
400
300
200
100
0
2008
Bank Income-Producing
Sources: PPR; Federal Reserve; Trepp; ACLI
2009
Bank Construction
2010
CMBS
Life Insurer
Other
As of 11Q1
page 7
CONSTRUCTION LOANS ARE BEING DEALT WITH FIRST
BANK CRE PORTFOLIO NONPERFORMING LOANS
$ (Billions)
200
180
160
140
120
100
80
60
40
20
REO
Sources: PPR; FDIC
page 8
Multifamily
Nonfarm, Nonresidential CRE
2011Q3
2010Q3
2009Q3
2008Q3
2007Q3
2006Q3
2005Q3
2004Q3
2003Q3
2002Q3
2000
1996
1992
0
Construction
As of 11Q4
REGIONAL & COMMUNITY BANKS FACE MORE DIFFICULTY IN
“EARNING THEIR WAY OUT”….
ROE BY BANK ASSET SIZE
10%
ROE
8%
6%
4%
2%
0%
(2%)
(4%)
2007
> $10B
Sources: PPR; FDIC
page 9
2008
2009
2010
2011
< $10B
As of 11Q4
BANK FAILURES ARE BEING DRIVEN BY THE CRE PORTFOLIO
COMMERCIAL REAL ESTATE AS A PERCENT OF TOTAL ASSETS FOR FAILED BANKS
30%
CRE Loans/
Total Assets
25%
20%
15%
10%
5%
0%
2008
Failed
Sources: PPR; FDIC
page 10
2009
2010
2011
Did Not Fail
As of 11Q4
chapter 2
page 11
Lender Modification & Disposition of
Nonperforming Assets
“TRUE” MODIFICATIONS CONTINUE TO RAMP UP….
SPECIAL SERVICER MODIFICATIONS BY QUARTER
450
% Using Rate/
Principal
Reduction
30%
# of
Modifications
400
25%
350
300
20%
250
15%
200
150
10%
100
5%
50
Maturity Extension
Rate Reduction
Sources: PPR; Trepp
IO Extension
Principal Forgiveness
2011Q4
2011Q3
2011Q2
2011Q1
2010Q4
2010Q3
2010Q2
2010Q1
2009Q4
2009Q3
2009Q2
0%
2009Q1
0
Hope Note
% Rate/Principal Reduction
As of 11Q4
page 12
CMBS LIQUIDATION ACTIVITY IS INCREASING
LIQUIDATION ACTIVITY & LOSS SEVERITY ON CMBS LOANS, BY QUARTER
Liquidated
Loans ($B)
Loss Severity
60%
4.5
4.0
50%
3.5
40%
3.0
2.5
30%
2.0
20%
1.5
1.0
10%
0.5
Liquidated Loans ($B)
Sources: PPR; Trepp
2011Q4
2011Q3
2011Q2
2011Q1
2010Q4
2010Q3
2010Q2
2010Q1
2009Q4
2009Q3
2009Q2
0.0
2009Q1
0%
Loss Severity
As of 11Q4
page 13
0%
San Francisco
New York
San Diego
Raleigh
Seattle
Boston
Washington - NoVA - MD
Philadelphia
Los Angeles
Orange County
New Orleans
Fort Lauderdale
Jacksonville
Norfolk
San Jose
Memphis
San Antonio
Sacramento
Portland
Inland Empire
Tampa
North - Central New Jersey
St. Louis
East Bay
Chicago
Dallas - Fort Worth
Denver
Atlanta
Oklahoma City
Stamford
Long Island
Las Vegas
Phoenix
Baltimore
Cleveland
Kansas City
Salt Lake City
Austin
Minneapolis
Palm Beach County
Nashville
Miami
Hartford
Indianapolis
Milwaukee
Charlotte
Houston
Detroit
Columbus
Orlando
Richmond
Cincinnati
Pittsburgh
BIFURCATION IN LIQUIDATION: LARGE COASTAL METROS GETTING
BETTER EXECUTION
CMBS LOSS SEVERITY AT LIQUIDATION, BY METRO, ON 2009 & 2010 LIQUIDATIONS
90%
Loss Severity
80%
70%
60%
50%
40%
30%
20%
10%
Sources: PPR; Trepp
page 14
2012 CMBS MATURING LOANS WILL CONTINUE TO STRUGGLE
PERCENT OF LOANS ABLE TO SECURE TAKE-OUT PROCEEDS UNDER VARIOUS ECONOMIC SCENARIOS
90%
% Not
Refinanceable
80%
70%
60%
50%
40%
30%
20%
10%
0%
All CMBS
Base Case
06/07 Vintage
Fed Stress
Source: PPR, Trepp
Note: Underwriting standards at refinance vary based upon economic outlook.
Modified Loans
As of 12/31/2011
page 15
BANKS BEGINNING TO MOVE LEGACY LOANS OFF THE BOOKS
BANKS’ NON-PERFORMING LOAN SALES BY QUARTER
10
$B
8
6
4
2
CRE
Sources: PPR; SNL; FDIC
2011Q4
2011Q3
2011Q2
2011Q1
2010Q4
2010Q3
2010Q2
2010Q1
2009Q4
2009Q3
2009Q2
2009Q1
0
Non-CRE
As of 11Q4
page 16
WHAT DISTRESSED OPPORTUNITY LOOKS LIKE
BANKS’ CRE OREO SALES BY QUARTER
4.5
$ (Billions)
# of Transactions
2,500
4.0
2,000
3.5
3.0
1,500
2.5
2.0
1,000
1.5
1.0
500
0.5
$ Billions
Source: PPR, CoStar Group, Inc.
2011Q4
2011Q3
2011Q2
2011Q1
2010Q4
2010Q3
2010Q2
2010Q1
2009Q4
2009Q3
2009Q2
0
2009Q1
0.0
# of Transactions
As of 11Q4
page 17
chapter 3
page 18
Relative Value in Today’s Environment
LENDING ON SMALLER CRE ASSETS REMAINS CONSTRICTED
CHANGE IN TOTAL BANK CRE LOANS OUTSTANDING BY LOAN SIZE
80%
60%
40%
20%
0%
(20%)
(40%)
<$100K
2003-2008
Sources: PPR; FDIC
$100-$250K
$250K-$1M
>$1M
2008-2011
As of 11Q3
page 19
CRE LENDERS HAVE TURNED THE CORNER
CRE LENDING INDEX BY SOURCE OF CAPITAL
180
Lending Index
(2007Q2 = 100)
160
140
120
100
80
60
40
20
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
0
Conduits
Commercial Banks
Sources: ACLI; Moody’s Analytics; Commercial Mortgage Alert; MBA; PPR
page 20
Life Insurers
Fannie/Freddie
Total
As of 11Q4
NORTHEAST BANKS ARE LENDING AGAIN
2011 CHANGE IN CRE LOANS OUTSTANDING, BY STATE OF BANK HEADQUARTERS
% Change in CRE
20% Loans Outstanding
10%
0%
(10%)
(20%)
(30%)
(40%)
DE
WI
NM
CO
UT
NV
KS
GA
ID
FL
AZ
TN
MI
SC
WA
IL
OR
TX
MS
MO
MN
MT
IN
NC
CA
PA
CT
SD
IA
OH
AR
HI
KY
VA
AK
DC
WY
MD
NE
OK
LA
ME
WV
VT
NH
NJ
AL
MA
NY
ND
RI
(50%)
Sources: PPR; FDIC
Note: Banks with greater than $50 billion in assets excluded from analysis.
page 21
As of 11Q4
LENDERS PULLED BACK IN 2H2011
DEBT YIELD BREAKOUT BY DEAL ISSUANCE TIMEFRAME
% of New Issuance
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2004
2005
< 6%
Sources: PPR; Trepp
2006
6-8%
8-10%
2007
2010H2
10-12%
2011Q1
12-14%
2011Q2
14-16%
2011Q3
2011Q4
>16%
As of 11Q4
page 22
LENDING SPREAD DIFFERENTIALS BETWEEN LARGEST MARKETS
AND REST OF U.S. REMAIN WIDE
LENDING SPREAD DIFFERENTIAL FOR LARGEST SIX U.S. MARKETS VERSUS REST OF U.S.
Spread (BPs)
35
30
25
20
15
10
5
0
(5)
(10)
Sources: PPR; ACLI
page 23
2011Q4
2011Q2
2010Q4
2010Q2
2009Q4
2009Q2
2008Q4
2008Q2
2007Q4
2007Q2
2006Q4
2006Q2
2005Q4
2005Q2
2004Q4
2004Q2
2003Q4
2003Q2
2002Q4
2002Q2
2001Q4
2001Q2
2000Q4
(15)
As of 11Q4
LENDERS CATERING TO SMALLER ASSETS CAN FIND ATTRACTIVE
RETURNS
COMPARED TO LOANS GREATER THAN $25 MILLION, LENDING SPREADS BY LOAN SIZE
OAS (BPs)
120
100
80
60
40
20
0
Less than $2 million
2011Q4
Sources: PPR; ACLI
page 24
$2 - 5 million
2011 Average
2010 Average
$5 - 15 million
$15 - 25 million
2000-2008 Average
As of 11Q4
LENDERS CAN GET PAID FOR INCREMENTAL RISK IN
TERTIARY MARKETS
ADDITIONAL SPREAD AND SPREAD PER UNIT OF YIELD DEGRADATION, COMPARED TO 65% LTV
LOAN IN TIER I MARKET
20.0
Spread/YD
Add'l Spread
2.50%
18.0
16.0
2.00%
14.0
12.0
1.50%
10.0
8.0
1.00%
6.0
4.0
0.50%
2.0
0.0
0.00%
Tier I
75% LTV Spread/YD
75% LTV Add'l Spread
Tier 2
Tier 3
85% LTV Spread/YD
85% LTV Add'l Spread
Sources: PPR; ACLI
Note: This analysis captures office loans and assumes 2012Q1 PPR cap rates for each asset.
As of 11Q4
page 25
A GOOD TIME TO BE A LENDER
Default Rate & Value
Change
Lending Spread
(BPs)
40%
450
400
30%
350
20%
300
250
10%
200
0%
150
100
(10%)
50
(20%)
0
(30%)
(50)
1972
1976
1980
Default Rate
1984
1988
1992
NCREIF Value Change
Sources: Snyderman/Esaki; FitchRatings; Giliberto-Levy; PPR; Trepp; NCREIF
Note: Purple bars combine actual to date & Compass projected defaults
page 26
1996
2000
2004
2008
2012
Giliberto-Levy Spreads
As of 11Q2