Although CRE debt liquidity has improved , existing commercial real estate loans continue to go into default, enter the Special Servicing phase or, are being posted for foreclosure altogether. The likely scenario now unfolding is Borrowers have just flat run out of cash to pay debt service and/or Lenders have grown impatient with lengthy debt restructuring negotiations.
Foreclosure postings in the DFW area are getting higher profile based on statements made last week by George Roddy, CEO of Addison, Texas based Foreclosure Listing Service following an announcement that Irish Anglo Bank had posted Turtle Creek Village and Office Complex. Apparently workout negotiations with pension fund advisor Common Fund were unsuccessful. The premier Oak Lawn property was posted for a early April foreclosure. Anglo Irish Bank also posted a premier land tract in Dallas’ Uptown area along with a separate tract near Northpark Mall.
While the quality and size of assets seem to be increasing, the overall volume of properties headed to foreclosure has remained fairly stable according to Roddy albeit 340 Commercial Properties are posted in April. This is a positive sign that indeed, 2011 may be providing the footing everyone has been looking for in terms of a recovery for commercial real estate in the DFW Metroplex.
DFW is not the only Southwest market where large commercial loans are in default. The Broadmoor Office Complex in Austin with its $78m loan balance entered Special Servicing status in mid-January. There will continue to be defaults throughout the major Texas markets on overleveraged properties.
Transaction volumes are increasing especially in core assets and multi-family. However, not every sale transaction is optically clear. For example, when a Bank or Special Servicer wants to clear an asset off their books, they may very well sell the existing mortgage or offer a discounted payoff (“DPO”) that most of the time requires new debt and equity capital to execute such a payoff. These note sales and DPO are often not recorded through a transfer of title so they don’t necessarily show up in transaction sales statistics. Bottom-line, there are probably a lot more deals happening than meet the eye.
With Banks now pushing back on “extending & pretending“, more Note and Asset sales appear to be hitting the market. This is a welcome relief for those of us who have been waiting the past three or more years for assets to begin the process of clearing the market.
The situation at the Special Servicer’s , those entities which oversee the massive amount of defaulted securitized “conduit” debt, has not been as forthcoming with respect to Note and Asset sales. Although the conduit default rate is high there is an ever increasing amount of maturing debt that can only be financed at lower leverage so the probability of continued defaults is a certainty. According to Trepp, there were over $85 billion of CMBS loans in Special Servicing at the end of February, a drop of almost $3.2 billion partially due to efforts by Special Servicers to quickly dispose of small loans via auctions, note and asset sales. Surprisingly, a substantial amount of these assets are still sitting in a state of limbo.
Another solution to moving/speeding up the disposition process might very well be that Special Servicer’s market distressed assets by taking back seller notes in order to maximize the asset value which effectively repatriates the current debt. This is the equivalent of taking a bad debt and turning it into a new good loan by selling the property to a new owner subject to favorable financing terms. Perhaps this methodology will pry loose some of the log jam at the Special Servicers albeit at the risk of the new owner possibly over paying for an asset in return for favorable financing terms.
Regardless of whether or not asset sales are optically clear or exactly how transactions are beginning to clear the market, there are just simply more transactions happening throughout North Texas region. New construction is way down in every property type which is further nurturing the property markets toward solid equilibrium. CRE debt and equity are re-entering the marketplace at a reasonable pace notwithstanding cautious underwriting. For the time being, capital providers ARE NOT underpricing risk which is the natural governance that assures only the deals that should get done, are getting done.