A new eblast service I receive is from CoStar: It is a WatchList which is a weekly column focusing on distressed market conditions, commercial real estate properties, mortgages and Corporations Published by CoStar News. I highly recommend it...
The following article which was published today shows the disparity in the views of bankers who think their problems are manageable and those of real estate practitioners who believe that they are living with their head in the sand with the depth of the problems for CRE loans. A key part of this article is that banks are reducing their exposure to CRE which means that they are not making any loans to new borrowers anytime soon.....which is contrary to the goals of the bailout our Federal government initiated and explains why things are not getting any better....money is currency and needs to flow for it to grow....but there is always next year, right?
Banks Report CRE Exposure Risky but Manageable
Multifamily Lending Showing Signs of Turning a Corner
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By Mark Heschmeyer
December 2, 2009
For the U.S. banking sector overall, commercial real estate exposure remains a significant risk. But it appears the risk level is becoming generally more manageable -- more so among the largest financial institutions than regional mid-size and smaller banking institutions, according to the Federal Deposit Insurance Corp.
As of Sept. 30, FDIC-insured commercial banks and savings institutions held $1.1 trillion of nonresidential commercial real estate loans and another $216.5 billion in multifamily loans. Of that exposure, approximately $149.3 billion of that had been charged off, was delinquent or the collateral backing the loan turned over to the banks, according to the FDIC.
Overall, the amount of commercial real estate and multifamily loans becoming delinquent has stopped increasing. While they are still much higher than June 2008, nonresidential income-producing property loans becoming delinquent have seemed to hit a plateau.
Noteworthy, too is that multifamily delinquencies have started to decline. Equally encouraging is that banks have also begun disposing of foreclosed-upon multifamily properties. The total volume of such assets has dropped from $1.58 billion three months ago to $1.44 billion. Banks also again increased their lending on multifamily properties in the last three months, marking the second quarter the amount has risen. The total outstanding loan volume on multifamily properties has increased from $210.6 billion at the end of March to $216.5 billion at the end of September - a nearly 3% increase.
However, banks have not shown equal leniency on nonresidential income producing properties. The amount of such properties being foreclosed upon or taken over by banks continues to escalate rapidly - more than doubling in the past year to $5.84 billion.
According to the Federal Reserve's October Senior Loan Officer Opinion Survey on Bank Lending Practices, conditions in the nonresidential construction sector generally remained quite poor. Nonresidential construction and employment continued to decline. Also, bank lending standards and terms tightened on commercial real estate loans because of widespread paydowns and charge-offs. At the same time, demand for new commercial construction as developers are reluctant to begin new projects or purchase existing projects under current poor economic conditions, which include a surplus of office space as firms downsize and vacancies rise.
Nearly all of the nation's 22 largest banks reported to the U.S. Treasury that they were actively reducing their exposure to commercial real estate loans, because they expected delinquencies to persist. The outstanding balance of commercial real estate loans among the 22 banks decreased 1% in September. However, they continued to show a willingness to renew loans to existing customers. Total renewals of commercial real estate accounts increased 18% from August to September.
Fitch Ratings completed a review of commercial real estate exposures across its universe of rated U.S. banks in November. In that review, Fitch estimated that simply taking into account assumed vintages by origination year and average changes in actual and expected values of commercial real estate, this total balance is exposed to a potential impairment of 10%. This level of impairment reflects the amount current loan balances may need to be written down in the future to support an assumed loan-to-value ratio of 75%.
Notably, Fitch said that does not mean it expects banks to report charge-offs in their commercial real estate portfolios of 10%. Rather, the 10% is Fitch's attempt to quantify the problem, which in this case represents the difference in value between current loan balances and the level such loans would need to be adjusted to achieve an underwriting standard of a loan to value of 75%.
A 10% reported loss rate would be a high water mark for this asset class and would exceed the levels of losses reported by the industry in the commercial real estate crisis of the late 1980s and early 1990s. Fitch said it does not believe the magnitude of the problem in today's commercial real estate portfolios exceeds the levels of past crisis levels in aggregate.
Fitch's analysis shows that a relatively small 20% of this impairment, or 2% of total outstanding, is represented by loan balances in excess of assumed collateral values (i.e. loan to value greater than 100%). The remainder of this impairment, which is the majority of the balance, represents loan balances that are protected by collateral values, but at levels that Fitch would view as at risk until meaningful improvements in commercial real estate values become evident.
Importantly, these amounts exclude the roughly $500 billion of construction loans, including residential construction loans, that are subject to even greater risk.
While a 10% impairment would appear manageable even after accounting for the greater risk exposures represented by the construction portfolio, the size, geographic concentrations, and product mix of individual bank portfolios differ materially and need to be evaluated on a case-specific basis, Fitch noted, for example, that none of the four largest U.S.-based banks (assets in excess of $1 trillion) have commercial real estate in excess of 10% of total loans.
Overall, commercial banks and savings institutions insured by the Federal Deposit Insurance Corp. (FDIC) reported aggregate net income of $2.8 billion in the third quarter of 2009, but loan balances declined by the largest percentage since quarterly reporting began in 1984. Quarterly earnings were more than three times the $879 million the industry earned a year earlier and represented an improvement over the industry's $4.3 billion net loss in the second quarter of 2009. More than 26% of all insured institutions reported a net loss in the latest quarter, up slightly from nearly 25% a year earlier.
The number of institutions on the FDIC's unpublished "problem list" rose to its highest level in 16 years. At the end of September, there were 552 insured institutions on the "problem list," up from 416 on June 30. This is the largest number of "problem" institutions since Dec. 31, 1993, when there were 575 institutions on the list. Total assets of "problem" institutions increased during the quarter from $299.8 billion to $345.9 billion, the highest level since the end of 1993, when they totaled $346.2 billion. Fifty institutions failed during the third quarter, bringing the total number of failures in the first nine months of 2009 to 95.
The U.S. thrift industry broke even for the second consecutive quarter in the third quarter of 2009, the Office of Thrift Supervision (OTS) reported. The industry's profit of $1.3 billion for the third quarter was a significant improvement from the losses of 2008 and early 2009. However, $1.1 billion of the third quarter profit resulted from a non-operating gain at one thrift. Without that gain, the industry's net income would have been $200 million - essentially breaking even.
The number of problem thrifts was 43, up from 40 in the previous quarter and 23 one year ago.
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Paul,
ReplyDeleteUnfortunately, you are missing the boat. DCF has always been in the appraiser’s tool bag. Different approaches are more indicative of value for different properties, in different locations at different times in the real estate cycle. The techniques are not outdated they are simply more or less applicable depending on the situation.
At present, it is a particularly difficult time to appraise and clients may need to understand that although a point value is often reported, the actual value is within a range. In these times with less data, the value range in which the appraiser is estimating a value is likely much wider than in times and in markets in which data is more plentiful.
It is not appraisal techniques that need updating but the client’s approach to appraisal services. They need to be clear about what questions they wished answered. They should seek a value range with the appraiser then offering an opinion as to where he or she thinks the most likely single-point value resides, if a single value is needed. Also, the client might request several values assuming different conditions: a best case, most likely case, and worst case scenario if you will. This worst case would differ from the case in which an owner is in distress, but would relate to unfavorable assumptions for the market and/or lease-up at the property.
Clients need to work with appraisers in getting them the critical data upfront much like they would their lawyer or accountant. I realize in the case of banks we need to be careful about independence, but clients need to provide the relevant information rather than offering incomplete information and referring appraisers to third parties or borrowers for the essential data.
Clients need to understand the scope of appraisals they have requested and its attendant limitations. An appraisal, by mutual agreement of the client and appraiser, may involve a very limited scope with little research or it can involve very extensive research. After report completion, clients are always free to seek an expanded scope for greater reliability of the conclusions or a second opinion. They can also alter their response to the appraisal by modifying the loan-to-value ratio, etc. this may have nothing to do with the quality of the appraisal but is due instead to the limited scope requested. Or it can be an acknowledgement that the point value estimate has reduced reliability, at no fault of the appraiser, but is instead due to a lack of solid market data indicative of current value. Even with DCF, the inputs and conclusions can be suspect if solid data on rents, discount rates, residual cap rates etc are lacking.
Lastly, the fee structure and pay policies for appraisers needs an overhaul. Appraisers need to be paid fairly for their services and provided a 50% retainer for work upfront with payment in full before the appraisal and its findings are released to the client, which was the process 20 years ago. With licensing and the overbearing control by the banks, appraisers are not paid at all on an assignment until 30 days or more after it is reviewed and accepted, which is often more than 60 days from when it was originally engaged. Clients also need to realize that the lowest fee is not always the best choice. Often you do get what you pay for, as the saying goes. In difficult times the work is harder, takes more time and should garner a higher fee than in good times when data is plentiful.
Well here are a few thoughts for you. Have a good one. I have to get back to it.
William R. Hemingway, MAI, MRICS
VP/ Research
BLUMBERG CAPITAL PARTNERS