Tampa Commercial Real Estate | Florida Commercial Property

Commentary: This is a blog on Florida and Tampa Area commercial real estate.  Why do we care about a Chicago bank?  Well, Corus had funded numerous area developments, including “Element,” in downtown Tampa, Centergate Lansbrook Village, Palm Harbor (Pinellas County), and Tuscany at International Plaza, Tampa, among others.

Corus was the 90th bank to fail this year, but it won’t be the last, particularly when it comes to Florida.  Florida banks carry a disproportionate number of commercial loans relative to net assets.  When the real estate market in Florida sneezes, Florida banks catch a cold.  In this case, the commercial real estate market has caught much worse than a cold and the effects are seismic shock waves sent through the State’s banking industry.  Bauer Financial keeps records on reported bank asset delinquencies and creates a star system based on financial strength.  It is worth a peek to see where your bank is rated.

FDIC Report on Corus Bank

FDIC Report on Florida’s Economic Profile and Banking Trends

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“We saw a few glimmers of hope with credit losses, though it is still too early to tell”

“CRE is a looming problem and will be a bigger driver of bank failures….Residential is still a bigger issue, but commercial is catching up and I do think it will be a bigger driver of bank losses and failures.”

On “going slow” on bank closures:

“The FDIC does not mandate bank closures. That is the job of the OTC or other regultor. ..its the primary regulators call as to when a bank is closed”

Commentary:  It is not terribly surprising that commercial real estate will be a bigger driver of bank failures.  Anecdotally, commercial banks, with which I have had experience, package their residential loans and sell them to investors as securities.  Although volume of commercial mortgage securities (such as CMBS) increased dramatically over the last decade, by and large, commercial loans (with larger margins than residential loans) have been portfolio holdings, particularly with community banks.

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Commercial Real Estate Opinions

This is an interesting piece on the equity markets from today.  Tony Dwyer of FTN Equity Capital and Lee Munson of Portfolio Asset Management finished their interview talking about the commercial real estate market.  Granted, they were discussing the equity market surrounding REIT’s, which usually leads market fundamentals.  Regardless, the two made points about the market that we have discussed in this forum.  In a nutshell, here were their thoughts (you can click on the picture to watch the entire piece.  They begin the meat of the real estate discussion at the 3:20 mark of the video):

• REITs and Institutional buyers make up a significant portion of all real estate in the market
• Yes, refinancing with banks is a challenge….BUT, the REIT’s don’t necessarily have to worry about refinancing.  Their stock prices have risen quite a bit and they can access equity through the markets to re-balance their debt to equity ratios.
• The two analysts cited Boston Properties as a REIT that took advantage of the current market price to recently access more capital.
• The negativity is already priced in to the market
• The US Government has said that it will intervene in markets that are not functioning properly.  The government will not allow the Commercial Real Estate market to take the banking system down.

I would add to their argument that institutional buyers have written down their fee simple real estate assets substantially and with the rise in the stock market are potentially significantly underweight real estate according to their investment policies.  They could very well be looking to increase their real estate holdings in the near term.

In the end,  the market is profoundly complex and resilient. In spite of all the negative press surrounding commercial real estate of late, this market may not behave they way many of the pundits are predicting, with a massive crash that jeopardizes the foundation of our financial system.

What do you say?

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Source: Richmond Times Dispatch

Exerpts from the above referenced article:

“….But commercial real estate can’t seem to shake its perception as “the next shoe to drop.”

If value write-downs by the country’s two largest pension funds are any indication, the other shoe has already dropped.

California Public Employees’ Retirement System (CalPERS) wrote its real estate holdings down by 35.8 percent as of March 31. The California State Teachers’ Retirement System (CalSTRS) wrote down its holdings by 43 percent for the fiscal year that ended June 30.

The combination of huge real estate value decreases with the surge in the stock market leaves both pension funds under-allocated for real estate.

Translation: Even though CalPERS and CalSTRS just absorbed enormous losses in real estate, they now need to focus on making new real estate acquisitions at a time when many buyers are on the sidelines.”

“…This trend should actually help increase the volume of real estate transactions at a time when investment sales are absolutely anemic.”

“….One industry insider coined the phrase, “a rolling loan gathers no loss,” which aptly describes current banking protocol where it makes more sense to extend loans rather than push borrowers into default at maturity.”

Commentary:  We have heard overwhelmingly from the press that commercial real estate is doomed.   I found the above referenced article contrarian to current popular opinion.    Not mentioned in this article, is the billions of dollars that are stacking up on the sidelines from vulture funds planning on buying prized assets at pennies on the dollar, which could potential prevent the bottom dropping out of the market, as many predict will happen.  Commercial real estate investment may still end up becoming a financial  apocalypse, but there will be forces acting in the opposite direction of the predicted collapse.  One thing that I have learned over my career in financial services and real estate is that when the majority predicts a certain outcome to a situation, rarely does the prediction actually play out as planned.

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Almost $165 billion in loans are due for renewal according to First American CoreLogic (source Bloomberg).  Orlando led the way in June with $96.9 million in loan maturities, followed by Memphis with $96.2 million.  It is widely predicted that maturing loans from now until 2012 will cause a significant amount of upheaval in the commercial markets.  Most of these loans were written with 5 year maturities and with the real estate market peaking somewhere around 2005-2006 (depending on the sector), the balance of many of these mortgages will in all likelihood be greater than the real estate is worth.

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CMBS defaults continue to increase.  Not surprisingly, the 2006 and 2007 vintages faired the worst resulting from the most aggressive underwriting standards in the go-go peak of the market.  For those unfamiliar with these instruments, they account for roughly 25% of the total debt on US commercial property.  The instruments are used primarily for very large commercial deals, packaged to provide some diversity and sold in to the debt markets.  Costar is reporting that Q1 2009 reported defaults rose to 2.25% from 1.62% in Q4 2008.  These markets remain locked, reflecting the lack of confidence investors have for the stability of the assets backing the notes.  (More info on CMBS defaults)

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