The owner/developers are now caught between the illiquid credit market and a significant devaluation of assets. Our severely handicapped and understaffed banks, hedge funds and other note holders now have the task of working out loans or building out projects that their borrowers cannot finish. As we work with these note holders it is clear, they are not effectively equipped to take over and manage properties. At best, note holders are placing receivers to carry out antiquated and busted business plans. At worst, note holders are simply refusing to recognize the current market conditions and the resulting impact on their loan portfolio. All parties are hoping for improved market conditions in the near future. This process is being played out daily which is effecting all lenders and borrowers in the real estate community.
What is now apparent is the painful reality of the greatest evaporation of wealth and liquidity of a generation. Values in home prices have fallen 30%-50%, wiping out home owner’s equity. Equity investments in the stock market are down 50% to pre-1997 levels. All sectors of our economy are laying off workers, causing a dramatic surge in unemployment. Banks are laden with non-performing assets. The recent government TARP funding has only given these banks a hope to continue to operate as “Zombie Banks”, banks with no incentive to write down loans as they would be announcing that they are insolvent. Layoffs, lack of consumer spending, and limited business activity are now poised to dramatically effect the cash flows of commercial real estate. The economy is now taking its toll on all property types and we all expect to see increasing vacancy, decreasing rents, and a drop in NOI. These factors will cause a spike in payment defaults, especially on highly leveraged properties and new construction projects. Approximately $530 billion of commercial mortgages will be maturing between now and 2011. These maturing loans include loans held by banks, thrifts and insurance companies as well as CMBS securities, ($160 billion in 2009 alone). Wall Street created the largest, most reliable and accessible real estate liquidity provider, CMBS. Unfortunately, CMBS has evaporated right before our eyes. The lack of a securitization market will be the number one cause of the pending maturity defaults. Due to the impact of rising vacancy, decreasing NOI's, and surging cap rates, virtually every loan coming due cannot be refinanced at its current loan balance.
The continuing story for 2009 will be how the master/special servicers will handle the massive amount of maturity defaults. Since October 2000 there have only been about 70 bank closures by the FDIC compared to approximately 1,000 during the S&L crisis. The default rate will dramatically increase in 2009/2010. As we know, the infusions of TARP funding and the continued taxpayer bailout have only slightly lessened the pace of bad news from the financial sector. As we continue to see massive losses, like those of AIG, we are forced to question how long the government will continue to backstop the largest major banking and insurance institutions. It is clear that 2009 will be a gut-wrenching, shakeout year for the commercial real estate industry; there will be less capital, lower prices, and certainly lower transaction volume.
David B. Norton Inc. has seen a noticeable shift in our business activity. Increasingly, our company’s expertise is utilized by both financial institutions and owner/sponsors to facilitate “work-out” situations. While most distressed situations require some type of new capital infusion, our first assignment is often in an advisory/consulting capacity. This consulting assignment involves all interested parties in the capital stack: senior lenders, mezzanine lenders, JV equity partners, and sponsors. David B. Norton Inc. has relationships with many investor groups who have a track record of working with current owners to take their projects to the finish line. These same investment groups also work with the lenders to purchase note positions or facilitate short payoffs.
This consultative approach has been the basis for which our company began providing services for financial institutions and owners in the early 1980’s. As the firm’s founder, I know the specific challenges that lenders and real estate owners are facing today. Being a lender for years, and specifically managing distressed bank assets for multiple large banking institutions, I understand the logic and process by which bankers view their loans. Working with the lender is about meeting each bank’s unique needs, regulatory as well as their individual loan investment guidelines. In addition, my firm has the proven ability to distill and present the property’s history and future performance in a way that is most advantageous to the owner. In this way, David B. Norton Inc. is not a typical brokerage firm, but a full service firm providing truly comprehensive real estate investment banking services. More detail regarding the consulting services and projects which we are currently involved with are detailed at: www.davidbnorton.com/consultingservices.html .
“Value Add” has becomes a catch phrase that many use. However, in today’s real estate environment, investment bankers/mortgage brokers must provide a real and measurable value add. As it is conveyed to our firm on an almost daily basis, lenders and investors tell us that our firm provides the most complete in-depth underwriting and analysis presented in a sought-after, professional format. We are told that most brokers simply pick up the phone and pass along leads and e-mail addresses but do not provide any value add. At David B. Norton Inc., we pride ourselves in taking relationships to the next level. In today’s economy, owners, developers, lenders, and investors do not have the time for unproductive discussions without the analysis and real work accomplished, resulting in a consensus recommendation. David B. Norton Inc. produces solutions, we look forward to the opportunity to work with you in the future.