May 27, 2010
Data Illustrates Continuing Drop in Home Prices (from Standard & Poor)
The March 2010 Standard & Poor’s/Case-Shiller home price index showed that prices of single-family homes fell 3.2% in the first quarter of 2010, but remains above its year-earlier level.
Prices in 13 of the 20 cities tracked by the index fell in March while eight MSAs posted new index lows in March – Atlanta, Charlotte, Chicago, Detroit, Las Vegas, New York, Portland and Tampa. Las Vegas and Phoenix have peak-to-current declines of 56.3 and 51.8%, respectively.
The Case-Shiller index measures repeat sales of homes and reflects a rolling three-month average, so the March data also captured transactions that closed in February and January.
The problem is a continuing oversupply of homes on the market, particularly foreclosures. Foreclosed properties typically sell at a discount, bringing down neighboring home values.
Case Shiller is predicting that the housing glut and foreclosures will drive the index down another 6 to 8% before reaching bottom in 2011.
Capital Economics is also predicting an additional drop in prices of 5% through the end of 2011.
Florida Bank Losses Narrow 86% to $104 Million In First Quarter (from the FDIC)
Operating losses for Florida banks narrowed by 86% on a year-over-year basis in the first quarter of 2010 with the industry’s 278 state-chartered institutions reporting a combined $104.2 million hit to the balance sheet.
A year ago, there were 305 Florida-based banks that endured a composite loss of $756.9 million for the same period from January through March in 2009, according to data provided by the Federal Deposit Insurance Corp.
As encouraging as the narrowing in losses is for the sector, Florida banks are still lagging behind the national industry, which posted its largest net income since the second quarter of 2008. In the first quarter of 2009, the national banking industry posted a net income of $5.6 billion, according to the report.
The losses in Florida reflect the differences in the operations of so-called community banks compared to banking conglomerates. Florida’s community banks are dependent upon real estate and business lending, two sectors that are struggling.
Banking conglomerates, by comparison, are able to post positive results by way of using profits from securities trading and other non-commercial banking activities to help offset their own ongoing losses in real estate portfolios.
Many banks in the state, especially in South Florida, are continuing to spend large amounts of time and money on workouts of problem loans, including foreclosures. Many lenders are also finding more cases where commercial real estate borrowers are having difficulty making payments.
Some banks facing that situation have the added burden of receiving pressure from regulators to boost reserves on some potential problem real estate loans. This is adding to the hesitancy toward renewing some credits and making new loans.
Florida banks had $544.8 million in loan loss provisions from January to March, compared with $950.5 million during the same period in 2009. The recent quarter’s provisions were high on a historical basis, and prospects of similar increases are likely for several more quarters.
Florida banks’ net interest income increased from $1.1 billion in the first quarter of 2009 to $1.2 billion during the same period this year. That is the difference between interest earned on loans and other investments and interest paid on deposits and other liabilities.
Although the FDIC does not provide information on loan volume, there are reports about lending for home mortgages, commercial real estate and other loans remaining at low paces in South Florida.
Banks have been benefiting from ongoing low interest rates. The FDIC data show that for Florida-based banks, the costs of funding earning assets fell from 2.20% in the first quarter of 2009 to 1.36% this year.
First-timers, Boomers Feel Housing Downturn the Most (from The Philadelphia Inquirer)
In a study for the Mortgage Bankers Association, conducted by the University of Kentucky the current financial crisis and recession exceeds the devastation created by other post-World War II recessions.
The report concludes there are growing concerns that the effects of this economic downturn could have a long-lasting effect on the housing market.
Saving rates have risen substantially and many Americans will continue to cut spending sharply out of necessity and others out of fear of what the future holds.
High unemployment and low house prices are widely projected to remain for an extended period, as well as the rise in problem loans at banks that will restrain their willingness and ability to provide credit.
Two groups expected to feel the pinch are young first-time buyers and the so-called active-adult purchasers who downsize as their children grow and move out.
In the first-time buyer group, the impact of a higher unemployment rate for Americans ages 16 to 24 could have a lasting effect on lifetime earnings and attitudes toward risk and social policies.
Those active-adults nearing retirement are delaying it and re-entering the labor force in an effort to rebuild some of the retirement wealth that was wiped out by the recession.
The housing industry had been banking on both of these groups to sustain growth during the coming decades, especially the empty-nester baby boomers.
The tougher economic circumstances for twenty-somethings and fifty-somethings will weigh on housing demand over the coming decade according to Moody’s Economy.com’s and the first-time buyer and second-home markets will be most directly impacted.
Today’s financing market is imposing more discipline by requiring bigger downpayments and better credit scores for buying homes. And the financial-reform package passed last week by the Senate includes provisions that, in addition to restricting prepayment penalties and controlling mortgage-broker compensation, would force lenders to consider applicants’ income, assets, and credit history before making a loan.
If this change is permanent, perhaps homeownership rates will come down to pre-1995 levels – the year they started to climb.
The homeownership rate slipped to 67.2% in the first quarter of 2010, its lowest reading since the first quarter of 2000.
Homeownership rates averaged 64% from 1985 to 1994, but accelerated in 1995 because of government policies that encouraged homeownership, especially for previously underserved low- and moderate-income buyers.
Rates reached record highs of 69% because of easy lending during the housing boom.
Although it is probably likely that the lack of good-paying jobs will delay the entry of the current 16- to 24-year-olds into the homebuying market, it is less clear what effect the re-entry into the workforce of baby boomers is going to have. In some cases, this may keep inventory levels down, as the boomers stay in their current homes while going back to work. On the other hand, they may opt to ‘trade down’ in an effort to maximize their retirement dollars while they’re replenishing their IRAs and 401(k) accounts.
Commercial Vacancies to Peak in Early 2011 (from the National Assocation of Realtors)
According to a report published by the National Association of Realtors, vacancy rates continue to rise in most commercial sectors and are not expected to level out in most markets until the end of this year or early 2011.
Lawrence Yun, NAR chief economist, says there is one bright spot in commercial real estate as the multifamily sector can expect increased demand as the economy creates jobs and new households are formed, likely in the second half of this year.
However, the office, warehouse and retail sectors continue to experience the delayed effects of the recession. These sectors should see gradual improvement after jobs pick up and create additional demand for space, meaning a broader improvement in commercial real estate is likely in 2011.
The Society of Industrial and Office Realtors in its SIOR Commercial Real Estate Index, an attitudinal survey of nearly 700 local market experts, confirms that significant fallout from the recession remains, but to a lesser extent.
The SIOR index, measuring 10 variables, increased 2.7% points to 38.2 in the first quarter, compared with a level of 100 that represents a balanced marketplace. This is the second gain following nearly three years of declines; the last time the market was in equilibrium was in the third quarter of 2007.
Development activity remains at a standstill with nine out of 10 respondents saying that it is virtually nonexistent in their markets.
Looking at the overall market, commercial vacancy rates appear to be approaching a plateau, according to NAR’s latest Commercial Real Estate Outlook. The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by CBRE Econometric Advisors.
With an elevated level of sublease space available, vacancy rates in the office sector are projected to increase from 16.9% in the first quarter of this year to 17.6% in the first quarter of 2011, but should ease later next year.
Annual office rent is likely to fall 2.3% this year and decline another 2.1% in 2011. In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is forecast to be a negative 24.6 million square feet this year and then a positive 25.5 million in 2011.
Leasing activity in the industrial sector is below historical levels with higher vacancies, more tenant concessions from landlords and a steeper decline in rental rates. In addition, obsolete structures remain on the market. Industrial vacancy rates are expected to rise from 14.3% in the first quarter of 2010 to 14.8% in the first quarter of 2011, then decline modestly as the year progresses.
Annual industrial rent will probably drop 6.3% this year, and decline another 1.5% in 2011. Net absorption of industrial space in 58 markets tracked is seen at a negative 90.0 million square feet this year and a positive 135.6 million in 2011.
Retail vacancy rates should rise modestly from 12.6% in the first quarter of this year to 12.8% in the first quarter of 2011, and should hold at that level for most of next year.
Average retail rent is projected to decline 1.5% in 2010, then edge up by 0.4% next year. Net absorption of retail space in 53 tracked markets is likely to be a negative 3.7 million square feet this year and then a positive 8.9 million in 2011.
The apartment rental market (multifamily housing) is expected to benefit from an improving economy and job market. Multifamily vacancy rates are forecast to decline from 7.3% in the first quarter of this year to 6.3% in the first quarter of 2011.
With recent additions to supply, average rent is likely to slip 1.5% this year, and then rise 1.2% in 2011. Multifamily net absorption should be 145,700 units in 59 tracked metro areas this year, and another 214,500 in 2011.
Posted by Scott R. Lodde
May 27, 2010
Survey: 4 in 10 homeowners would consider walking away from ‘underwater’ mortgage (from the Sun Sentinel)
A study conducted this month by Harris Interactive for real estate firms Trulia and RealtyTrac touched on a topic that affects many South Floridians … foreclosure.
According to a national online survey, more than 40% of homeowners with a mortgage say they would consider abandoning an “underwater” property.
More than 371,000 homes in Palm Beach, Broward and Miami-Dade counties were worth less than the mortgage amount at the end of the first quarter according to Zillow.com. An executive at Trulia “absolutely expects” more homeowners to walk away in the coming years as the stigma of foreclosure fades.
Because South Florida home prices have fallen by more than 40% since the peak of the housing boom in 2005, underwater borrowers here may have to stay put for a decade or more until they can break even in a sale. Some of these homeowners say they’re unwilling or unable to wait that long.
Adding to the frustration, many borrowers are disgusted with their lenders, feeling as though the banks are “stonewalling” their attempts to seek mortgage modifications and stay in the homes.
The Mortgage Bankers Association issued a recent report that sent mixed signals about delinquencies and foreclosures. Some figures indicating a drop in the rate of distressed loans weren’t seasonally adjusted, but other numbers that were adjusted showed minor increases in late payments. The chief economist for the group said that Florida is getting worse when it comes to delinquencies and foreclosures.
Banks Continue to Embrace ‘Extend and Pretend’
According to report in Bloomberg, a growing number of hotel investors are finding that their lenders are increasingly willing to redo loans often backed by struggling properties rather than risk taking an immediate loss.
In the article, an executive from the consulting firm of Deloitte Real Estate Services stated that banks are less likely now to take back an asset as we begin to see some positives in the economy such as a decrease in the unemployment rate and increased consumer spending.
The trend called “extend and pretend” continues as lenders postpone inevitable losses on owners swamped by debt taken on during the commercial real estate boom of 2002 to 2007.
Lenders and owners restructured $10.5 billion of troubled debt during the first quarter, up from $2.2 billion a year earlier, according Real Capital Analytics Inc. Such deals accounted for 49% of newly troubled and foreclosed commercial properties in the first quarter, compared with 13% in the first quarter of 2009.
Real Capital Analytics defines restructurings as those in which loan terms have been modified, the lender remains in that role and the owners retain a majority stake in the property.
Although hotels have been a main beneficiary of lenders’ willingness to redo loan terms, a 40% decline in commercial real estate values since the 2007 peak is also squeezing owners of office buildings, malls and apartments.
An estimated $1.4 trillion in commercial mortgages will mature through 2014, according to Deloitte. It is estimated that 65% of those would have difficulty to be refinanced, which could mean extensions for many since lenders continue to be concerned about the risk and cost of foreclosing. Banks also don’t want to hassle with trying to unload properties they take over.
A recovery of the U.S. hotel industry isn’t likely until 2011 because room rates are down and commercial real-estate values have plunged. Net occupancy will decline 0.2% this year as the addition of rooms will outpace demand, according to estimates by Smith Travel Research Inc.
According to the article, regulations enacted in the fourth quarter are enticing banks to restructure. A regulatory directiveby the U.S. Federal Reserve in October allowed lenders with current loans worth more than the underlying property to split up the debt and increase backup funds for only a portion of the loan. In addition, the Internal Revenue Service changed the Real Estate Mortgage Investment Conduit rules, which are the guidelines that govern CMBS trusts, allowing certain commercial- mortgage borrowers to modify and restructure their securitized loans without triggering tax penalties. The new rules make it possible for loans to be transferred to special servicers prior to default.
Preceding the rule change, the special servicers, who hold the power to modify, extend or liquidate CMBS loans, weren’t able to initiate the workout process until the loan was already in default.
Florida Bank Failures Cost FDIC $1.3 Billion in Losses in 2010
Florida, which already leads the nation in bank seizures this year along with Illinois, is on pace to experience 27 financial institution failures in 2010, according to a new report from CondoVultures.com.
Regulators seized their 10th Florida-based bank of the year on May 21st, closing the Bank of Bonifay with $243 million in assets. The closure produced an estimated loss of nearly $79 million for the FDIC.
So far this year, the FDIC has absorbed losses of nearly $1.3 billion related to Florida bank failures. This is in addition to the $7.3 billion the FDIC lost in 2008 and 2009 related to 16 other Florida bank failures, according to the report.
The FDIC established a 500-person bank seizure and asset sales satellite office in Jacksonville, Fla., in September 2009. Given the FDIC office and the challenges of the real estate market, it is possible that the regulators will close more than two dozen Florida banks this year.
A typical foreclosure now takes about 18 months to complete at a cost of at least $100,000.
Regulators have already closed 68 U.S. banks this year after closing 140 banks in 2009 and 25 in 2008. The FDIC insurance recovery fund has had to absorb losses of $16.1 billion and counting in 2010, $36.5 billion in 2009, and $10.4 billion in 2008, according to FDIC data.
Florida’s bank failures rank it atop the list for the states with the most seizures this year. Georgia ranks second with seven failures, and Washington State is third with five failures. Rounding out the top five rankings are California and Minnesota with four each, according to the report.
NAR urges Congress to combat commercial real estate crisis (from the National Association of Realtors)
With the commercial real estate markets experiencing its worst liquidity challenge in almost 20 years the NAR, asked Congress to take action to prevent a deepening crisis in testimony to the U.S. House of Representatives Subcommittee on Oversight and Investigations.
According to the NAR’s testimony, the crisis is driven by a confluence of high unemployment, a slow economy, weakening commercial property fundamentals, and an increase in commercial loan delinquencies. Commercial real estate is the basis for much of the growth in the American industry and economy, and having a stable and well-functioning commercial market is crucial to our nation’s economic recovery and the market is now in the midst of a financial meltdown and many property owners are underwater.
The group stated that, “we cannot regain our footing until action is taken on such issues as an enhancement of liquidity and extensions of terms for performing properties.”
The NAR outlined a number of proposals he urged the congressional panel to consider.
First, changes that will boost lending to the commercial real estate and small business markets. Currently, due to the slumping economy and falling commercial real estate values, many commercial banks have tightened their credit standards and reduced their loan volumes. Credit unions have often filled this need in the past, but they are hampered by a business lending cap of 12.25% of total assets. NAR strongly supports H.R. 3380, “Promoting Lending to America’s Small Businesses Act,” which would increase the cap on credit union lending to 25% of total assets.
Second, lenders should be encouraged to extend the term of current loans but they have been wary of offering extensions because of oversight and regulatory concerns. Incentives and improved cash flow for investors of commercial property would help fend off some of the challenges the market faces and soften some of the commercial liquidity crisis.
Third, the most effective means of improving the cash flow on real property is to provide more generous depreciation allowances. NAR believes that some combination of accelerated depreciation (or shorter recovery periods) and passive loss relief would be significant investor incentives.
Fourth, NAR supports developing a mortgage insurance program for commercial debt and an extension of the Term Asset-Backed Securities Loan Facility (TALF) program. A proposed mortgage insurance program would provide insurance on the difference between the current value of a commercial property and the debt service. NAR believes an extension of TALF will help stimulate the commercial mortgage-backed securities market and that the program requirements should be less burdensome for investors.
During the testimony, a NAR spokesperson stated, “The commercial real estate sector supports more than 9 million jobs and generates billions of dollars in federal, state and local tax revenue. NAR believes the commercial market is vital to American life and urges Congress to act quickly on these crucial issues.”
Posted by Scott R. Lodde
May 24, 2010
John Mauldin is the author, writer and editor of the popular (and free) Thoughts from the Frontline e-letter which goes to well over 1,000,000 readers weekly, and is posted on numerous independent websites. He also edits the free weekly e-letter “Outside the Box” which features the writing of original thinkers on a wide variety of subjects.
In his most recent newsletter, entitled The Case for a Fed Rate Hike (May 22, 2010), John writes about a variety of topics including employment, the money supply, inflation and the inverted yield curve.
Most interesting is Mauldin’s analysis of the money supply. He notes that the growth in the money supply is slowing. And points out that one of the measures of money supply called the MZM (Money of Zero Maturity) has been flat for well over a year and was actually down the last two months.
The broader M2 money stock has also flat-lined for well over a year, a phenomenon, as points out that has not occurred over the last 30 years.
In both measures there was a large increase beginning in the middle of 2008 as the Fed pumped the money supply in order to inject liquidity into the system. This was basically the $1.25 trillion purchase of mortgages. However, as Mauldin points out, the Fed’s intervention was not boosting the money supply as much as it did in the beginning.
Why? Due to the tremendous decrease in lending by commercial lending at US banks which is down almost 25% in less than a year and a half.
With the money supply slowing, Mauldin believes the Fed will not be reducing its mortgage holdings any time soon. That will come when it is obvious that a recovery is firmly entrenched. He doesn’t see a scenario where they can risk reducing the money supply any more than they already have, especially given the subdued outlook for inflation for some time to come.
Posted by Scott R. Lodde
May 17, 2010
Debt Capital Market Update(from Jones Lang LaSalle Hotels)
According to a recent update from Jones Lang LaSalle Hotels there continues to be an imbalance between the limited supply of available properties and the vast amount of available equity capital on the sidelines. According to the report, this has created a unique window of opportunity whereby the market has transformed itself into a “seller’s market”. So far in 2010 only $1.1 billion of hotel transactions have been completed in the United States.
Despite a limited amount of distressed asset sales, increased activity has been seen in structured equity recapitalizations fueled primarily by the inertia of balance sheet lenders and special servicers.
The most activity has been seen with mezzanine lenders who have the ability and willingness to invoke the UCC (Uniform Commercial Code) foreclosure process. This is the process in which the lenders foreclose out the equity interests pledged by hotel owners (borrowers), allowing the mezzanine lenders to step into the equity position and take control of problem hotel assets. Unlike a real estate foreclosure which can be a cumbersome and sometimes litigious process, the UCC foreclosure process allows the mezzanine lender to quickly and efficiently take control of such hotel properties within a four to six week timeframe.
Jones Lang LaSalle Hotels has been recently involved in some of the well-publicized UCC Foreclosures including the Gansevoort Hotel in Miami, the Four Seasons Resort and Club in Las Colinas, and the W Hotel and Residences Downtown Atlanta. The company believes that as fundamentals continue to improve and the value curve begins its upward climb, we are likely to see more and more mezzanine lenders take action against troubled borrowers and step into a controlling position in order to control their own investment destiny. This will also likely increase the value of such mezzanine positions leading to a more vibrant market for mezzanine position trades.
Extended-stay Hotel Demand at Record High (from The Highland Group)
According to the U.S. Extended-Stay Lodging Report: First Quarter 20010 published by the Highland Group, extended-stay hotels accommodated 19.3 million room nights in the first quarter of 2010 as demand surged 16.5% compared to the same period in 2009. Room nights accommodated were the highest ever during a first quarter period.
Strong demand growth combined with a sharp decline in new rooms opening and occupancy rose more than 10%. Quarterly increases in occupancy of this size have not been seen for at least a decade. Falling decreases in average rate boosted extended-stay RevPar to its first positive quarterly increase following six consecutive quarters of decline.
Project Openings to Be Cut In Half (from Lodging Econometrics)
According to a report from Lodging Econometrics, new hotel opening are now forecast to decline 54% in 2010 as compared to 2009. The company projects 715 hotels with 80,830 rooms will open this year with gross supply estimated 1.7%; lower than other industry predictions.
For the first quarter, the hotel construction pipeline stood at 3,395 projects with 396,797 rooms. The Q1 2010 pipeline represents the first time in four years the pipeline has fallen below 400,000 rooms. Totals have also now decreased 42% by projects and 49% by rooms from the Q2 2008 peak.
According to the report, the 300,000-room pipeline threshold will be attained early next year. For 2011, they expect 654 hotels with 63,141 rooms to come online for a gross growth rate of 1.3%. There have now been seven consecutive quarters of rapid pipeline declines.
They report that Courtyard by Marriot accounts for 16% of all total upscale projects in the pipeline with 110 and that three Marriott International brands make up a combined 42% of the upscale pipeline. IHG has the largest pipeline of any company at 675 projects and 67,992 rooms.
In terms of markets, the top five pipeline markets of New York, Washington, Houston, Phoenix and Dallas make up 49% of the total rooms pipeline and 49% of all guestrooms expected to open in 2010.
Posted by Scott R. Lodde
May 9, 2010
Condos with water views escaped brunt of housing crash
A recent article published in the Sun Sentinel (Broward/Palm Beach, Florida) discussed the effect of water views and its affect on real estate values during the current recession. Nearly every condo in South Florida lost value in the past four years, with some dropping 50% or more. However, despite this overbuilding oceanfront properties did not take the same hit as those build more inland.
The median price for existing condos in Broward in March 2010 was $73,600, a 66% drop from the February 2006 peak of $216,800, according to the Florida Realtors association.
Palm Beach County’s March 2010 median was $90,900, a 61% slide from the July 2006 peak of $231,300.
Short-term investors helped create the housing boom during the early part of the past decade, scooping up units at preconstruction prices and then flipping them for huge profits in a matter of days or weeks.
To meet the seemingly insatiable demand, and with a dearth of prime locations available, South Florida developers started converting modest apartments – even those near railroad tracks with no water views – into condos, with some prices approaching $300,000.
According to the article, while virtually no buildings have been spared, values in high-end condos hugging the coast have been the most resilient because of the inherent lure of the ocean and Intracoastal Waterway.
Oversupply developed everywhere when developers flocked to the downtowns of Miami and West Palm Beach in the past 10 years, ultimately creating a glut of empty units that still has prices there depressed.
Fort Lauderdale was one area however, where city commissioners limited the number of downtown condo units in response to concerns about overdevelopment.
Las Olas Grand opened near housing boom in summer 2005, but it hasn’t been hurt by vacancies or owners in financial distress. 213 units in the project are selling for $550,000 to $1.8 million, down from $750,000 to $2 million during the boom years. During the first three months of 2010, six units sold there. On average, the sellers got a quarter less than they paid, not bad compared the averages noted above.
In Palm Beach County, Mizner Tower in Boca Raton also has avoided major price declines, in part because it’s a stable development that opened more than a decade before the boom. The 136-unit Mizner Tower, which opened in 1989, sits on the grounds of the Boca Raton Resort and Spa and also has views of the ocean and Intracoastal.
Foreign buyers kick-start Orlando-area condo sales
According to an article published in the Orlando Sentinel, condominiums are now selling faster in Central Florida than they did at the peak of the real estate market four years ago.
In March 2010, buyers closed on 790 condo units in the four-county metro area, 25% more than in March 2006, when real estate agents made 630 sales.
Who is buying all of these units?
According to brokers, industry reports and others, foreign buyers are largely behind the surge.
As an example, about 80% of the sales these days at the Mosaic at Millenia, a south Orlando apartment complex that went condo in 2004, have been to international investors.
According to realtors, they are paying all cash, and their primary purpose is to get a monthly rented unit that provides cash flow with the expectation of some appreciation. Unlike the deals that drove condo speculators during the frenzy of the mid-2000s, these sales aren’t based on incentives or inflated promises of rental income; they aren’t paying inflated prices either. In March 2006, the median price of the condos sold in Metro Orlando was $159,600; by March of 2010, the median had dropped 69% to $49,700.
According to a report by the National Association of Realtors, the sharp decline in prices since the market’s peak in 2005-06 is part of the reason Florida accounted for almost 25% of all U.S. property purchases by international buyers in late 2008 and early 2009. California was second with a 13% share of the foreign market.
Nationwide, those foreign buyers paid a median of $247,100 during the period studied, compared with a median of $198,100 for all buyers. About 70% of the purchases were single-family homes, 18% were multifamily, and the rest were commercial properties.
In Florida, most foreign buyers come from the United Kingdom, other parts of Europe, and Canada.
A recent survey by the Association of Foreign Investors in Real Estate ranked Orlando 12th among U.S. cities for investment opportunities. The last time members felt as strongly about U.S. real estate was in 2003. In the group’s fourth-quarter survey, two-thirds of those who responded plan to increase their U.S. holdings this year compared with 2009.
University of Florida: Florida real estate market has hit bottom
According to the most recent Survey of Emerging Market Conditions published by University of Florida, the Florida real estate markets show the first tentative signs of recovering from the most painful recession in the state’s history.
Results of their first quarter survey indicate that the real estate market in Florida has hit bottom and is in the process of stabilizing across most property types. However, most of the respondents in their survey indicate that the market probably won’t get any worse and a few will tell you that things are getting better.
On the positive side, private capital, both foreign and domestic is continuing to enter the state in search of quality investment deals. As banks start to deal with their problem assets, more deals will come to market.
Another good sign: Life insurance companies have started to re-invest in commercial properties after backing off for the last year and a half as they see the fundamentals of the economy stabilizing and they see the opportunity to get quality assets at a good price.
On the negative side, unemployment continues to be one of the state’s biggest problems, edging up to 12.3% in March, its highest level since the state began keeping count in the 1970s.
Although there is a potential for job growth later in the year, even under the most optimistic assumptions the report indicates it will take three to four years to return to 2006 levels.
Also of concern is the continued reluctance of commercial banks to lend money because of pressure from regulators to manage risks along with depressed values that make it difficult to refinance mortgages.
The retail and office markets are the worst off and until there is an increase in job growth, there is no need for more office space. Apartments continue to be the best market in the state due to high demand from people moving out of foreclosed homes. Statewide, Florida’s new housing market will continue to be slow, a result of more foreclosed homes becoming available.
One of the strongest areas of the state is South Florida, especially Miami-Dade and Broward counties, with their diverse economies, steady migration and influx of foreign capital. The glut of condos in South Florida is actually starting to change hands, investors are beginning to rent them and there is more life in downtown Miami than there has been in a long time.
The report predicts that Florida’s big cities Orlando, Tampa, Jacksonville and Miami are less bad off than the rest of the state, and they’re going to recover quicker than other places.
Jacksonville, in particular, is in a good position because its housing market never got as hot as other markets; and, as a result, it doesn’t have as many foreclosures.
Fitch: Commercial mortgage defaults to keep rising
According to Fitch Ratings, defaults on the loans behind U.S. commercial mortgage backed securities will continue to rise through the year.
The agency expects the overall rate of default for deals it has rated to exceed 11% by year-end.
That spike would follow a more than fivefold increase in loan defaults last year, to 1,464 loans totaling $17.75 billion, with 34% of defaults happening in the last three months of the year.
Fourth-quarter default rates reached their highest ever levels both in principal balance and number of loans with no clear signs of stabilization according to Fitch.
One big area of concern is large loan defaults. In 2009, 56 loans over $50 million in size defaulted, compared with just five in 2008.
Most of those loans were written between 2006 and 2008, which Fitch said was not surprising. In fact, deals made in 2007 accounted for 35.6% of the principal balance of defaulted loans.
Aggressive underwriting and higher leverage in the 2007 is leading to substantially higher default rates. Fitch predicts 10-year cumulative default rates on 2007 Fitch-rated commercial mortgage backed securities to reach 27%.
Retail property mortgage defaults had the most new defaults, taking the top spot from multifamily properties for the first time in five years. After those two, office and hotel mortgages followed. Fitch expects sizable default increases for each property type, with rates likely to increase at accelerated rates for office and hotel loans.
Larger concentrations of hotel loans in recent vintages will translate to higher defaults, particularly among luxury properties, resort destinations and those hotels heavily reliant on group and convention business.
Posted by Scott R. Lodde