Headlines – Week of July 18, 2010

July 23, 2010

CNBC study: Fla. has top state workforce

In my July 14th posting, I reported on the recent CNBC ranking of America’s Top States for Business.  Texas came out as the #1 state on 40 different measures of competitiveness.  One of these measures included the State’s workforce which ranked its ability to attract businesses.

Under this category Florida moved up from number three in 2009, reclaiming the number one rank the state held in 2008.

Overall, however, the survey ranked Florida No. 28 nationally for businesses, the same rank it held in 2008. While many of the 10 measured qualities changed marginally, the economy hit the state hard. In the 2009 survey, Florida ranked No. 23 for economy; in 2010, the state’s ranking for its economy dropped to No. 48.

The No. 1 workforce ranking in CNBC’s annual study was based on several indicators, including the education level of the workforce, the number of available workers, union membership, and the success of worker training programs.

Full Article

 Top 10 Best Small Cities for 2010

Money magazine has released its list of the best small cities in America. The list, which recognizes locales with great schools, safe neighborhoods, high employment rates, and low crime, is a coveted honor and one that can have a significant economic impact on a growing community.

This year’s top 10 winners are:

 1. Eden Prairie, Minn.

2. Columbia/Ellicott City, Md.

3. Newton, Mass.

4. Bellevue, Wash.

5. McKinney, Texas

6. Fort Collins, Colo.

7. Overland Park, Kan.

8. Fishers, Ind.

9. Ames, Iowa

10. Rogers, Ark.

Full Article

More Americans’ credit scores sink to new lows

According to the credit agency FICO, Inc., the credit scores of millions more Americans are sinking to new lows.

Figures provided by FICO Inc. show that 25.5%  of all American consumers (43.4 million) now have credit scores of 599 or below, marking them as poor risks for lenders. It is unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.

Because consumers relied so heavily on debt to fuel their spending in recent years, their restricted access to credit is one reason for the slow economic recovery.

The findings in the report indicate an increase of about 2.4 million people in the lowest credit score categories in the past two years.  As recently as the mid-2000s, only about 15% of U.S. consumers had scores in the bad range.

Since it can take several months before payment missteps actually drive down a credit score, more are likely to join their ranks.  According to the Labor Department, about 26 million people are out of work or underemployed, and millions more face foreclosure, which alone can chop 150 points off an individual’s score.

On the positive side, the number of consumers who have a top score of 800 or above has increased in recent years. At least in part, this reflects that more individuals have cut spending and paid down debt in response to the recession. Their ranks now stand at 17.9%, which is notably above the historical average of 13%, although down from 18.7% in April 2008 before the market meltdown.

There also has been a notable shift in the important range of people with moderate credit, those with scores between 650 and 699. The new data show that this group comprises 11.9% of scores. This is down only marginally from 12% in 2008 but reflects a drop of roughly 5.3 million people from its historical average of 15%.

 Posted by Scott R. Lodde

Headlines – Week of July 11, 2010

July 16, 2010

STR: Host Study reveals U.S. hotel industry hit hard in 2009

According to a report issued by Smith Travel Research (STR), the U.S. hotel industry ended 2009 with US$92.41 billion in room revenue, the lowest year-end room revenue since 2004 (US$85.18 billion). 

The information was gathered from the Hotel Operating Statistics (HOST) Study for 2009, compiled by STR.

The HOST Study is an extensive and definitive database on the U.S. hotel industry revenues and expenses. The study includes operating statements from more than 5,900 hotels. HOST contains information on hotel revenues and expenses, as well as presents information by department including rooms, food & beverage, marketing, utility costs, property and maintenance, administrative & general, and selected fixed charges.

According to the HOST Study, room revenue in 2009 fell 14.2% in year-over-year comparisons. Total revenue for the industry declined US$13.4 billion to US$127.2 billion. This loss in revenue resulted in a reduction in the Gross Operational Profit (GOP) to 34.0%, compared to 38.2% in 2008.

Each of the three key performance metrics, including occupancy, average daily rate and revenue per available room, reported decreases during every month of 2009.  RevPAR fell 16.7% to US$53.53, the worst decline recorded since STR started tracking the industry in 1987.

Other highlights of the HOST Study:

  • Full-service hotels reported an average occupancy rate of 62.5% and ADR of US$146.74 in 2009, compared with 2008 when occupancy was 67.4% and ADR was US$164.31.
  • Full-service hotels’ GOP for 2009 was 29.4%, compared to 34.3% in 2008.
  • Among the participants, full-service hotels generated US$233.72 in total revenue per occupied room night. Full-service independent hotels produced US$295.22 in total revenue per occupied room night, and full-service chain-affiliated hotels produced US$227.86.
  • Overall, limited-service hotels reported occupancy of 63.3% for 2009 and year-end ADR of US$85.26.
  • GOP for participating limited-service hotels in 2009 was 47.1% (compared with 51.2% in 2008), which amounts to US$9,485 per available room.
  • Among the limited-service hotels, the Middle Atlantic region reported the highest occupancy (68.6%), followed by the Pacific region (68.4%).

 STR/TWR/Dodge: Hotel Construction Pipeline

The total active U.S. hotel development pipeline comprises 3,387 projects totaling 358,739 rooms, according to the June 2010 STR/TWR/Dodge Construction Pipeline Report released this week. This represents a 28.5% decrease in the number of rooms in the total active pipeline compared to June 2009. The total active pipeline data includes projects in the In Construction, Final Planning and Planning stages, but does not include projects in the Pre-Planning stage.

Among the Top 10 Markets by rooms in the In Construction phase:

  • New York topped the list with 9,416 rooms (compared with 12,870 rooms in 2009), which represents a 27.0% decrease from 2009
  • Houston, Texas, with 2,527 rooms (52.0% decrease from 2009)
  • Dallas, Texas, with 2,168 rooms (a 28.0% decrease from 2009)
  • Las Vegas, Nevada, reported 1,243 rooms in the In Construction phase and fell 84.0 percent compared to 2009, for the largest decrease among the top 10 markets.

 Marriott Reports Encouraging 1st Quarter 2010 Earnings

Marriott International Inc.’s (MAR) second-quarter earnings more than tripled, fueling optimism that the lodging industry is finally turning the corner from a brutal downturn.

Wall Street had anticipated a strong second quarter for hoteliers as they continue to benefit from cost-cutting measures and increased corporate and leisure travel despite lingering concerns about the national economy.

Analysts at Robert W. Baird & Co. believe the market is still looking for group bookings to significantly pick up. Baird expects national revenue per available room rates to increase 6% during the second quarter compared to the same period last year and anticipates that increases in revenue will boost profitability for the first time since 2007.

In a sign of improving demand, revenue per available room, or RevPAR, in the first five months of the year rose 1% to $52.99, according to Smith Travel Research Inc. In comparison, it averaged $64.57 in the first five months of 2008.

In the most recent period, Marriott’s RevPAR jumped 9.9%–or 8.2% in constant dollars–beating April’s prediction for 5% to 7% growth.

Posted by Scott R. Lodde

Foreclosures and Bank Repossessions Continue to Affect Home Values

July 16, 2010

Foreclosures and Bank Repossessions Continue to Affect Home Values

Homes lost to foreclosure on track for 1million 2010

According to information provided by RealtyTrac, nearly 528,000 homes were taken over by lenders in the first six months of the year, a rate that is on track to eclipse the more than 900,000 homes repossessed in 2009.

More than 1 million American households are likely to lose their homes to foreclosure this year, as lenders work their way through a huge backlog of borrowers who have fallen behind on their loans.

By comparison, lenders have historically taken over about 100,000 homes a year.

The number of households facing foreclosure in the first half of the year climbed 8% versus the same period last year, but dropped 5% from the last six months of 2009.

In all, about 1.7 million homeowners received a foreclosure-related warning between January and June. That translates to one in 78 U.S. homes.  And there are more than 7.3 million home loans in some stage of delinquency, according to Lender Processing Services.

In a related report from CondoVultures.com, banks repossessed an average of 4,000 South Florida properties per month in the first half of 2010, representing an 83% year-over-year increase for the tricounty region of Miami-Dade, Broward, and Palm Beach.

Miami-Dade led the surge, experiencing a 125% spike in repossessions on a year-over-year basis. Palm Beach experienced a 112% jump while Broward’s repossessions increased 42%.  The report was based on Circuit Court records from Miami-Dade, Broward, and Palm Beach.

At the current pace, nearly 50,000 properties would be repossessed in South Florida in 2010, which would significantly outpace the high of 30,400 repossessions that lenders took control of in 2009. Lenders repossessed nearly 26,250 properties in 2008 after taking title to 10,100 properties in 2007, according to the report.

Besides market conditions, another key reason the number of bank repossessions has increased this year is the implementation of a new online auction technology being used by the South Florida circuit courts to clear the backlog. The online auction technology now allows hundreds of properties to be auctioned off more efficiently.

At the start of the housing crash in 2007, lenders estimated the typical foreclosure would take about six months to repossess a property at a cost of about $40,000 in the loss of debt service, damage, court courts, and attorney’s fees. By 2009 as the foreclosure filings were spiking, the process extended out to an average of 18 months with an estimated cost of at least $100,000 per repossession, according to CondoVultures.

According to some industry professionals and assuming the U.S. economy doesn’t worsen, aggravating the foreclosure crisis, it will take lenders through 2013 to resolve the backlog of distressed properties that have on their books right now.

A new wave of foreclosures could be coming in the second half of the year, especially if the unemployment rate remains high, mortgage-assistance programs fail, and the economy doesn’t improve fast enough to lift home sales.

One of the most alarming results of lenders taking over more than a million homes this year is the effect on home values.

Foreclosed homes are typically sold at steep discounts, lowering the value of surrounding properties.

According to Moody’s Economy.com, the downward pressure from foreclosures will persist and prices will be very weak well into 2012.  Moody’s predicts home prices will fall as much as 6% over the next 12 months from where they were in the first-quarter.

Economic woes, such as unemployment or reduced income, continue to be the main catalysts for foreclosures this year. Initially, lax lending standards were the culprit. Now, homeowners with good credit who took out conventional, fixed-rate loans are the fastest growing group of foreclosures.

Among states, Nevada posted the highest foreclosure rate in the first half of the year. One in every 17 households there received a foreclosure notice. Overall, however foreclosures in Nevada are down 6% from a year earlier.

Arizona, Florida, California and Utah were next among states with the highest foreclosure rates. Rounding out the top 10 were Georgia, Michigan, Idaho, Illinois and Colorado.

Posted by Scott R. Lodde

America’s Top States for Business

July 14, 2010

Texas takes first place in CNBC’s 2010 edition of “America’s Top States For Business.”

The state scored 1,508 points out of 2,500, the best in the history of the study. Last year, the winner was Virginia.

CNBC scores all 50 state using publicly available data on 40 different measures of competitiveness. States received points based on their rankings in each metric. The study separates those metrics into the ten broad categories, with input from business groups including the National Association of Manufacturers. The study weights the categories based on how frequently each is cited in state economic development marketing materials.

So, for example, a strong showing in the Cost of Doing Business category–worth 450 out of a total of 2021 points–is much more important to a state’s overall score than Access to Capital, which is worth 50 points.

The categories and weightings, for a total of 2,500 points, are:

Cost of Doing Business (450 points)

Workforce (350 points)

Quality of Life (350 points)

Economy (314 points)

Transportation & Infrastructure (300 points)

Technology & Innovation (250 points)

Education (175 points)

Business Friendliness (175 points)

Access to Capital (50 points)

Cost of Living (25 points)

Texas wins based upon the strength of its economy which has been top-ranked in the Economy category four years in a row. The Texas economy is the 15th largest in the world, according to government figures; larger, for example, than all the Scandinavian nations combined.

Texas is home to 64 Fortune 500 companies, more than any other state, in a wide variety of industries.

Texas has also managed to avoid the worst of the real estate crisis.

Florida ranked 28th in this year’s study.

The top 10:

1 Texas

2 Virginia

3 Colorado

4 North Carolina

5 Massachusetts

6 Iowa

7 South Dakota

8 (tie) Minnesota

8 (tie) Utah

10 Georgia

Posted by Scott R. Lodde

Podcast Notes – Bank Failures, and the Opportunities They Present

July 13, 2010

Recently, heard a podcast from an interview presented on the Commercial Real Estate Distressed Assets Association (CREDAA).  JW Najarian, one of the founders of CREDAA interviewed Peter O’Kane, a partner with Roanoke Financial Group.  Roanoke specializes in the acquisition, servicing, and disposition of loans and loan pools from banks, FDIC controlled institutions, and other lending intermediaries.  The group was formed one year ago to capitalize on the opportunity to acquire loans at discounted prices due to the changing economic environment. 

CREDAA was founded in January of 2010 and is the brainchild of Scott Miller and Warren Samek, both National Commercial Account Executives with Fidelity National Title in Seattle, WA and JW Najarian, formally a commercial lender with Pathfinder Commercial Mortgage and the Founder of The Commercial Real Estate Professional Investor Group out of Los Angeles.

CREDAA is dedicated to, discovering solutions to the troubled assets market to help and guide in supporting, enlightening, educating and engaging its member base and the industry on the current state of Commercial Real Estate, Distressed, toxic, unstable, troubled Assets or Non-performing Notes.  The organization uses technology, seminars, lectures, symposiums, webinars, teleseminars, and other media to deliver high quality and pertinent industry news, views, content, analytics and analysis and education.

During the interview, Peter discusses the RTC of the 90’s, Loss Share Agreements, the FDIC and how they handle failing banks and acquiring banks. Peter also discusses how his firm capitalizes on the opportunities to help investors find out where the opportunities exist.

In addition to JW Najarian, both Warren Samek and Scott Miller were on hand to ask questions and provide relevant comment.

The following are my notes from this enlightening discussion with some additional background and insight that I provided to clarify a number of issues covered during the interview.

During the last real estate meltdown, the Resolution Trust Corporation (RTC) was formed to help liquidate real estate and financial assets which it inherited from insolvent thrift institutions.  Between 1989 and mid-1995, the RTC closed or otherwise resolved 747 thrifts with total assets of $394 billion.

The Resolution Trust Corporation pioneered the use of so-called “equity partnerships”.  While a number of different structures were used, all of the equity partnerships involved a private sector partner acquiring a partial interest in a pool of assets, controlling the management and sale of the assets in the pool, and making distributions to the RTC reflective of the RTC’s retained interest.

Prior to introducing the equity partnership program, the RTC had engaged in “bulk sales” of asset portfolios. The pricing on certain types of assets often proved to be disappointing because the purchasers discounted heavily for “unknowns” regarding the assets, and to reflect uncertainty at the time regarding the real estate market.

By retaining an interest in asset portfolios, the RTC was able to participate in the extremely strong returns being realized by portfolio investors. Additionally, the equity partnerships enabled the RTC to benefit by the management and liquidation efforts of their private sector partners, and the structure helped assure an alignment of incentives superior to that which typically exists in a principal/contractor relationship.

During my tenure at Liberty Real Estate Group, Inc. (division of Liberty Mutual Insurance Company), we purchased a portfolio of loans and assets from the RTC during the early 1990’s.

RTC vs Now

In the previous savings and loan crisis, the average failed banking institution had total assets of $205 million. In 2009, the average collapsed institution had total assets of $1.2 billion.

RTC took assets in and auctioned them off at a discount in bulk sales of asset portfolios.  As noted above, they also pioneered the use of “equity partnerships” or sharing arrangements.

In the current situation acquiring banks want deposits NOT loans.  The loss sharing arrangements being utilized are often necessary to entice the acquiring banks to take the loans through guarantees (usually up to 80%) if loss is realized at the time of sale.

Prior to closing a bank, the FDIC polls acquiring banks that might have interest in purchasing the branches of the failed institution. The often negotiate “best” bank to acquire failed bank deposits and assets.  They strive to have no interruption of services to the existing clients of failed bank.  This process is NOT open to everyone and is relatively “hush hush”.

If the FDIC cannot find an acquiring bank to take the impaired loan portfolio of a failed institution, they will conduct sealed bid auctions three to six months later. 

This is the business that Roanoke Financial bids on.

Besides the FDIC, Roanoke has several other sources of loan sales.  Some solvent banks are now trading sub-performing loans to “clean up” balance sheets.  This is also true for the special servicers of CMBS loans.

According to its own estimates, the FDIC will sustain losses exceeding $36 billion to cover the 140 bank failures in 2009. That price tag will eclipse the total dollar amount of the losses the FDIC incurred during the six years spanning 1987 through 1992, when 1,049 banks collapsed during the savings and loan (S&L) crisis, costing the FDIC $29.6 billion.  From 2000 to October of 2007 only 27 banks were closed down by the FDIC.  Since the recession started, the FDIC has closed down 237 banks.   As of the first quarter in 2010, 775 financial institutions with $431 billion in assets were on the FDIC’s “Problem List.” 

As far as the FDIC and the banking industry, everything being done now is being done with the hope that the economy will miraculously turn around before judgement day appears. Almost nothing is being done to deal with the long term; everything is being done to save the present in regard to banking and the U.S. economy. 

FDIC is currently out of money and is getting the banks to prepay three years of fees into the fund, in hopes of not having to admit the need to tap into the credit line offered by the Treasury Department.

Sheila Colleen Bair, the Chairman of the FDIC is hoping these tactics work.  Expected losses from bank failures from 2009 through 2013 are now $100 billion.   It originally was estimated at $70 billion.

Therefore, the need for the FDIC to extend out losses on asset sales (extend and pretend). They need to recover the maximum possible on these failed loans over the next 2 to 3 year period and slowly absorb the expected losses.

This is a different strategy than RTC which took hit on many loans and moved on.  The FDIC is “pushing ball down the road”.  Things will get resolved over time by extending “reset” date on existing property.

Many believe this is akin to what happened in Japan during 1990’s.  Peter O’Kane is big believer in taking hit and moving on.

That being said, the FDIC has some “duality” in their approach.  They encourage some banks to get rid of certain type of assets and loans while forcing others to “extend and pretend”.

The big banks that can’t be taken over are starting to dump some of their own troubled assets through the auction process.

There are multiple buyers in market now but “price discovery” is big problem.

Roanoke bids on many pools.  They don’t win every time… if they do they feel they are paying too much.

The company targets a 20% plus return on loans.

Many LARGE buyers are losing out on portfolios (multifamily, hospitality) and there appears to be a bidding frenzy going on for top tier assets and loans.

Large companies have a lot of money to put out.  Some fund managers need to get it back if not put out.

Roanoke is competing with people all over the country for smaller portfolio of loans.

So, will there be a tsunami of bad loans and property in the near future? 

It won’t happen since FDIC is extending out the recovery.  Since they cannot currently cover losses, this process could extend out another 5-10 years.

Peter O’Kane and others, are afraid the U.S. will experience a “lost decade” just like Japan did in the 1990s.

No one can pick up any momentum since there are no current or relevant valuations.

The good news is there is a lot of capital.  However, many cannot see a clear path so they do nothing and there doesn’t appear to be clear vision by the Federal government. 

VERY cloudy out there.

“A crisis is a terrible thing to waste”

Roanoke starting operating about a year ago.  They describe themselves as a boutique loan acquisition and servicing firm.  An opportunistic firm looking to make above average returns due to the banking crisis.  They look for smaller portfolios … the ones the large firms often ignore.

To them it’s not about finding perfect apartment building in perfect location.  It’s not about finding the perfect asset at a perfect price. 

They would rather buy at 30 cents on a dollar in a third tier city.  Their philosophy is that if you buy an asset at a great price then it is hard to go wrong.  Any kind of asset at the “right” price.

“There is no bad asset there is just a bad price”

Their downside … get our money back.

The firm caters to high net worth investor and smaller investment firms.

When they buy loans they are not looking to foreclose.  Their preference is to work out arrangement with borrower.

Property types – multifamily is still trading at fairly high prices.

They use an intelligent approach to finding good assets.

In closing, everyone believes we are not going back to the way things were.  There is truly a shift going on.  Debt game is changing.  Commercial real estate market will be different in the next ten years.

Most firms are going back to Business 101.  Concentrate on how the property is doing right now.  Don’t buy hoping that cap rates will fall in the future.

 Posted by Scott R. Lodde

Headlines – Week of July 4, 2010

July 12, 2010

 Most Affordable Popular Retirement Locations

According to an article published by U.S News and World Report, the real estate downturn has turned some very popular retirement destinations into bargains.

To determine where the prices are most attractive, the article examined data provided by Onboard Informatics and sought out places with a low cost of living and reasonable housing prices that still offered access to the services and amenities that people should look for in an ideal retirement spot. They examined price-to-income data for 384 metropolitan statistical areas which expresses the relationship between owner income and home values.

Each city on the list has high-quality healthcare and elder-care facilities, as well as an abundance of educational and cultural events.

Florida had two areas to make the top of the list.

Here are 10 retirement locations where homes are most affordable by this measure:

  1. Bend, Ore.
  2. Napa, Calif.
  3. Fort Myers, Fla.
  4. Fayetteville, Ark.
  5. Las Vegas
  6. Sante Fe, N.M.
  7. Punta Gorda, Fla.
  8. Phoenix, AZ
  9. Santa Cruz, Calif.
  10. Burlington, Vt.

Full Article

Slide Show

The Commercial Real Estate Slaughter of 2010? (from The Investor’s Business Daily)

According an article in the Investor’s Business Daily, Inc., the default rate for commercial real estate loans packaged within mortgage-backed securities (Fitch ratings) hit 8% in the first quarter of 2010, up from 6.6% in December.

There have now been $31 billion of commercial mortgage-backed securities (CMBS) defaults over the last 39 months.

Shopping centers, apartments, hotels and offices make up the lion’s share of struggling properties, and default rates are highest in Texas, Florida, Arizona, and California. The data will get a lot worse before it gets better according to many experts.

Commercial real estate analysts suggest that defaults will continue unabated for the foreseeable future and Fitch predicts that the rate will exceed 11% by the end of this year.

Many banks that have troubled loans on their books don’t want to foreclose on properties or sell loans because they may not have the capital to cover the loss they’d have to recognize. And special servicers overseeing troubled loans hesitate for the same reasons.

Government policies are allowing lenders to avoid writing down bad commercial property loans. However, real estate investors lacking the cash flow to service their debt will at some point collapse.  And for those wishing to hold on, credit markets remain challenging for those simply looking to refinance.  

$30 billion dollars has been raised since the beginning of 2009 in order to invest in distressed commercial real estate, and many of those investors expect that future investor demand should put a floor under the commercial real estate market. 

These opportunistic investors are hoping to buy distressed real estate for pennies on the dollar and charge lower rents vs. competitors stuck with heftier debt service.

For now however, this new money on the sidelines and appears to be in no hurry to buy.  Many are predicting that more distressed assets would come to market in 12 to 18 months, amid a sluggish recovery and lackluster job growth.

And there continues to remain a significant bid-ask gap between existing owners and the potential new owners or lenders.  Deteriorating property fundamentals will make it more difficult for lenders to continue their extend-and-pretend policies and may provide more deals before the end of the year.

Full Article

Rents Rise as Apartment Vacancies Fall (from the Wall Street Journal)

Finally some good news for one sector of the real estate industry.

According to an article published in the Wall Street Journal, apartment vacancies were down and rents were up last month as people got tired of living in their parents’ basements and rented a place of their own.

Nationally, the apartment vacancy rate was 7.8% at the end of June, according to research firm Reis Inc., down from 8% in the first quarter.

Rents gained by 0.7% during the seasonally strong April-to-June period, the biggest quarterly gain in two years, led by improvements in Long Island, N.Y.; San Jose, Calif.; Boston and Seattle.

The apartment sector could benefit from some current trends.

First, mortgage lending standards are much tighter today than at any point in the past decade, which should keep more renters from leaving to buy homes.

Second, the lack of financing for new apartment construction over the past two years has constrained the pipeline of new supply that should hit the market in the next two years. The apartment sector, which added between 100,000 and 150,000 units annually over the past decade, is on pace to deliver just 60,000 units in 2011 and 2012 according to the article.

Full Article

Posted by Scott R. Lodde

Continuing Commercial Loan Problems

July 7, 2010

Many opportunistic investors have turned their attention to the bundles of securitized loans known as commercial mortgage-backed securities, or CMBS. They believe that in commercial real estate these loans stand ready for a day of reckoning.

These loans, as their residential cousins, were compartmentalized (or tranched) into many pieces. While the highest-rated tranches, rated triple-A may not be in danger, the tranches most likely to be hurt are those with the worst ratings – the triple Bs. These were the biggest victims of lax underwriting standards.

According to Commercial Mortgage Alert, the boom years of 2005 through 2007 saw a total of $602 billion in CMBS issuance. (The CMBS written during those three years account for a total of 49% of all CMBS written over the past 20 years.)

CMBS, however, accounts for only about 20% of the total loan market, according to an article in MoneyCNN.com which quotes Jones Lang LaSalle (JLL). According to JLL, the bigger danger to the capital markets — and to banks — are speculative commercial loans, like those in construction and land loans. Those aren’t backed by firm assets and are a key part of the reason that many smaller banks have failed in recent years. For many, it is these loans and not the CMBS loans that are worrisome and could yet bring a day of reckoning to commercial real estate.

To illustrate this point, on June 21st, the Federal Deposit Insurance Corporation (FDIC) closed its 83rd bank this year –Nevada Security Bank (NSB).

The FDIC’s loss sharing agreement with the takeover bank, Umpqua Bank will cost the Deposit Insurance Fund an estimated $80.9 million.

Nevada Security Bank had net loans and leases of $330 million. Of that total, almost two-thirds, $204 million, was in commercial real estate. Commercial real estate, multifamily, and construction loans combined totaled $275 million, just over 83% of the bank’s lending balance sheet. The default rate on its commercial real estate loans was 10.6%  in the first quarter, more than double the national average. Similarly, the default rate on its construction loans was 25.8%.

Globest recently published a study conducted by Dr. Sam Chandan, Global Chief Economist at Real Capital Analytics.

The study notes the continued deterioration in the performance of commercial real estate and construction loans as the key driver of strains in the regional and community bank sectors. However, while the default and loss experience in banks’ commercial real estate portfolios varies substantially, smaller lenders’ average exposure to real estate is clearly higher than at their largest peers.

Dr. Chandan studied 56 bank failures since 2008. In each of these cases, the resolution of the failure resulted in a loss to the FDIC’s Deposit Insurance Fund (DIF).

Across the thirty-six bank failures where commercial real estate was cited the average default rate on commercial mortgages was 11.4% in the last quarter during which the bank was active – three times the average bank commercial real estate default rate of 3.8% in the fourth quarter 2009. Surpassing commercial defaults, the default rate for multifamily mortgages across the same subset of failed banks was 17.9%; the construction loan default rate, 29.7%.

The exceedingly high default rates in the commercial, multifamily, and construction loan pools weighed on the failing banks because these loan pools represented a large share of each bank’s total lending. On average, the sum of commercial, multifamily, and construction loans represented 75% of net loans and leases at failed banks cited for commercial real estate exposures. 45% of the combined balances were in commercial real estate specifically. By way of comparison, the average commercial real estate concentration across all active banks at year-end 2009 was 15%.

The most interesting part of the study was that 7,721 banks – roughly 97% of all active banks in the first quarter – have at least some exposure to commercial real estate. Of these, 565 currently report commercial real estate default rates of at least 10%. Even when employing the higher benchmark of an 11.4% default rate (the average commercial real estate default rate for failed banks), 440 banks report higher default rates in their legacy commercial portfolios. These banks represent more than 5% of all FDIC-insured institutions and 3% of the system’s total assets.

In the second quarter of 2010, there were 45 bank failures in the U.S., generating a loss of nearly $11.1 billion for the FDIC. The failed banks had assets of $50.1 billion, and deposits of $40.5 billion. 

In Florida, regulators seized eight banks with combined assets of $6.3 billion, generating a loss of nearly $1 billion for the FDIC’s insurance recovery fund.  The second quarter seizures means 14 Florida banks with combined assets of $8.6 billion have failed in the first six months of 2010. This year’s closings match all of 2009 when 14 Florida bank failed.

Florida now has the most bank failures of any state in the nation for 2010. In fact, only one other state – Illinois with 12 failures – has experienced a double digit number of bank seizures this year,

Banks have failed in 24 states ranging from Arizona to Nebraska, Oregon to South Carolina. Rounding out the top five states for the most bank failures after Florida and Illinois are Georgia with nine failures, Washington with seven failures, and California and Minnesota with six failures each.

Posted by Scott R. Lodde

The Second Leg Down in Housing

July 2, 2010

In one of my previous editions of Headlines (Week of June 20, 2010), I summarized two articles which touched upon the state of our residential housing market. 

In their State of the Nation’s Housing 2010, the Harvard University Joint Center for Housing Studies, pointed to a number of issues which will continue to affect the future of homeownership in this country for some time to come.

Among the issues in the report were persistently high unemployment, too many vacant housing units, the fact that people in their 20”s are wary of buying a house — even if they could afford to, the trend toward higher lending standards and the loss of the federal tax credit for home purchases

The only (and barely) good news in the report is that houses are more affordable than they’ve been in years. Nationwide, the median sales price dropped from 4.7 times the median household income in 2005 to 3.4 times in 2009. When combined with low interest rates, this puts mortgage payments on the median priced home closer to median gross rents than at any time since 1980.

This week I ran across an article written by Barry Ritholtz, CEO and Director for Equity Research at Fusion IQ.  In it, Barry begins by providing a brief history of events following the 2000 Dot Com crash when Fed Chairman Alan Greenspan brought Fed Funds rates down to ultra-low levels and its net result –a credit bubble and a housing boom in which 10s of millions of Americans became, albeit temporarily, home owners.

In 1992, some 4 million homes per year were being purchased. A decade later, that number had risen 25% to 5 million. A mere 3 years later, annual sales were 7 million units — a 40% increase.

According to the National Association of Realtors, existing-home sales were at a seasonally adjusted annual rate of 5.66 million units in May. We are now back to levels achieved in the years 1997/1998.

He describes a situation in which buyers of limited financial means who en masse overpaid for their houses at ultra low rates created a recipe for disaster. As the Fed began its cyclical tightening, price appreciation slowed, then reversed. Sales plummeted, and prices fell. Five million of those buyers were foreclosed upon, with another 5 million likely to come.

Barry’s article agrees with the Harvard report but digresses on the main reason why the residential market will continue to be weak for many months to come.

He agrees that credit is now tight resulting in demand is far below what it was during the past decade. He agrees that unemployment is a critical factor holding back demand.  He also agrees that inventory is extremely elevated and that a huge supply of shadow inventory is out there, including speculators, flippers and bank owned real estate (REOs) who overpaid but have held onto their properties to await modestly higher prices to sell.

He is also one that believes we are barely halfway through a decade long foreclosure surge.

In his analysis, price stands out as being the prime mover of the next leg down.

Home prices are still unwinding from artificially high levels, and remain over-priced. By using traditional metrics, such looking at US housing stock as a percentage of GDP or median income vs home prices or even ownership vs renting costs, Barry believes prices remain elevated.

From 1977 to 2010, the median U.S. home price was 4.1 times median household income. But as the charts indicate, home prices are still above that mean. Same with home prices relative to rentals, or housing value as percentage of GDP.

His bottom line is that prices must revert to a sustainable level … and we aren’t there yet.

Through a combination of mortgage modifications and buyers tax credits, the government has managed to temporarily create artificial demand and keep more supply off of the markets.

Government policies temporarily stopped prices from finding their natural levels. Now that the tax credit has ended, and most mortgage modifications are failing, the prior downtrend in price will now resume.

Without what he calls –the heavy hand of the government intervening, the residential real estate market is will soon experience what price discovery is all about.

Full Article

See CNBC – Housing: What to do Now?

Posted by Scott R. Lodde

Headlines – Week of June 27, 2010

July 2, 2010

Top 10 Fastest Growing U.S. Counties (from CNNMoney.com)

The fastest-growing counties in the country, according to the U.S. Census Bureau, are mostly in suburban areas outside of urban centers.

The census numbers govern the distribution of more than $400 billion in federal money each year.

Here are the 10 fastest-growing counties:

  1. Kendall County, Ill. (Chicago), 92.1 percent
  2. Pinal County, Ariz. (Phoenix), 89.7 percent
  3. Rockwall County, Texas (Dallas), 88.9 percent
  4. Flagler County, Fla. (Jacksonville), 83.9 percent
  5. Loudon County, Va. (Washington, D.C.), 77.6 percent
  6. Forsyth County, Ga. (Atlanta), 77.4 percent
  7. Lincoln County, S.D. (Sioux Falls), 70.7 percent
  8. Paulding County, Ga. (Atlanta), 67.4 percent
  9. Williamson County, Texas (Austin), 64.3 percent
  10. Douglas County, Colo. (Denver), 64 percent 

Fastest Growing U.S. Cities

The U.S. Census Bureau has released its most recent population estimates for the nation’s incorporated places, including cities, boroughs, and villages.

These are not 2010 population counts. They reflect administrative records, including updated housing unit estimates.

The first 2010 U.S. census counts will be available by April 1. 2011.

Bloomberg BusinessWeekused the data from the Gadberry Group to identify the fastest-growing city in each state.  Texas came out on top of Gadberry’s survey, with four high-growth cities: Atascocita, Katy, Mansfield, and Wylie.

 The report only included areas larger than 10,000 occupied households that met requirements for growth rate, household income, length of residence, and other factors.   According to the report, part of the state’s strength is its diversified economy. Main industries include petroleum refining, chemical production, aerospace, and information technology.

What is the fastest growing city in Florida?  According to the Bloomberg study that distinction goes to Fruit Cove, a town with 12,048 households located south of Jacksonville by the St. John’s River. 

The town has grown over 6% since 2008 and over 102% since 2000.  The average household income is $113,727.  Surprisingly, employment opportunities in Fruit Cove increased in 2009, according to the data and many of the residents work in the financial and insurance sectors.

In a separate article, The Wall Street Journal identified where urban population growth is trumping suburban and vice versa. 

According to an analysis of Census data by Brookings Institution, suburban growth lagged from July 2008 to July 2009, another indication of how the recession and housing bust have kept people trapped in place. There has been a widespread slowdown in suburban growth especially since mid decade.

According to the analysis, between July 2008 and July 2009, 27 of the 52 biggest metro areas saw their suburbs grow slower than in the year-earlier period, and 33 slowed down from the rapid growth in 2004-2005, when the housing boom was in full swing. The slowdown was especially hard in cities hit hardest by the housing bust, including Phoenix, Las Vegas and Orlando. 

In 2008-2009, 13 metro areas, including Chicago, Seattle, Washington DC, Denver and Charlotte saw their core city area grow faster than the suburbs, up from 6 in 2004-2005.

New Orleans, LA saw the largest percentage increase from 2008 to 2009 at 5.4%.

Housing Expert: ‘The Suburban Century Is Over’ (from MinnPost.com)

At a recent meeting of the Urban Land Institute of Minnesota, housing researcher John McIlwain said “a new normal” will be created in the housing market over the next 10 years, and he marked the end of “the suburban century.”

He noted that markets offering “a vibrant 24/7 lifestyle” will see the most robust activity, “net-zero-energy” units will become the norm, and the rental market will expand as homeownership rates fall to more historic levels.

Suburban town centers will gain popularity among those wanting an urban lifestyle without living in a big city.

Over the next decade, McIlwain said four demographic groups will fuel the housing market. He said older baby boomers increasingly are moving back to the central city, while younger baby boomers are finding it more difficult to relocate for jobs because they cannot sell their suburban houses. Meanwhile, millennials are more environmentally aware and will seek urban lifestyles, and immigrants who cannot afford large suburban houses to shelter multiple generations will increase demand for rentals.

With 1.5 million housing units per year needed to accommodate the shift to normal levels of household formation, McIlwain said zoning, financing, and regulations need to be rethought to meet housing demand.

Posted by Scott R. Lodde

Bank Lending Continues Freefall

July 1, 2010

In the last few years, anyone in the market for bank financing has been stonewalled by their lenders for any type of loan including those for acquisitions, working capital or short-term business loans to weather the ups and downs of seasonal markets such as those here in SW Florida.

Long term financing for major projects is virtually non-existent.

On the advice of a friend and colleague, I recently subscribed to the Frontline Weekly Newsletter,written by John Mauldin a recognized financial expert and editor of Thoughts from the Frontline that goes to over 1 million readers each week.

In a recent edition of his newsletter, John discusses The Risk of Recession. He is on record as saying there is a 50-50 chance that the U.S. slips back into recession in 2011.

The research to support this conclusion indicates that tax cuts or tax increases have as much as a 3-times multiplier effect on the economy. If taxes are cut by 1% of GDP then you get as much as a 3% boost in the economy. The reverse is true for tax increases.

In responding to a question on what could change his prediction, John pointed to an increase in bank lending which would help to jump start the economy. However, as he points out in a very interesting chart, bank lending is still in freefall and if this trend continues bank lending will have fallen by 25% in about two years.

As he notes, this is truly a SCARY trend and is unprecedented in modern history.

Unless this trend begins to abate and lenders start to provide needed capital for businesses to expand and hire, a double deep recession could be in our future.

Posted by Scott R. Lodde

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