Emerging Trends in Real Estate 2012 - Urban Land Institute

Chapter 2: Capital Flows
Exhibit 2-4
Maturing Loans: Preferred Strategy for Lenders
Extend with
mortgage modification
53.5%
Extend without
mortgage modification
6.3%
Source: Emerging Trends in Real Estate 2012 survey.
Note: Based on U.S. respondents only.
Foreclose and dispose
14.8%
Sell to a third party
25.4%
with modifications rather than refinancing or disposing of them;
they wait for more propitious opportunities and avoid balancesheet
issues until space markets improve. “The fundamentals
aren’t bailing them out yet” (exhibit 2-4). “We’re only at the end
of the beginning of market clearing as deleveraging continues.”
Special servicers “aren’t geared to handle large volumes from
all the CMBS deals coming due, and the presumption is the
loans will get extended as long as borrowers make pay downs
and pay fees.”
No Emergency. This gamesmanship, abetted by nervous
regulators, probably will avert a feared “refinancing crisis.”
Good-credit tenants with well-leased real estate “can get
money”; lenders just “put off as long as necessary dealing with
assets in bad shape.” Some borrowers could get forced into a
box: buying time pushes their eventual refinancing into a potentially
higher-cost, higher-interest-rate environment. Stronger
financial institutions will be more proactive about taking necessary
haircuts and undertaking dispositions in a stepped-up but
measured sales process. And make no mistake, “borrowers
who overpaid for properties and overleveraged see their equity
basically wiped out.” They may manage to recoup a fraction of
their original investment—maybe a management contract or a
chance at some future upside as a minority partner.
Needed Scrutiny. A majority of respondents forecast that
underwriting standards will remain the same or become even
more rigorous—both on debt and especially on equity transactions
in 2012 (exhibits 2-5 and 2-6). They anticipate renewed
attention paid to supply/demand issues in markets as players
prudently take less for granted in recovery scenarios. “Real
estate is a tough asset class. It’s easy to get money out quickly
to plenty of guys who will take it, but much harder to get consistent
returns.” The summer 2011 hiccup in CMBS issuance
underscored the need for vigilance after “frothy underwriting”
raised eyebrows among bond buyers. “Once again we had
gotten ahead of ourselves, when you’d think recent experience
would have kept that from happening.”
Follow the Money. Indeed, important lessons from past
investing snafus, including circa 2005–2007, highlight how
buyers and lenders should retreat anytime capital rushes
into real estate markets. A good barometer may be cap rates
plunging below 5 percent. In the 1980s, too many dollars fueled
overdevelopment and overpaying for prime assets just as a
flood of cheap credit precipitated the recent hemorrhage. Easy
capital availability can overwhelm property markets and blinds
industry players to realities of supply/demand trends, as well as
changing tenant behaviors. Even if one assumes the economy
is in an early-stage recovery, these market indicators require
greater scrutiny today when the economy takes such a bumpy
and potentially uncertain path. Fund investors also should know
by now “they cannot rely on manager discipline” to keep them
Exhibit 2-5
Equity Underwriting Standards Forecast
for the United States
+30+47+23
30.5%
46.7%
22.8%
More rigorous Will remain the same Less rigorous
Source: Emerging Trends in Real Estate 2012 survey.
Note: Based on U.S. respondents only.
Exhibit 2-6
Debt Underwriting Standards Forecast
for the United States
+33+35+32
33.0%
35.1%
31.9%
More rigorous Will remain the same Less rigorous
Source: Emerging Trends in Real Estate 2012 survey.
Note: Based on U.S. respondents only.
Emerging Trends in Real Estate ® 2012
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