Major local real estate players expect the distressed commercial market that emerged during the recession to continue offering up deals for well-funded buyers for at least the next three years – and maybe longer.
Commercial real estate debt in the U.S. currently totals about $3 trillion. Of that, roughly $180 billion is in distress, so there is ample opportunity for investors to purchase underwater loans, Gregory LaBine, director for Holliday Fenoglio Fowler, told a gathering of Real Estate Finance Association members this morning.
One firm that has taken advantage of the distress market is Boston-based The Davis Cos., which started buying performing loans in 2009 when that market began to open up. The company raised a $230 million fund and has already cycled through those funds once. It bought six large loans from Wachovia, five which are performing and one it took the title to. All told, Jonathan Davis’s firm bought more than 25 assets, not including CMBS paper, between 2009 and 2010.
That, however, has changed.
"We haven’t bought a performing loan since early 2009, and I don’t anticipate we can compete for those loans in that market," because it’s the deep-pockets of the banks that are purchasing those performing loans, said Davis, a panelist at the REFA meeting.
When the banks started taking that market, he exited most of his CMBS positions and started acquiring non-performing loans. Davis’s firm bought more than 1.5 million square feet of office space and about a thousand residential units, many which they’re re-positioning from Class C to Class B apartments and leasing them up. In total, his company has bought about $450 million of property, with another $20 million on the Wachovia purchase. All told, he has grown his portfolio by about 40 percent in recent years.
TD Bank is one of the banks putting performing loans on its books, said Paula Mello, senior relationship lender for the bank. She said she can’t take on any loans that look like they’re not performing or in distress.
"Our clients … are really strong borrowers with the depth to take a project from empty to beyond," Mello said. "You need a whole group of people behind you who know how to acquire debt."
Another major factor in the commercial real estate market will be the $2 trillion in CMBS loans maturing in the next four or five years, LaBine told the crowd. Right now, the special servicing market is good, with special servicers holding about $90 billion on the books. Of that, $30 billion is current and $60 billion is delinquent, LaBine said.
Yet, while they have been resolving some issues, most of those issues are loans of $10 million and under, and the percentage of loans they’ve actually modified has exceeded those they’ve liquidated, so they are merely "continuing to kick the can down the road," LaBine opined.
And the inventory of what is struggling is not necessarily what’s expected, said Thomas Goodwin, executive vice president of sales for Boston-based DebtX, a loan sale advisor. While office and retail are among the highest concentration of CMBS loans, it’s hotels in secondary and tertiary markets, places where there are five hotels in a three hotel town, "that’s hitting the fan hardest in CMBS."
