Financial Pain and Gain

The nature of the commercial real estate market is such that the mood of many has improved significantly, even in the face of global economic uncertainty. Investors in significant numbers are moving forward on deals.

By Suzann Silverman, Editorial Director

Only a few short years ago, large national and small regional banks alike were failing in droves, sunk by securitized pools of troubled mortgages. Lenders were extending maturing loans and prognosticators were forecasting doomsday scenarios for the looming glut of loans made in the boom days of 2007, not to mention the aforesaid extensions, crafted in the dark days that followed.

The nature of the commercial real estate market is such that the mood of many has improved significantly, even in the face of global economic uncertainty. Demonstrating the proverbial cautious optimism, investors in significant numbers are moving forward on deals. As our own survey indicates, mortgage bankers are now accepting higher loan-to-value ratios and are increasingly interested in construction loans.

Although the job market has improved only modestly, other indicators are strengthening. A peaking market for distressed assets (as discussed in last month’s Distressed Debt & Asset Update) and lower delinquency rates than many predicted are giving rise to more upbeat views of the industry’s prospects. In fact, as the dreaded maturations of the 2007-vintage loans approach, they appear to be posing a far smaller threat than was once thought, as Real Capital Analytics Inc. noted in a report offering predictions for 2012. On the other hand, the forecasting firm remains concerned about loans that were extended after the capital markets crash and are now maturing.

So does Jack Cohen, CEO of Cohen Financial, who warns in our mortgage bankers Q&A that extending those loans has achieved little. Values remain low for the assets in question, and many lenders will have to accept losses in order to reset pricing and put the investment market back on pace again.

The securitization market never regained its momentum of early 2011 after foundering last July, but major players are beginning to test the waters. At press time, Bloomberg Businessweek was reporting that Goldman Sachs and Citigroup were preparing to market a $1 billion CMBS pool. Lenders and advisors alike were pointing to a comeback of the CMBS market as a prerequisite for a recovery.

Taken together, these signs foretell more pain to come, but financiers seem to consider that pain a necessary and bearable price to pay for an improved market.