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All Encompassing Mortgage and Real Estate Thread


UTPhil2006

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32 minutes ago, Wulaw Horn said:

I just told my friends that in a text that this was going in dry on the commercial guys.
First response back "Good, I'm in the market for a gently used patagonia fleece vest- this should soften that market up"

Don't know about CRE, but Finance and Techbros all seem to be downshifting to Cotopaxi. 

Edited by Bozo_Casanova
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6 hours ago, bluto said:

Between office market turmoil and multi family speculative purchases on floating rates the last 18 months, commercial RE is about to get lit the f up. Shit tons of apartments underwritten with debt service that has ballooned 4x since purchase along with outrageous insurance premium bumps, and rental rates plateaued due to general inflationary pressures/job losses on renters. 

You have no idea.  Seeing some of these deals under "rescue capital" terms and even with super attractive terms wouldn't touch them with a 10 foot pole.  Some of these fools are still underwriting low 4% cap rates on deals when trying to raise capital to save deals.  It's going to be a mess.

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12 hours ago, Esque said:

You have no idea.  Seeing some of these deals under "rescue capital" terms and even with super attractive terms wouldn't touch them with a 10 foot pole.  Some of these fools are still underwriting low 4% cap rates on deals when trying to raise capital to save deals.  It's going to be a mess.

Meanwhile assessors valuing a class on sub 4caps in central Tx. Roll a closing statement into Harris cad for 20% below assessment and get ignored entirely. 

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13 minutes ago, bluto said:

Meanwhile assessors valuing a class on sub 4caps in central Tx. Roll a closing statement into Harris cad for 20% below assessment and get ignored entirely. 

Yeah, lots of folks getting SMOKED on taxes and insurance y-o-y.  Going back and looking at some u/w versus actuals is sort of hilarious.

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3 hours ago, Incredulity said:

When will the mainstream media and John Q Public findout?  Give it 6 months.

CRE bag holders are finding out NOW.

It all comes down to i) the lenders and ii) the government.  For the lenders, it is all game theory.  The more everyone can work out loans and kick the can, the better for all - until one person can't, they sell loans at a loss, and they effectively force a mark to market of everyone's loan books and you see more calling of lines of credits and loans from lenders.  I've been watching a few key assets for 24 months now and many of them have been able to roll and extend for 12 months, much to my surprise.  But many of these deals are dead - equity is for sure wiped out and debt may be sitting on 85/100, but marked 100/100.

This is all to say, you still have another 12 months or so.  The defaults in office are not going to surprise anyone.  The defaults in MF will and that is what will catch a lot of people offsides.  But will be a good time to pick up blue chip public REITs as NAV gets punished by short term market volatility - or so I guess.  In many ways the public markets have already front run the private markets.

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Yep I’m trying to sort through where to put some cash on a REIT that is heavy cash currently as there could/should be some solid deals. still thinking the general supply demand fundamentals are still decent for Texas multi fam, but pricing needs a reset with the rate hikes.

 
heard from a buddy today that asset managers/owners he works with are giving strong consideration to handing the keys over to the bank. The sobering thing for me is my reference point is mainly Texas multi fam, and if these properties in this states economy/population growth are going under then the whole country must be in major danger. 

Edited by bluto
  • Hook 'Em 1
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On 5/26/2023 at 1:23 PM, bluto said:

Yep I’m trying to sort through where to put some cash on a REIT that is heavy cash currently as there could/should be some solid deals. still thinking the general supply demand fundamentals are still decent for Texas multi fam, but pricing needs a reset with the rate hikes.

 
heard from a buddy today that asset managers/owners he works with are giving strong consideration to handing the keys over to the bank. The sobering thing for me is my reference point is mainly Texas multi fam, and if these properties in this states economy/population growth are going under then the whole country must be in major danger. 

WTF are vacancy rates in that market?   If you've got tenants in a multi-family deal, you oughtta be able to  pull through.

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2 hours ago, Gil Bang said:

WTF are vacancy rates in that market?   If you've got tenants in a multi-family deal, you oughtta be able to  pull through.

Thank you for this - gave me a good laugh.  But also a good reminder of how the general public does not understand what is going on in real estate and thus why so many get caught offsides when the tides go out.  Not even trying to make a dig, but will provide some insight below.  Keep in mind, keeping this very simple and high level.

Valuations

Commercial real estate valuations are based on capitalization rates, which are just inverse multiples.  So a 20x EM is the same as a 5.00% capitalization rate (1/20).  Capitalization rates for stabilized assets are generally priced on an equity risk premium spread to the risk free rate.  The US10Y is often used.  The capitalization rate is applied to net operating income which in its simplest terms is revenue minus expenses.

So let's make some basic assumptions: NOI is $10, NOI is flat y-o-y, and Class A MF in DF/W trades at 180 bps spread to the US10Y.  Well what just happened in the last 18 months?  The US10Y went from 1.5% to 3.8%.  So market capitalization rates went from 3.3% to 5.6%.  So the value of the property went from $300 to $180, (40%).  This is purely a function of the capital markets.

Net Operating Income

Market rent growth remains positive and vacancy remains very low.  But, many owners are getting killed by year-over-year increases in property tax and property insurance.  As a result, net operating income year-over-year is negative - further hurting valuations.

Financing

This is where the rubber meets the road.  Because all of the above is pure accounting and on paper until the property has a transaction.  If you're a current owner, why would you sell today unless you have to?  Well, here we go...

Commercial loans are term loans with covenants.  The most common terms are 3 and 5-years.  Lots and lots of transaction in 2020 and 2021 were done with 3-year term paper because a lot of buyers through rates would stay very, very low.  So let's say a buyer bought a property for $100 with $75 of debt and $25 of equity.  Today all of the equity is gone AND $15 / $75 is gone on the debt.  When the term matures, the lender comes and wants to be made whole.  The owner has two options.  First, they can do a "cash-in refinance" meaning they need to go back to their investors and ask them for a 60% ($15 / $25) equity injection via a capital call.  The second is they can't achieve this and they have to default.

The other issue with financing today is the same borrowers that were using high leverage, 3-year debt were the most likely to take on floating rate debt with rate caps.  As those rate caps have been expiring they have been seeing massive increases in their debt service because their effective rate went from say 3% to 8% overnight.  The property can not service the debt and they go into technical default, which then has to be worked out.

 

There's obviously much more to this.  But needless to say, these is a massive capital markets issue out in the market that isn't being discussed fully.  There's way too much on the shitty fundamentals of office and not enough people understand there's too much leverage in MF and industrial.  It takes time for this all to play out and as more borrowers come under pressure as their debt rolls over, the worse it will get.  The "maturity wall" as it was really kicks off later this year through 2025.

Hence you will have a new "survive to '25" mantra in CRE which was an inside joke back during the savings and loan crisis: "survive to '96".

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