16 posts tagged “capital”

Barry Sternlicht is starting a mortgage REIT in a time when credit is badly needed to restore market liquidity.

Sound familiar?

This new innovation in the debt markets, which provided high leverage at low rates, without recourse or risk to the borrowers, required other non-securitized loan providers, such as commercial banks, to be competitive and keep up or drop out, further rapidly expanding credit.

As the reaction to the overly abundant credit, initially in the sub-prime residential market, spread to other sectors, in the form of credit market contraction, a price/value decline was set off.

Lack of credit has also dried up capital for the purchase market, currently with transaction volumes at their lowest level in decades.

Historically, its almost always increased capital flows that induce the major crisis in real estate, not recessions.

And the re-establishment of prudent, patient capital flows that cures it.

When capital flows to real estate dramatically increase its often debt, abundant cheap debt, that starts the cycle.

A predictable cycle, that stops only when the effects of over-levered inflated investments are felt.

Those effects are usually in the form of too much capital fueling over building with eventually insufficient demand to keep up (eg the residential markets today),

Because real estate is a lagging re-actor (due primarily to the long time lag in development and the lease renewal lag in commercial assets) the supply/demand reaction is delayed, and the imbalance becomes dramatic.

So does the crash - typical of real estate.

These cyclical problems and solutions are very similar across time.

Barry Sternlicht is a very bright and experienced innovator to real estate structures and I'd give respect to his mortgage REIT direction as one means of restoring capital flows to real estate.

Real Estate Forum published "A Conversation With Blumberg Capital Partners' Philip Blumberg: Finding investment opportunities in a down market". An excerpt:

What types of investments do you play for the new fund?

We are clearly looking to make investments in the US debt markets. I think there are some outstanding opportunities on the debt side. That means buying existing loans at significant discounts where you feel you're within a margin of safety and can generate double-digit returns.

To read the full article, click here.

Philip Blumberg appeared on CNBC Squawk Box Europe today on a segment titled "The Reality of Real Estate".

To view the full transcript, visit Blumberg Capital Partners.

Blumberg Capital Partners was featured today in a New York Post article, "Banks Worry About Next Wave of Loan Defaults".

An excerpt:

Phillip F. Blumberg, chairman of Blumberg Capital Partners, thinks banks are really worried about the commercial real estate loans they issued during the orgasmic 2000s. That’s the reason, says Blumberg, banks are remaining conservative in their lending.

Credit cards may be bad but commercial real estate is worse.

"It’s absolutely frightening," says Blumberg, who adds that he sold most of his real estate holders before the bust. And the most dangerous time for banks will be 2010 to 2013 when $1 trillion in commercial real estate loans will mature and — like homeowners before them — owners of commercial properties will need to refinance.

To read the rest of this article, click here.

Potential Bank Losses

The Wall Street Journal conducted a survey of 940 lenders finding that CRE loans could create losses in excess of $100 billion for the industry by the end of the year. The Journal collected data from each of the banks' Federal Reserve findings to assess their health, applying the loan-loss criteria used in the federal stress tests of the largest banks. 923 of the banks' estimated losses would exceed bank revenue (as projected by the analysis), and at 634 banks the gap would be wide enough to reduce capital below the level considered comfortable by regulators.

"They are in just much worse shape" than the big banks, says Terry McEvoy, an Oppenheimer & Co. analyst who reviewed the Journal's analysis. "There is a lot less earnings power at these banks." The survey suggests that the potential losses from commercial real estate at these small and midsize banks could easily be double the writedowns that the banks face on residential properties.

For more news and information, visit Blumberg Capital Partners.

Real Estate Loan Delinquency

The government will release the results of the stress tests being performed on the 19 largest US banks this Thursday, with expected hilights to include a measure of CRE loans that are piling up, according to a Wall Street Journal article. The tests are designed to determine which banks will need more cash if the economy continues to weaken; the Federal Reserve has said that banks will be required to keep extra capital on hand in case losses escalate, which means some banks will be forced to raise money.

A document viewed by The Wall Street Journal indicates that there are projected losses of up to 12% on commercial real estate loans over two years, and that regulators are likely to point at CRE debt as a major reason for why some of the large banks need additional capital. Analysts are forecasting hundreds of bank closures in the next five years; the stress test assumptions could accelerate the decline. Citing the 12% loss rate, Richard Bove, an analyst at Rochdale Securities, said "you're talking about a depression in the U.S. economy and a major crisis in the banking system."

For more news and information, visit Blumberg Capital Partners.

Storm Brewing

The delinquency rate on about $700 billion in securitized loans backed by office buildings, hotels, stores and other investment property has more than doubled since September to 1.8% this month, according to data provided to The Wall Street Journal by Deutsche Bank AG. Increased loan delinquencies threatening to cause tens of billions of dollars in losses to banks, 47 of which have failed nationally since 2007.  Foresight Analytics has estimated that the banking sector could suffer as much as $250 billion in commercial real-estate losses in the current crisis, and predicts that 700 banks could fail under CRE exposure.

At the end of 2008, more than 2,900 banks had more than 300% of their risk-based capital in CRE loans.  "In perfect hindsight, we would have done less commercial real-estate lending," said Larry B. Faigin, president and CEO of First Bank of Beverly Hills.  The Calabasas-based bank's oustanding commercial property debt was fourteen times the bank's total risk-based capital at the end of last year, with delinquencies reaching 12.9%.  

For more news and information, visit Blumberg Capital Partners.

Atlanta is showing signs of a renewal in commercial property interest as small foreign investors are beginning to return to the market for the first time in 15 years, according to an Atlanta Business Chronicle article. These small private firms are seeking to take advantage of the falling property values in the market and are able to acquire distressed properties, benefiting from the weakened dollar for European investors.

"You have this Bermuda Triangle that many developers find themselves in, with rents and property values that are plummeting and credit lines that are locked down and a flow of capital that has all but come to a halt, said Phillip Thompson, a partner with the Atlanta office of Duane Morris LLP. Foreign investors, both firms and individuals, are hoping to benefit from participating in real estate amid a shortage of US capital.

Equity investors plan to increase investment by 40 percent globally and by 73 percent in the United States in the next year, according to an annual survey conducted by the Association of Foreign Investors in Real Estate. The survey reflected that foreign real estate lenders plan to increase lending by 54 percent globally and by 58 percent in the United States. The survey was carried out in the fourth quarter of 2008 among the association’s nearly 200 members.

For more news and information, visit Blumberg Capital Partners.