Wednesday, March 04, 2009

Troubled Assets - Mining Distress for Opportunity

Since the credit crunch took hold in the fall of 2007, questions about its impact on commercial real estate have been front and center. But assessing the damage has remained largely guesswork—until now.

With highlights in this issue and in the Troubled Assets Radar report, Real Capital Analytics is providing some answers. As of December 17th, 2008, we have identified at least $106B of threatened commercial properties. Many of these troubles have intensified since September, when concerns heightened over maturing debt, securitized and otherwise. The Troubled Assets Radar covers all geographic regions, property types and financial challenges. This is our first report, but we will continually update this new resource.

Office sales in 2008 have fallen hard, and pricing and cap rate data are beginning to reflect the depth of the capital market tumble. Year-to-date, sales of $49.6B were 67% below $152.6B for the same period last year. Closed sales in November totaled just $1B and involved fewer than 50 properties. Volume was off 60% from October’s $2.6B, and 90% below sales volume for November 2007.

Early sales data through mid-December show that the pause in the market continues and there is not likely to be the typical frenzy of year-end closings. After conservatively predicting 2008 office sales last month at around $61B, the year end total should settle between $53B and $55B.

While no one is buying, new offerings continued with $4.3B of office properties listed for sale, comparable to levels in September and October. Sellers appear to be getting more realistic since asking caps are up 25 bps and asking prices are down sharply since September. Prices on closed deals are no longer as influenced by the flight to quality and are also down sharply.

RCA has initiated a program to identify distressed and potentially troubled assets. The inventory of office property already tops $22B and is growing rapidly. Truly distressed situations where the mortgage is in default, the owner is bankrupt or the property has already been foreclosed total approximately $6.1B, encompassing over 150 assets. Of this total, 24 office properties valued at $450M have reverted back to the lender to become Real Estate Owned (REO). Most of the distressed assets have only recently fallen into default and a foreclosure process commenced. The analysis also ignores $7.6B of distressed office deals that have been resolved.

For more detailed information, learn about RCA’s Troubled Asset Search tool.