October 01, 2010
- Stabilizing operating conditions, firming values and strengthening recovery rates will inspire lenders to increase their disposition of distressed properties, though a flood of liquidations will not occur. Many lenders extended loans or warehoused reclaimed assets through the downturn, waiting for values and operations to improve before taking REO properties to market. As buyer activity has increased this year, lender confidence has improved, and more lenders have begun moving distressed assets to market. Distressed sales activity during the first half of 2010 nearly tripled the activity levels recorded in the same period in 2009, with assets under $5 million comprising over 80 percent of the transactions. This controlled liquidation will continue over the next year as lenders clear their balance sheets of bad commercial real estate debt, whether through note sales, short sales or REO dispositions.
- The average recovery rate increased from 63 percent in 2009 to 67 percent in 2010, with approximately 15 percent of all resolutions resulting in full first-mortgage recoveries, bolstering lenders’ confidence in the market and generating a rise in REO sales activity. By delaying their liquidation of distressed assets until after the worst of the downturn, lenders have been able to avoid the fire sale many investors and opportunity funds anticipated. Lender recovery rates will continue to edge up through the remainder of 2010 and early 2011 as vacancy rates stabilize and transaction velocity accelerates, allowing lenders to bring additional properties to market.
- Deals involving CMBS loans typically result in some of the lowest recovery rates, as securitized lending increased dramatically between 2005 and 2007, a period characterized by peak property prices, lax underwriting standards and high-leverage loans. Recovery rates also have been influenced by traditional demand drivers, such as location and quality. Properties in coastal markets have achieved higher recovery rates, with lenders faring best in Seattle, San Diego, Los Angeles, Miami and Manhattan. Markets with significant amounts of undeveloped land in the Southeast and Southwest, as well as Midwestern metro areas, fall at the low end of the spectrum.
- Apartments have already begun to post improvements in occupancy and rents but remain at the low end of the recovery rate spectrum, with lenders recapturing an average of 64 percent on resolutions. This reflects high concentrations of distress involving properties last traded at the height of the housing boom, when condo conversion deals significantly inflated apartment prices in many markets. Warehouse properties, on the other hand, experienced less price appreciation than apartments through the boom period and now boast one of the highest recovery rates among the core property sectors at 70 percent.
Impact on Commercial Real Estate
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The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.