Three recent speed bumps for commercial real estate.

CRE in Savannah is slow and steady. I am fielding more inquiries than ever for leasing, and the leases I complete are for longer periods of time (3-4 years vs. 1 or 2 years). Transaction attorneys at Lee, Black, Hollis and Rouse and busier than a partner there says.

Three recent news articles report market activity to watch though.

First, U.S. Commercial Real Estate Market Experiencing Decelerating Recovery according to JLL. 

Summary: Real estate recovery continues, but at a slower pace. Not all segments will recover uniformly, but they are recovering.

Key Quotes:

The U.S. office market absorbed a little less than 1 million square feet during the quarter - far below the 8.6 million square feet averaged over the prior six quarters.

Nearly two-thirds of the 45 markets tracked demonstrated stable or declining leasing volumes.

Technology expansion and startup activity gained momentum in almost every market with prospects for growth.

Energy-heavy markets posted some of the largest leases and witnessed sales momentum and speculative new construction.

Despite declines in leasing volume, 57.8 percent of the markets saw gains in tour velocity and active tenants compared to the previous quarter.

Sales activity and volume was evenly distributed among geographies with nearly one third of markets reporting an uptick in sales.

Construction remained low across most markets; however, activity has increased from 18.1 million square feet under development to 33.7 million square feet.

 Second, CMBS Slump As NY Fed Commercial Mortgage CDOs May Be Sold. This means the rumored sales of CRE collateralized debt obligations (CDOs) caused the value of CMBS to decline. This video explains CDOs really well. If CMBS decrease in value, it becomes harder to refinance them.

Third, Commercial Real Estate Woes Fueled Recent Bank Failures, two of which were in Georgia. As said in a previous post, if there is diminished (or no) cash flow or if real estate values are increasing as planned, then the notes aren't repaid and the banks can be at risk. Too much exposure to bad loans means the bank fails.

Savannah is doing well in its own little bubble, we just don't need the larger economy to burst it. 

A. Joseph Marshall
Coldwell Banker Commercial
Commercial Real Estate Advisor
Savannah, Ga

You Want to Fix the Economy? Here's a Start. (Let the howling commence.)

Charles Hugh Smith has some pretty far fetched ideas- read them for yourself at http://www.oftwominds.com/blog.html. What he suggests here is draconian but is probably essential reform. I think it was Einstein who said (something like) that the minds who created the problem can't create the solution.

 

By Charles Hugh Smith on Business Insider.

 

A simple 8-point plan would restore both the banking and the real estate sectors, and end the political dominance of the parasitic "too big to fail" banks. Craven politicos and clueless Federal Reserve economists are always bleating about how they want to fix the U.S. economy and restore "aggregate demand." OK, here's how to start:

 

1. Force all banks to mark all their assets to market at the end of each trading day, including all derivatives of all types, including over-the-counter instruments.

2. Allow citizens to discharge all mortgage and student loan debt in bankruptcy court, just like any other debt.

3. Banks must mark all their real estate to market weekly as defined by "last sales of nearby properties" adjusted for square footage and other quantifiable measures (i.e. like Zillow.com).

4. Require mortgage servicers and all owners of mortgage-backed securities to mark every asset within each pool to market weekly.

5. Any mortgage, loan or note which was fraudulently originated, packaged and sold, including the misrepresentation of risk, the manipulation of risk ratings, fraudulent documentation by any party, etc., will be discharged as uncollectable and the full value wiped off the books and title records without recourse by any of the parties.

If a bank fraudulently originated a mortgage and the buyer misprepresented material facts on the mortgage documents, then both parties lose all claim to the note and the underlying asset, the house, which reverts to the FDIC for liquidation, with the proceeds going towards creditors' claims against the bank.

6. Any bank which misrepresents marked-to-market asset values will be fined $10 million per incident.

7. Any bank which is insolvent at the end of a trading day will be closed and taken over by the FDIC the following day, and liquidated in an orderly manner via open-market auctions of all assets, including REO (real estate owned).

8. All derivative positions held by the insolvent bank will be unwound immediately, and counterparties who fail to make good on their claims will also be closed, given to the FDIC and liquidated.

You know what this is, of course: a return to trustworthy, transparent accounting. And you know what the consequences would be, too: all five "too big to fail" banks would instantly be declared insolvent, and most of the other top-25 big banks would also be closed and liquidated.

At least $3 trillion in impaired residential mortgage debt would be written off, maybe more, and $1 trillion in impaired commercial real estate would also be written down. Derivative losses are unknown, but let's estimate it's at least $1 trillion and maybe much more.

If $5.8 trillion of fantasy "value" is wiped off the nation's books, that's only a 10% reduction in net household and non-profit assets, which total $58 trillion. Even an $11 trillion hit would only knock off 20%. If that's reality, if that's what the assets are really worth in the real world, then let's get it over with. Once we've restored truthful accounting and stopped living a grand series of debilitating lies, then the path will finally be clear for renewed growth.

The net result would be the destruction of the political power of the "too big to fail" banks, the clearing of the nation's bloated, diseased real estate market, and the restoration of trust in institutions which have been completely discredited.

Bank credit would flow again, and we could insist on a healthy competitive system of 250 small banks instead of a corrupting system of 5 insolvent parasitic monsters and 20 other bloated but equally insolvent financial parasites.

Those who lied would finally get fried. At long last, those who misprepresented income, risk, etc. would actually pay some price for their malfeasance. Criminal proceedings would be a nice icing on the cake, but simply ending the pretence of solvency would go a long way to restoring banking and real estate and ending regulatory capture by TBTF banks.

What's the downside to such a simple action plan? Oh boo-hoo, the craven politicos would lose their key campaign contributors. On the plus side, the politicos could finally wipe that brown stuff off their noses.

Read more: http://www.businessinsider.com/you-want-to-fix-the-us-economy-heres-a-start-2011-7#ixzz1SgnjXsfe

 

A. Joseph Marshall

Commercial Real Estate Agent

Savannah, Ga.

Georgia Tops Watch List for Failed Banks

Trepp, LLC, a real estate research firm released a report last week that Georgia houses the most banks with a high risk of failure. This means that of the 200 at risk banks on Trepp's list a quarter of them are in Georgia and all of them have been on the list for at least a year.

Although the report doesn't disclose which banks are on the list, it does congratulate itself that Mountain Heritage Bank, McIntosh State Bank and Atlantic Bank and Trust (which had an office on East York Street) all failed and were also on their Watch List.

The good news is that the "loss severity eased very slightly in June" and that "the pace of closures continued to moderate". The loss severity is lower because the failed banks are small with a median assest size around $200 million.

As I've written before in prior blogs, Georgia has too many banks due to a previous and unofficial "open door" policy by the Department of Banking and Finance. No one wants to see a bank close and the FDIC take a loss. But it is an essential part of the economic recovery and the FDIC will also share in the recovery of non-performing loans due to loss sharing agreements.

A. Joseph Marshall
Commercial Real Estate Agent
Savannah, Ga.

The Coastal Bank gets FDIC order commentary

This morning's news that the Coastal Bank agreed to a consent order with the FDIC rattled commercial real estate agents.

This news usually means a bank has six months to live, and The Coastal Bank is where some borrowers took their business when First National Bank and Darby Bank and Trust closed.

 

In a meeting I attended with agents from three CRE offices, the general feeling was concern that this news would help create a chilling effect among potential local investors. It’s no secret that I prefer to work with local lenders. Everyone knows that lending is already constrained. But when a bank fails because it’s not making an adequate profit, it appears that there is little to no chance for an investor to obtain a loan for a project that makes good sound financial sense.

We've all seen an increase in CRE activity- investors looking for good cash deals, interest in leasing property, and multi-family housing, for example-  and there is concern that local lending is getting tighter. I have three lenders I work with on my deals and only one (Workmen's Circle Credit Union) assures me the vaults are open.

I spoke with Mike Lee, past president of Savannah’s United Community Bank, who now works with the FDIC in Knoxville. He told me that this information about The Coastal Bank should not be extrapolated. He said there are too many banks in Georgia to begin with, which is the fault of the Georgia Department of Banking and Finance. When there’s an economic crunch in a crowded field only the economically fit will survive. He said there are more banks will fail, but the worst is behind us.

There’ve been 46 bank failures in 2011 so far and four recently in Georgia (Bartow County Bank, First Georgia, Atlantic Southern and New Horizon Bank). Atlantic Bank and Trust, a small South Carolina Bank which has an office on East York Street, was closed on June 3^rd and reopened as First Citizens. The government and lenders can both say that the economy is picking up, but then again, they have to give loans on real estate, not rhetoric, to convince people otherwise.