June 14, 2013
by Carrie Rossenfeld
SAN DIEGO-While the picture is brightening, we’re still not out of the woods when it comes to troubled assets, Bliss Morris, founder and CEO of First Financial Network, tells GlobeSt.com. Morris is a scheduled panelist at the session “Opportunities in Troubled Assets and Bank Notes” to be presented next Tuesday, June 18, during RealShare Investment & Finance here. (The conference is part of the RealShare Conference Series produced by ALM Real Estate Media Group, which publishes GlobeSt.com and Real Estate Forum.) For the following exclusive interview, GlobeSt.com spoke with Morris recently about troubled assets and her outlook for the future.
GlobeSt.com: With the CMBS delinquency rate dropping significantly, can we exhale about troubled assets yet?
Bliss Morris: According to a recent Trepp report, all major property types saw their delinquency rates drop in April. The biggest downward movement came from the lodging and multifamily segments as a result of payoffs, curing and restructuring. The delinquency rate for US commercial real estate loans in CMBS fell 47 basis points to 9.03%—the lowest since November 2010.
That being said, I think we are still a long way from being able to exhale. Sure, we are seeing some improvement in CMBS delinquencies; however, the nation’s banks still have more than typical percentages of non-performing loans on their books—both commercial real estate and commercial and industrial. The current low interest rates and tight credit environment are working to keep new CMBS issues near zero. It is important to look at what sectors are not on the same pace—namely, the $20-billion of CMBS office loans in special servicing, nearly one-third of all special-servicing loans.
However, true recovery will be dependent on the resolution of the remaining of non-performing loans still on many banks’ balance sheets and the stabilization of property values securing those loans, particularly in slower-to-recover secondary and tertiary markets.
GlobeSt.com: What does the fact that, according to the MBA, CRE loan originations rose 9% year-over-year indicate for the industry?
B.M.: The increased origination rates reported by MBA are a healthy sign on the road to recovery. These originations are taking place in primary markets where property values have rebounded. So, interest rates and property values in better markets are the drivers of these new loans; however, increased regulatory pressure and still markedly decreased collateral values in many smaller markets serve as major impediments to lending. It’s also worth noting that the loan-origination figures for commercial real estate actually experienced a decline in the first quarter compared to the previous quarter.
GlobeSt.com: With $367 billion of loans maturing this year and CMBS struggling to close the gap, what opportunities are out there for the debt market?
B.M.: High levels of distress will ultimately be the result of delinquency rates hovering at 9%, coupled with the CMBS loans slated to mature through the rest of the year. Our continued buy-side conversations reveal that investors have plenty of loans to review, and we feel that acquisition opportunities will continue to be available in the market.
GlobeSt.com: What other trends do you notice regarding troubled assets?
B.M.: We have noticed a definite uptick in loan pricing over the past two quarters, and not just for CRE loans but also C&I loans. Banks and other lenders have had time to write down the assets to a level that is realistic and, at least in our shop, successful trades are getting executed. In 2012, we sold 99% of the loans we took to market, which shows that investor appetite is strong for loans that are accurately valued.