Inside commercial hard money lending.
CoStar Group is reporting that the Walnut Creek Chili’s Fetches $398 PSF. The 5,778 square foot building sold for $2.3 million.
Real estate investors are still interested in purchasing prime real estate in a great location.
The Wilder Project in Orinda, CA is facing legal challenges according to Orinda project stumbles over another legal hurdle – ContraCostaTimes.com.
The lender for a luxury residential subdivision in Orinda’s scenic Gateway Valley has sued the site’s developer, seeking to foreclose on the project, which in February staggered into default on its $180 million mortgage.
The 1,600-acre Wilder project has a murky outlook now that the loan default, the lawsuit and a court’s decision to place Wilder into receivership have coalesced to create a number of fresh financial and legal obstacles for the development, which was first proposed two decades ago.
Merrill Lynch Mortgage Lending Inc. sued OG Property Owner LLC, the developer of the Wilder project, on April 7, Contra Costa County court records show.
OG Property planned to build 245 homes, an arts and garden center, five sports fields, a fitness and pool center, a city corporation yard, and preserve 1,400 acres of open space. The homes were pegged for sale at $3 million to $5 million each.
The Contra Costa Times is reporting that the project has been in the works for over 20 years and has faced many similar obstacles.
To make matters worse,
A dozen contractors, however, have filed liens against the property, claiming that the developer has not paid them for their work. The combined money owed to contractors, court records show, is $17 million.
It appears that a major investor is looking to buy out Merrill Lynch’s note. Barring this the project is likely to be tied up in court for some time.
BusinessWeek is reporting that California’s Foreclosure Notices Soar.
Lenders filed a record number of mortgage default notices against California homeowners during the first three months of this year, according to the research firm MDA DataQuick.
The company blamed the recession and of lenders playing catch-up after a temporary lull in foreclosure activity. A total of 135,431 default notices were sent out during the January-to-March period, an all time high in the company’s database which goes back to 1992. That was up 80.0 percent from 75,230 for the prior quarter and up 19.0 percent from 113,809 in first quarter 2008, according.
According to the DQNews.com article Golden State Mortgage Defaults Jump to Record High:
The median origination month for last quarter’s defaulted loans was July 2006. That’s only four months later than the median origination month for defaulted loans a year ago, in first quarter 2008. That suggests a period where underwriting criteria were particularly lax.
Of the 3.7 million home loans made in 2004, less than 1 percent have since resulted in a lender filing a default notice. Of the 3.7 million loans originated in 2005, 4.9 percent have triggered a default notice so far. Of the 3 million in 2006, 8.5 percent have so far resulted in default. A particularly toxic period appears to have been August through November 2006 which had more than a 9 percent default rate. Of the 2.1 million loans made in 2007, it’s 4.6 percent – a percentage that’s likely to rise significantly during the rest of this year.
The lending institutions with the highest default rates for loans originated in August to November 2006 include ResMAE Mortgage (69.9 percent of loans resulting in a default notice), Master Financial (64.6 percent) and Ownit Mortgage Solutions (63.6 percent). Of the major lenders, IndyMac has a default rate on those loans of 18.9 percent, World Savings 8.0 percent, Countrywide 7.7 percent, Washington Mutual 6.3 percent and Wells Fargo 3.4 percent. Less than 1 percent of the home loans originated in late 2006 by Citibank and Bank of America have since gone into default.
The DQNews.com article also reported:
Foreclosure resales have emerged as a significant market factor, accounting for 58.1 percent of all California resale activity last quarter. A year ago it was 33.1 percent. Foreclosure resales varied significantly by area, from 13.0 percent in San Francisco County to 80.8 percent in Merced County.
Real estate values have not settled in California. This new “wave” of foreclosure notices is going to cause uncertainty in the markets for a while. This combined with the “shadow inventory” of as many as 80,000 homes reported by SFGate.com will keep prices depressed and may drive them lower.
The San Francisco Chronicle is reporting in Commercial real estate market softens that some smaller office buildings are on the edge of foreclosure.
Owners of several small commercial buildings in San Francisco already are behind on payments, and local industry observers are laying odds on which large property could be the first to be seized by a lender.
…
“Real estate fundamentals are softening dramatically,” said Richard Parkus, research analyst at the German bank. “Over the next 12 to 18 months, we expect to see pretty significant deterioration.”
Of particular concern for San Francisco is the fact that nearly 75 percent of the Class A – premier – office buildings downtown traded hands in the past four years, according to Tove Nilsen, director of market research at Colliers International. The flurry of activity propelled sales prices to record highs and drove the ratio of rental income to cost to all-time lows.
According the article vacancy in San Francisco has risen by 32% from the 1st Quarter of 2008 to the 1st Quarter of 2009.
Marcus & Millichap predicted in their 2009 National Office Report a rise in vacancy of 400 bps to 15.1% in 2009 for San Francisco. As well, they predict that effective rents could drop as much as 10.7%.
Falling rents and rising vacancies will drive the value on a leased office property lower. Lower values make it more difficult to obtain financing.
Another factor that is hurting owners’ ability to refinance is rising cap rates. Investors are acknowleding the greater risks inherent in real estate and are expecting a greater return. This desire for a greater return is driving cap rates higher.
It may be a while before we see the end of the commercial real estate cycle. Properties that provide a strong cash flow now may still be a good buy. Don’t expect to find financing in today’s market for a property that cannot service the debt at a ratio of $1.10 of income to $1.00 of debt service. More institutional lenders are requiring even hire debt service coverage ratios of 1.3 or greater.
CoStar.com is reporting that Opportunities Mount for Distressed Office Buildings, But Few Are Trading.
According to the report there are currently 19,600 office buildings with vacancy ranging from 60-100% of the office space. According to the chart compiled by CoStar San Francisco has 125 buildings in this category and the Oakland/East Bay has 208 buildings.
The article also reports few if any sales of these distressed assets.
The reasons for the dearth of deals appear to come down to three primary factors: the pricing disconnect that exists due to rapidly declining market fundamentals, tightened credit conditions, and a lack of appetite for risk on the part of [both] lenders and investors.
The answer CoStar provides is exactly correct and comes down to a matter of perspective.
Sellers tend to be optimistic about the future value of assets and buyers tend to be pessimistic or at least realistic. Sellers foresee rental rates rising and demand picking up for commercial office properties. This perspective motivates sellers to hang on to the property until a buyer who recognizes the “true value” of their property or they are forced to sell through foreclosure.
Buyers realize that though the seller may expect rents to increase, there is no guarantee that this will actually happen. Buyers want to pay a price based on actual rents, if not decreased rental rates due to the over abundance of office space. Buyers with this perspective will hold out until they can buy a property that meets their criteria.
A lot of the value attributed to office buildings in the past five years was a product of the ability of buyers to leverage the properties to such a degree that even a slight increase in rents or occupancy gave a nice bump to their rates of return.
With 80-90% loan to value leverage, unavailable buyers need to have a greater upside in relation to the purchase price to get a compensating return commensurate to the risk they are taking on.
It has become a staring match of sorts. Neither side wants to show weakness and neither side is ready to admit defeat.
Until one side concedes defeat, the staring will continue and properties will remain unsold.
Who will blink first? Will it be they buyers or the sellers?
Office Depot is shuttering 122 stores. This is more bad news for retail property owners.
The NY Times is reporting on the likely increase in defaults of CMBS loans.
Many of these loans were made in a competitive lending market. Underwriters made aggressive forecasts for property income and expenses in order to justify higher loan amounts.
If the buildings miss these targets or lose tenants it may be difficult for them to make the monthly payments on this CMBS debt.
The New York Observer has an interview with the head of CB Richard Ellis’ distressed asset team, Spencer Levy. CB Richard Ellis is among the many players that have formed distressed asset teams or funds to take advantage of the incredible buying opportunity in the coming years.
Anyone interested in the San Francisco East Bay office market should head over to Jeffrey Weil’s blog.
Jeffrey works for Colliers International in the Walnut Creek office. Read his bio here.
Diana Olick outlines some of the issues that are causing jitters in the commercial real estate world.
“As the market is now deteriorating, as vacancy rates are rising and as asking rents are moderating and in some places declining, gaps in cash flows, how much money is the property producing versus what the debt service payments are, that gap is widening in many cases and it’s making it really challenging to meet the debt service coverage payments.”
Is this part of an insidious plan to force the Middle East to kowtow to the U.S. by having them throw money after companies swirling around the drain?
Saudi Prince Alwaleed bin Talal plans to support Citigroup by upping his stake in the bank, but news of the modest increase may not be enough to revive weary investors' confidence.
I think home prices are coming back to reality.
Despite an increasingly uncertain economy, thousands of homebuyers around San Francisco Bay kept snatching up foreclosed homes last month, dragging down the median home price by 41 percent from a year ago, a real estate tracking firm said Thursday.
The median home price in the nine-county region plunged to $375,000 in October, compared with $631,000 in the year-ago period, according to San Diego-based MDA DataQuick.
Last month’s median price was down 6.3 percent from September and nearly 44 percent from the peak median of $665,000 in the summer of 2007.
NorCal median home price plummets 41 percent – Yahoo Finance.
Commercial Mortgage Lender for Owens Financial Group a California based hard money portfolio lender.
phone: (925) 280-5388
