Unlikely commercial real estate rebound
29.12.2010 00:01
For years commercial real estate has been billed as the next big train wreck. So why are some investors shouting all aboard?
A slowly is part of it, though no one expects to make a quick killing on loans and securities tied to office buildings, hotels, shopping malls and the like. The bigger drivers of this rally are the pushing investors to by taking on more risk, and the that has allowed lots of companies once left for dead to refinance loans and trudge forth.
All aboard the CMBS express?
Those trends made commercial real estate debt and commercial mortgage-backed securities, or CMBS, among the top-performing asset classes this year. Buyers aren't banking on a repeat of the past year's mega-returns, which were driven by the sector's stubborn failure to collapse and by a surge in bond prices fueled both by liberal and fear that the economy was .
But at a time when investors feel the powers that be are forcing them to take on more risk, some strong supply-and-demand factors appear to be on CMBS investors' side, at least if they keep their wits and stick to higher-quality deals.
"Commercial real estate is one of our favorite risk assets," said Christine Hurtsellers, chief investment officer for fixed income and proprietary investments at ING Investment Management. She said the firm has 10% of assets in whole commercial loans and is also overweight CMBS.
Greg Michaud, who is the head of real estate finance at ING, said CMBS values have been especially aided by loose Federal Reserve policy because they are priced against Treasury bonds, which until recently were trading at yields near longtime lows. The yearlong decline in Treasury yields helped to bring in CMBS spreads as well.
"If you can give it some time, employment will bounce back and then commercial real estate will start rising," said Michaud. "And you're getting paid enough that you can afford to wait for a bit, because it's not going to happen tomorrow."
No indeed. A recent Deutsche Bank report notes as "headwinds" the continued weakness of household balance sheets, the rising number of underwater mortgages, the lack of corporate pricing power and the unhappy fiscal outlook for all levels of government. So it's pretty windy out there. Add to that the recent back-up in bond yields, and you have a good, stiff breeze blowing in your face.
"Investors should be cognizant of the impact downside risks could have on their portfolio," Deutsche Bank analyst Harris Trifon counsels.
Even so, many investors are crossing their fingers and hoping for a low double-digit return in 2011, on the assumption spreads will further tighten. CMBS spreads have narrowed sharply over the past year in part because the worst case scenario widely discussed in mid-2009 , and more of the same is expected for 2011.
"A year or two ago these were priced for the second Depression and then some," said Arne Espe, vice president of fixed income research at USAA Investment Management in San Antonio. "We haven't seen the huge defaults a lot of people were expecting."
Bank of America analysts say the high-yield default rate should fall to 2% in 2011 from 13% or so at the worst of the 2008-2009 crisis. Meanwhile high-yield issuance could hit $300 billion, in line with this year's record performance.
Yet CMBS issuance remains deeply depressed, an artifact of the near total collapse of this market after the bust of 2007. New bond sales are expected to rise for the second straight year to a range of $40 billion to $50 billion, yet are likely to remain some 80% below the 2007 peak. As long as the bond market stays open, it appears there will be deals to be had.
No one can guarantee the slow moving commercial real estate recovery won't jump the track, obviously. Deutsche Bank's Trifon warned this month that while banks have managed to slash commercial real estate exposure by $150 billion over the past 15 months, the sector still poses "a systemic risk to the banking system if the economic recovery falters."
What's more, the flood of high-yield issuance creates the prospect of a refinancing cliff in coming years. Deutsche Bank points to $700 billion of high-yield refinancing obligations coming due this year, though it sees that sum as eminently manageable.
Less optimistically, Moody's in a recent report that while the wave of extend-and-pretend deals in high-yield land "has allowed many to avoid default and continue to ride out the halting economic recovery, it has built a towering debt obligation in the years ahead."
That doesn't sound healthy. Even so, some bond buyers say the deleveraging and property price declines of recent years make both commercial loans and CMBS a decent relative value at a time when value plays are few and far between.
"With low yields, people are sniffing around everywhere," said Espe, who helps run funds including the USAA Cornerstone () fund, which invests up to a fifth of its money in real estate related plays. "There is some risk, but it is hard to stress super seniors enough to lose money."
And while it may seem like everyone and his brother is piling into high-yield this and mortgage-backed that, the lesson to skeptics from the past decade is that the market can stay irrational far, far longer than you can stay solvent.
"Yes, I'm worried about herding," said Espe. "But I think the move into these assets is just beginning to happen."
I am very happy to hear the strong rebound of commercial real estates in USA. Because it is quit a coincidence I thought about USA economy. Different from miserable Japanese economy(by the way I am Japanese living in Canada now and had been in Ohio for 5 years), USA has no national debt to China and Japan and etc. No person has any debt. Every company does not have any debt like Apple Inc. Any states have no debt. so, and now There is only possibility for USA Economy that the price of real estates property will surely gp up an up way to the moon. no wonder. and The price of houses will go up and up way. we must realize different from poor Japan,USA did not bailout any banks and any comanies.
We as rational person has to realize again unbelibable robust condition of American Economy, it is not Japan.
God bless America. America is So Great.
It's weird for sure. I didn't notice a huge arrive of commercial properties in foreclosure situation.
regards
tony
The primary issue is the bank regulators and accountants have agreed not to force banks to "realize" their losses and thus have "artificially" propped up the commercial real estate markets.
Posted By Tony Frank Dallas, TX: December 21, 2010 11:03 pmThe number of delinquencies in commercial mortgage-backed securities continued to climb in November rising to 8.63%, according to Moody's Investors Service.
Analysts said the Moody's Delinquency Tracker has remained on a steady upward trajectory during the second half of this year, although the rate hasn't increased by more than 25 basis points in any month. November's rate is 24 bps higher than the 8.39% for October, which was up from 8.24% for September. The increase last month was the largest since May but still significantly lower than the monthly average of more than 50 bps in the first half of 2010.
Posted By Anonymous: December 21, 2010 4:56 pmAt last those deeply in the rut want to extend a hand for others to go done with them. No Thanks it is time to fess up and admit the ship is going down, the only thing is they slowed it down. Everyone will know when it hits rock bottom. Have you looked at the surplus in commercial real estate maybe you should take off those rose colored glasses.
Posted By hoodwinked port saint lucie florida: December 21, 2010 4:16 pmThis is a deflationary crash! Nothing has been fixed. We are doing more of the same. Sovereign debt, state and local government debt is at risk. Stimulus is going to end. All that is left will be a mountain of debt. State and local governments are already cutting jobs, pensions, spending. They won't be able to pay their debt! And individual investor is fully invested in the bond bubble just when deflation is going to hit harder:
Posted By Paul Hank, Redondo Beach, CA: December 20, 2010 12:01 pmKeep dreaming
Posted By Minneapolis MN: December 20, 2010 10:21 am « »CNNMoney.com Comment Policy: CNNMoney.com encourages you to add a comment to this discussion. You may not post any unlawful, threatening, libelous, defamatory, obscene, pornographic or other material that would violate the law. Please note that CNNMoney.com may edit comments for clarity or to keep out questionable or off-topic material. All comments should be relevant to the post and remain respectful of other authors and commenters. By submitting your comment, you hereby give CNNMoney.com the right, but not the obligation, to post, air, edit, exhibit, telecast, cablecast, webcast, re-use, publish, reproduce, use, license, print, distribute or otherwise use your comment(s) and accompanying personal identifying information via all forms of media now known or hereafter devised, worldwide, in perpetuity. .
Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.Subscribe to Street Sweep: | Company | Price | Change | % Change |
|---|---|---|---|
| 4.78 | 0.01 | 0.19% | |
| 13.37 | 0.10 | 0.75% | |
| 20.41 | 0.25 | 1.24% | |
| 18.38 | 0.20 | 1.07% | |
| 16.72 | -0.16 | -0.92% |
| Index | Last | Change | % Change |
|---|---|---|---|
| 11,585.19 | 30.16 | 0.26% | |
| 2,663.91 | -3.36 | -0.13% | |
| 1,259.43 | 1.89 | 0.15% | |
| 3.48 | 0.13 | 3.88% |
| | | | | | | | | | | |
chooseFortEKeyFooter(); | | | | | © 2010 Cable News Network. A Time Warner Company ALL RIGHTS RESERVED.
under which this service is provided to you. . .
| Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. . Morningstar: © 2010 Morningstar, Inc. All Rights Reserved. The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2010 is proprietary to Dow Jones & Company, Inc Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2010. All rights reserved. |
Please create a screen name to access this feature.
Screen name (Select one with 3-12 characters; Numbers and letters only)
Forgot password
Enter your e-mail address below and we will send you an e-mail with a link and code to reset your password.
Password selection
Reset code
New password
Log in & let's get started!
Password
Remember me for two weeksNot a member yet?
Sign up or
Screen name
Select one with 3-12 characters;Numbers and letters only
You will receive an e-mail to validate your account
Password
Make it 6-10 characters, no spacesType what you see in the grey box
If you can't read this,Yes, I would like to receive occasional CNNMoney member updates about new features and special offers.
CNNMoney will use the information you submit in a manner consistent with our . By clicking on "sign up" you agree with and and consent to the collection, storage and use of this information in the U.S. subject to U.S. laws and regulations. ()
For our international users, please be aware that the information you submit when registering for our services is collected in the United States of America. In addition to being subject to our Privacy Policy, the collection, storage, and use of your data will be subject to U.S. laws and regulations, which may be different from the laws and regulations of your home country. By registering for this service, you are consenting to this collection, storage, and use.
We're Sorry!
This service is temporarily unavailable. Please try again soon.
Thanks!
Please check your e-mail and click the link to confirm your membership. Then, you'll be ready to participate in all activities and conversations on our site.
Add comment