Rick Jones at Crunched Credit has a thoughtful piece where he offers a hopeful picture for commercial real estate debt markets in 2012.  I can’t go there.

On several basic points he’s overly optimistic (his view in bold).  My view is this:

  • Unemployment (6-7%): for the next 3-4 years, the new normal is +8% – with the most important segment of our work force (the young adults) hammered at +16%.  Hammering the future workers of America will  . . . . ugly thought for old people like me.
  • Commercial Real Estate ("firming of demand . . . mostly expand’): demand for and expansion of commercial real estate will firm up only in limited markets, and only for certain products in those markets.  For example, the opening of the "new" Panama Canal will result in increased demand for industrial space along the Gulf Coast. But, across the nation, retail will remain a point of pain: tepid consumer spending and significant increase in online purchases will undermine the recovery in "sticks’n bricks" retail. As I’ve noted, the human vulture effect of online shopping will impact the retail footprint, and it will ripple across the entire CREF platform.  Next up: office demand will feel a similar squeeze.  For example, my law firm will move in 2012 – with more lawyers but into a much smaller leased premises.  The technology mantra for office space is "fewer people doing more in LESS SPACE."
  • Housing ("housing will finally make a bottom"): its all about moving back the US percentage of home ownership to the more frugal 1960 average of 62% – which will be a significant drop from the ’09 high of @ 67%.  It could be a ten year downward trek, which could take us until 2019 for a return to close to the 1960 number. (Part of me begs to be wrong on this one.) 
  • "EU" feels like "OUch":  by some measures, the EU’s economy is the biggest in the world. We’re tied to the EU both through our heritage, and as a major trading partner.  This is why the US Treasury periodically supports the EU banks. Rick Jones and I agree on this one. The EU is OUch.
  • CMBS comeback ("modestly better"): like Rick, I anticipate an improved CMBS market. Unlike Rick, I pin meaningful improvement for CMBS on the adoption of my "three-step" model:
    • risk retention
    • loan level transparency
    • consistent appraisal & underwriting standards

We’re entering into "tepid" times, which does not equate to "good" news.

Sure, we’ll be innovative and the like.

But  . . .  we can’t structure our way out of this one.

If you view any of this differently, please comment below.

I’ve been following the MERS saga for several years now (prior postings for background).

My bottom line:

  • we need a Federal solution.  This one-state-at-a-time approach is a painful process – and it will negatively impact the iquidity needed in our mortgage finance markets

If you’re just now dropping in on this topic, MERS is an electronic registry that tracks ownership of many residential and some commercial mortgage loans (MERS homepage).  It was created as a tool to bring greater liquidity to the mortgage finance market.  The "paper world" of mortgage finance simply could not, and never will, keep pace with a mortgage market trading in a "electronic world."  In the end, technology will win.  The only question is this:  what is the correct technology solution for mortgage finance?  But back to MERS . . . .

MERS is like the newspaper: once you pick it up, it seems to be at or on every place you touch: at the legislature; in the courts; at the podium with local and state officials; and at the microphone on TV, the radio and blogs.



In the "old" economy, MERS received little scrutiny.  In this "new" economy, MERS periodically is "above the fold" news.

(Yes, the link to a definition of "above the fold" is for those of us who receive news electronically and without the black stuff on our fingers, the kitchen cabinet, the door, etc.) (Link on removing it from wood and from clothes.)

Here’s my update:

  • Courts (MERS making a comeback): after several early losses, MERS now seems to be winning cases. For example, a recent holding by a Federal Court in Texas upheld a MERS foreclosure (giving a nice summary of Texas law, which has a statutory provision supporting MERS).  Also, a recent ruling by the Michigan Supreme Court also was a win by MERS.
  • Political – State Legislatures: this is where laws are created, and as I noted previously, where it could get very interesting.  With Presidential campaigns about to hit full throttle, I expect state and local voices to be very active.  This is the melt-down venue.
  • Political – State Attorney Generals: at least one State Attorney General (Delaware) has joined the lawsuit fray.  Kudos to MERS for . .
  • Transparency:  the MERS site has a good collection of cases, press releases and other information.  Kudos to MERS. (Disclosure – I support MERS and firmly believe in its mission: greater liquidity for the US real estate market through electronic loan registries)

We need a Federal solution.

Please post your comments below.

Yesterday,  I attended the BisNow Dallas Capital Markets Summit.  My partner Chris Nixon chaired the debt panel in front of a crowed that looked to be 400+.  The room was packed (forcing the hotel staff to bring in extra chairs).

The focus was on "where are we heading on commercial real estate?"

You can weigh in on my version of this same topic by participating in my straw poll.

Here are my take-aways (from comments made by the debt panel AND from my conversations with attendees):

  •  CMBS volume, investor risk tolerance & loan level information: one panelist put CMBS loan production at between $25bill & $35bill for 2011; and up to $45bill for 2012.  Frankly, both numbers seem aggressive to me.  This good comment was made: CMBS market is driven by the risk tolerance of the investor.  Good comment; but it takes me back to my soap box: transparency or disclosure of loan level information will solve this; so "show them the beef (information)!  But the loan originators refuse to do so.  (I don’t buy the "privacy" argument – the disclosure can be made in a manner that does not harm the tenant or other parties.)
  • Life company volume: 4thQ 2011 should see a pick up in life company loan closings; and 2012 will increase over 2011.  No surprise to me.  Currently, life companies are being flooded with loan applications.  However, the life company allocations will not satisfy the demand, so borrowers will continue to turn to CMBS for financing . . . which is where "bid-ask" and "bifurcated" come into play (see below)
  • FDIC Slows Down Bank Closures:  now this is way off the radar – service providers that support the FDIC as it shuts down banks are experiencing a severe slow down (even shut down) of work because the FDIC is slowing (even halting) its bank closure program.  While I have NOT confirmed this with other sources (thus it is NOT a "head line" in this blog entry), the source is a good one.  So, combine this with  . . . .
  • Bid-Ask Gap Returns: the uncertainty in the market, and the belief that a second downturn is near, will cause the opportunity buyer to NOT buy right now.  Combine this thought with the FDIC taking a time out, and you get . . . nothing.  More stand-down in the market.
  • Bifurcated Debt Market:  if the property has current cask flow (from solid tenants under good leases), then the property has a long line of lenders offering attractive financing terms; but for every thing else, the only hope is   . . . . inaction by the lender (also knows as "kick the can").  Cash is king; everyone else is a pauper.
  • Smart Money Real Estate Play – Buy a Special Servicer:  you’ve probably been following this one – the rash of investors buying special servicers as a pathway to evaluate and eventually control ownership of key properties (or at least earn fees through affiliated services).

 If you attended this conference and have other comments, or if your market looks like this, please comment below.

So what were the –

  • "hottest" topics read here on TT4L during the first Q of 2011?
  • the items most popular "downloads" of materials available for download on TT4L?

The list (and links) below are the most widely read blog posts from ToughTimesForLenders (TT4L) from 1st Q of 2011.

During Q1, we focused on a wide range of topics involving distressed investments, including the increasingly popular subject of “lessons learned,” which is a result of lenders reentering the positive lending market.

1Q2011 Top Blog Posts

Frequent readers know that we also post materials, too.  Here are the most frequent downloaded materials in the Q1: 

1Q2011 – Top Blog Downloads

Also, we hit several milestones in Q1.  These numbers might interest you, too:

  • 21,000 "hits" in Q1
  • reached the 350 blog post mark (since our first blog entry in September of 2008)
  • reached the 4,700 download mark (since September of 2008)

We hope TT4L is a rich and helpful resource for you. Coming later this year: “GoodTimes for Lenders” – where we’ll focus on loan origination!

If you have a "favorite" post or download, please mention it below.


Earlier this week, another member of ACMA called me to ask if I’d be on a panel (at the ACMA fall conference) that will cover "lessons learned for loan documents."

It was an easy "yes" for me – because I’ve covered parts of that list here (new non-recourse events); and as we work on distressed mortgage loans, we’ve been collecting and creating this list.

Here are a few more items from our list, with another comment by me on "how" they point to a very, very basic change looming for commercial real estate: transparency is arriving.

  1. New Financial Reporting Requirements:  commercial real estate finance is all about income and the ability to track and analyze – and to do it quickly and in a manner that allows for better decision making across the entire portfolio (since work loads increase – they do NOT decrease).  So, the loan documents need to support all of this.  Here are a few of the "new" provisions that we’ve seen implemented in workouts and now in new loan document forms:
    • the ability to dictate the format of reporting, such as the use of spreadsheets, XML formatting, and even the use of new data standards (such as those created by MISMO)
    • the ability to require new reporting requirements in the future, based on Lender’s regulatory or investor requirements
    • rent roll and operating statements on at least a quarterly basis
  2. Investors Need Transparency:  I firmly believe that a meaningful return of the CMBS market or product will require better loan level transparency.  It is a view that I now share with PWC, which leads off a recent report with this point:  "Rebuild investor confidence through transparency, expanded disclosures, and enhanced quality of information."  But loan level transparency is a very basic battle of perspectives:
    • commercial real estate professionals believe that the value of their project is closely tied to the "secret" recipe baked into the project by the developerowner (the recipe is the terms of the leases, the terms of the underlying debt, etc.) – and while the value of a project is grounded in the rental stream, the "details" can not be shared (such as the rent roll and lease summaries)
    • investors want to know "what" they are buying, and on the topic of CMBS bonds, a rating agency stamp of approval (i.e., a rating) is not nearly enough information; so this means they want (and I believe deserve) loan level information on lease terms – including the rent roll and the lease summaries

 Please post your comments below.

Perhaps the most important “message” from this year’s MBA-CREF convention is this question: 

  • Will we (finally) see increased liquidity in the commercial real estate finance sector in ’11? 

The convention placed a unanimous “yes” to the question, based upon the “return” of the CMBS lending product – as evidenced by recent securitizations, the large number of CMBS lenders, and predictions that total CMBS securitizations will range from $40Billion to $90Billion during ’11.  And those numbers exceed predictions that life company (portfolio) lending will range from $30Billion to $45Billion in ’11.

While I agree as to increased liquidity in ’11,  my perspective and experience is that CMBS will NOT quickly push aside the life company (portfolio) lenders as the favored lender group – as it did from ’04 to ’07.  in other works, CMBS loans probably will exceed life company loans in ’11, but the life companies generally will capture the best product.

Here are several reasons behind my perspective:

  • CMBS lendingg: basically, the product has too many points of pain on some very fundamental topics to quickly return to dominance over the portfolio lenders, such as:
    • The CMBS closing process is in its infancy, as the lenders struggle with the need to simplify loan documents for smaller loans, more complicated SPE requirements (due to the GGP case), and heightened loan level review at pooling.  The deals are tough to close – and questions and work on loans are not “over” until the securitization occurs. This points to my second point  . . .
    • This is “CMBS 2.0” and not merely a tweaking of CMBS 1.0. In other words, this is NOT “CMBS 1.1.” Sure, there is the concern that underwriting and pricing standards might quickly erode given the large number of CMBS lending platforms (such that any changes will make the return of CMBS merely "CMBS 1.1"). However,
      • Investors are focused on loan level information – just look at the “discussions” on the proposed pooling warranties and representations as a pathway for addressing risk retention. In these meeting, the investors are very vocal in their desire to significantly change or strengthen these provisions (when compared to CMBS 1.0). The topics of risk retention and transparency are very basic, and unresolved, issues. (And not the only unresolved issues.)
      • I really doubt that the investor market is anywhere near as large as it was during ’04 through ’07. In that time period, the investor appetite for CMBS bonds literally sucked loans into CMBS debt – and one consequence was the erosion of basic commercial real estate underwriting standards.  Investors now know this, which takes me back to  . . . transparency.
  • Life company (portfolio) lending: simply stated, there is more of it (more $$ allocated) and the life company lenders are willing to price it attractively (but without eroding underwriting standards). These lenders are focusing on  recapturing market share for top-quality product, and they are moving to do so in ’11.

If If you have a different view, or merely want to comment, please do so below.

Below are some observations and comments collected by me from formal and informal meetings, and random conversations though lunch on this second day of the 2011MBA-CREF Convention.

They do reflect my "coming up roses" word picture for ’11: we’ll have more roses blooming in the commercial real estate finance garden, but in ’11 we’ll still be dealing with the continuing bad or under performing product as well.

  • Technology: more signs that technology is changing commercial real estate –
    • Loan Servicing: Investment made by portfolio lenders and loan servicers in databases have been a huge help in assessing tenant-mix risk and in responding to tenant defaults.  This has been money well spent.
    • Loan Production and Underwriting: a next step in the use of technology will be the utilization, by commercial real estate lenders and servicers, of databases used by commercial lease brokers, who have built databases showing entire lease stacking plans (showing full lease terms) and debt payment terms covering buildings in specified markets; these tools will assist commercial lenders and investors in differentiating assets – and in making better investment decisions ("private is the new public").  
    • REO Management: increasingly, apartment rental rates and terms will use database-driven yield management tools, which allow apartment owners (and foreclosing lenders) to set apartment terms based upon "real time" market terms.  (One comment: 30-40% of all first-class apartment operators use this type of too.)
  • Market Share: CMBS – How deep is the CMBS investor market?
    • Life companies and hedge funds will only support annual new issuance of CMBS of no more than $100Billion
      Investors will fight for loan level information (at the time of securitization and during the entire term of the pool) ("private is the new public")
  • Market Share: Life Insurance Companies continue to "take back" market share "lost" to the CMBS loan market – How?
    • better pricing
    • better closing process (shorter loan documents, less structure, etc.)
    • focusing on "best" properties, in the "best" markets
    • let the 25+ CMBS lenders fight over the secondary properties

That’s it for now.  Off to lunch.

Please post your comments or questions below.

More on the trend pushing for loan level transparency, which I believe is a needed second step to create a deep and vibrant CMBS market . . . . one in which investors have needed information and thus can more accurately evaluate risk, and consequently commit more capital to the product – and to remain committed.

(Can we agree on this: we need MORE investment capital in commercial real estate? Sure, pricing is a [superficial] problem, but isn’t the fundamental problem one of information?)

And, I’m convinced that technology is in place, which will make loan level transparency a reality.

If I’m correct, then who will lead the charge?

Recall that the SEC is pushing for disclosure of loan level information, in what I call "private is the new public." (For my other entries on this topic, search this blog with the term "transparency.")

But can the will to generate loan level information be driven from within the commercial real estate industry?  What commercial real estate niche or player will take the finger out of the information technology dike?

It certainly is NOT –

  • loan servicers, who are not sufficiently capitalized to capture and manipulate information as data
  • lenders (and loan originators) have been bailed out (without having to embrace transparency) andor are profitable again (and thus not motivated to invest in change)
  • investors, who have other asset classes to place their capital (why should they bring commercial real estate into the information age? they buy a product – not manufacture one)

So, if not servicers, lenders nor investors, then who takes their finger out of this dike?

Maybe this one:

  • Apartment landlords

In the Tuesday, January 4 edition of the Wall Street Journal, Dawn Wotapka has a piece titled "Landlords Upgrade Rent Monitoring."

She reports that sophisticated apartment landlords are using database driven software to collect market rental information, allowing them to quickly make rental rate adjustments to optimize apartment income – in the same was as airlines, hotels, and casinos gather real time information for real time pricing decisions.

This simple use of technology creates valuable information.

This will be information that:

  • lenders must approve (if loan documents give lender the right to approve rental terms – or perhaps the method of establishing rental terms)
  • Investors will seek before they invest (and continue in the investment)

Like all data: the "best" data is created by an initial user, and once it is created, it has immense value to the balance of the investment capital food chain.

Here it comes.

So, what do you think?  Will this little hole in the dike be the beginning of the information age in commercial real estate?

Or, is commercial real estate simply a "one-off" jewel, incapable of understanding by anyone other then the jeweler?

Please post your thoughts below.

At least one rating agency (Fitch) has announced that it will be looking more closely at loan level valuation.  HousingWire reports that Fitch  "plans to look more closely at property valuations and loss-coverage multiples when assigning ratings for fixed-rate commercial mortgage-backed securities transactions."

My assumption is that this is at securitization or pooling – and not during the life of the loan NOR at the transfer of a loan into special servicing.   (Am I incorrect in this?)

As I’ve noted, a healthy CMBS 2.0 will be a three step dance:

  1. risk retention
  2. loan level transparency
  3. consistent appraisal and underwriting standards – during the entire life of a pool (and the individual loans)

One – Two- Three . . . One-Two-Three

Question: will Fitch’s approach put further pressure, or at least consideration, for a common valuation methodology for valuation at loan origination AND throughout the life of the pool and the loan (including any transfer to special servicing) – what I call "step 3"?

Hopefully it will.

If not, then  . . . step three is not a reality and we really do not have a dance.

Please post your comments below.

The focus on risk retention under the Dodd-Frank Act and by industry regulators and committees is well-deserved.  

However, in order for the public capital markets to fully bring liquidity into the commercial real estate industry, risk retention merely is the first step in a three-part move.  The liquidity dance will not be complete until two more significant steps become part of the routine.

In order for public capital markets to meaningfully return to the commercial real estate industry, the capital market dance will need to learn a new three step:

  • Step One: Risk retention for the pool (read: structure)
  • Step Two: Loan level transparency during the life of a loan in the pool (read: new uses of technology to deliver information) (Or as I like to say:"private is the new public") (My friend, Jim Flaherty, is more blunt about it: "CMBS 2.0 without fully disclosing the rent rolls and underwriting models is a bad idea.")
  • Step Three: Consistent appraisal and underwriting standards during the life of a loan in the pool – such that loan origination and servicing both apply the same standards (read: consistent methodology)

Until all three of these elements are in place, the public capital markets will not be a significant source of capital for the commercial real estate market; and unless another product enters the market (perhaps covered bonds), credit liquidity will be a challenge for the commercial real estate industry.

All three steps are needed in order to public investors assurance that both their investment and their return (or profit) on the investment will never be at risk – under almost any scenario  (short of a nuclear war, collapse of a nation, etc.).  

No one should be surprised that all three steps are necessary.

Remember that the riddle in the ’80s was "how can we monetize commercial real estate, so that it will trade like a credit card receivable? Can we transform commercial real estate, so that it is fungible?  And if not, how can we structure around it?"

CMBS 1.0 was the answer . . . but with a focus on structure (Step 1) (sample large loan structure), with little thought about Steps 2 (information) and 3 (methodology).

CMBS 1.0 was all about structure: structure this, structure that . . . . step one, step one, step one.  And a lot of step one.

We know "how" the first dance ended: it was a one-step move that finally shut down the band.

If there is a meaningful second dance (at meaningful investment levels by the public capital markets), it’ll have a more than a single dance step – enough steps to cover the entire dance floor.

Please post a comment if you have thoughts or suggestions.