Cap Rates in Decline for Class-A Properties in All Sectors

Cap Rates in Decline for Class-A Properties in All Sectors
Mar 9, 2010 - CRE News

The days of rising capitalization rates are coming to a halt for class-A properties in all commercial sectors, says CB Richard Ellis.

Cap rates for those assets with stabilized incomes in the office, multifamily, retail and industrial sectors last year declined or held flat in more markets than the number of markets in which they rose, according to the brokerage's analysis of sales data from Real Capital Analytics.

Going forward, CB expects the number of markets with flat or falling cap rates will even more significantly outnumber those in which they increase.

Cap-rate declines last year were slightly less prominent for class-A office, multifamily and industrial properties that are considered value-add in nature. Those are properties whose incomes could be significantly increased through renovations, re-tenanting and other strategies.

In several regions, the number of local market cap-rate increases for value-add properties within specific sectors exceeded the number of cap-rate declines. But in 2010, the number of markets in which cap rates for those value-add properties in office, industrial and multifamily sectors decline will exceed the number in which they rise, CB predicted.

For the retail sector, CB said that "rates appeared to have peaked." It expects rates for both class-A and -B assets to decrease in 2010, particularly on the East Coast, while rates should rise for lower-quality, class-C retail assets.

It noted that cap rates for power and grocery store-anchored centers have recently declined in markets that include Boston, Tampa, and Dallas. CB also said investor interest last year increased from the year before in virtually every retail market that it covers and is expected to spike further this year.

Its retail-sector coverage did not differentiate between stabilized and value-add properties.

Across all sectors, the brokerage expects buyers' growing sense that pricing has hit bottom will rev up their already-strong interest in class-A assets. That would also prompt them to make higher bids, which translate into lower cap rates.

It further noted investors have been building their acquisition war chests, led by REITs, which last year raised $28.3 billion of capital, including $17.2 billion of equity from 59 stock offerings.

It also expects sales activity to increase as a result of more properties being offered by sellers, particularly lenders with assets that back loans that are in default. Cap rates for class-A properties have been kept down by a combination of owners' general unwillingness to sell over the past year and strong investor demand for higher-quality properties, as compared to the weak demand for class-B and -C assets. Investor demand pushes up offering prices, which pushes down cap rates.

When you combine all quality properties, and even after accounting for the dull investor appetite and low bids for B- and C-quality properties, CB noted that cap rates are increasing "at a moderate level."

Cap-rate compression for class-A properties has varied somewhat by property type and geographic markets. For example, in the office sector, it's been most evident on the East Coast, where the rate for stabilized properties last year dropped in eight of the 14 central business districts tracked by CB, compared to drops in seven of the 23 CBDs in the Central and Western regions combined.

Pricing reflects property performance, and CB noted that office-vacancy increases in major markets in the East were less steep than those in its Central and West regions.

In the Central's 11 CBDs, cap rates for stabilized class-A office properties declined in four, rose in four, and held flat in the remainder. For 2010, CB sees cap rates holding flat in eight Central markets and falling in Chicago, Cincinnati and Detroit.

In the West, rates rose in seven of the 12 CBDs tracked, dropped in three and held flat in the other two. Rates there are seen rising this year in Denver, which recorded a range of 8.5 to 9.0% last year, and Sacramento, CA, whose rate last year ranged from 8.0 to 8.5%.

The West, however, slightly led the East in cap-rate compression for class-A multifamily properties that are stabilized. In 11 of the 12 Western markets covered, cap rates declined last year and are expected to fall again this year. The sole exception was Portland, Ore., where cap rates held flat at a range of 6.5 to 6.75% and are expected to increase by less than 50 basis points this year.

Cap rates for stabilized multifamily properties declined in eight of the 14 Eastern markets, held flat in two and increased in four: Miami, Philadelphia, Jacksonville, Fla., and Raleigh, N.C.

For 2010, CB expects cap rates for stabilized multifamily to decline or hold flat in every market in the East except Memphis, TN, where it foresees a 50-plus bp gain from the 2010 range of 6.75 to 7.25%.

In the Central region, cap rates for stabilized, class-A multifamily dropped in five markets and increased in the other six. Rates are expected to hold flat in all of the Central region's 11 multifamily markets this year.

The Central region had the highest proportion of industrial markets cap-rate declines last year, dropping in five of the region's nine markets and increasing only in Detroit and Cincinnati.

Rates declined in six of the East's 14 industrial markets, rose in another six and were flat in the other two. In the West, the rate declined in eight of 12 markets, rose in three, and was flat in Phoenix.

As an example of how cap-rate suppression has been slightly less evident for value-add properties, eight East Coast markets last year recorded cap-rate increases in class-A industrial transactions that were considered value-add, versus four with declines and two with no change in rates.

Copyright © 2010 Commercial Real Estate Direct, a service of FM Financial Publishing LLC. All rights reserved.

Mezz Market Heats Up in First Quarter

Mezz Market Heats Up in First Quarter

By: Jerry Ascierto
Multifamily Executive/Apartment Finance Today

The mezzanine financing market is heating up in the first quarter of 2010, with all-in rates dropping and more lenders re-emerging from the shadows. And while the rates and terms being offered today aren’t exactly aggressive, they are starting to come back down to earth and resemble historical norms.

“The market is loosening up incredibly in the last 60 days; it’s really taken a 180,” says Gary Mozer, managing director of Los Angeles-based George Smith Partners. “People are trying to put money out now, which is a big difference from last year. We’re seeing a lot of money getting a lot cheaper and more flexible.”

For the most part, mezzanine debt is being priced in the 12 percent to 16 percent range, down from 14 percent to 18 percent a year ago. The cream of the crop can access rates near 10 percent these days, while riskier transitional assets may get up to 18 percent. Still, the long-term average for mezz loans is around 12.5 percent, so the prices are a bit high by historical standards.

RCG Longview, one of the multifamily industry’s most prolific mezz lenders, remains active. And there are a handful of large mezzanine providers that have grown more active recently, including mortgage REITs Starwood Capital Group, Ladder Capital, and Colony Capital. For the most part, these mezz providers are offering 1.05x debt service coverage ratio (DSCR) requirements, though given today’s fundamentals, few deals make it that far.

New Era
Still, it’s a turnaround from last year. Throughout 2009, the market for mezz debt was effectively stalled. Lenders began focusing more on the losses racking up in their existing portfolios, and uncertainty over the depth of the recession muted activity. Plus, the fact that Fannie Mae, Freddie Mac, and the Federal Housing Administration were offering leverage levels around 75 percent lessened the need for mezz financing.

“People are becoming a little bit more comfortable that, no matter where the bottom is, it’s not going to be too far from here,” says Dave Valger, director of New York-based RCG Longview. “And both Fannie Mae and Freddie Mac have pulled back to where you’re seeing average loans in the 65 percent range. Underwriting, performance, and values are all reducing senior loan proceeds and creating a larger void for us to fill.”

Last year, RCG Longview closed a $600 million debt fund to originate bridge and mezz loans. The company invested about 30 percent so far but still has about $500 million in capacity. When the fund was closed, the company saw a lot of opportunity in lending to owners with significant amounts of deferred maintenance. But in a sign of the times, RCG is also targeting the program more to lenders who find themselves unwitting owners and struggling to deal with REO.

Indeed, most of the demand for mezz is on the defensive side: to recapitalize an asset through a discounted payoff, for instance, or to fill the gaps on a refinance. The focus for RCG this year is cash-in refinancings, where a borrower with a maturing construction loan or other short-term loan seeks to refinance.

Taking Charge
The issue of maturing loans hangs like a dark grey cloud over the multifamily industry. But Freddie Mac, for one, is taking the problem into it’s own hands. The government-sponsored enterprise (GSE) recently announced it would soon partner with a handful of mezz providers to help refinance over-leveraged properties.

The program was still being ironed out as of late February so much remains to be seen. But the intent is that partnering a senior loan with a mezz piece will allow owners to borrow up to 85 percent of the property’s value when refinancing.

The GSE said that the program isn’t intended to rescue deeply troubled properties, where values have fallen so far that there’s no equity left in the deal. Instead, the company will target good owners stuck in bad markets, cash-flowing properties of experienced borrowers victimized by declining values.

“This would be a solution for the refinancing of over-leveraged properties,” says Mike May, senior vice president at McLean, Va.-based Freddie Mac. “The mezz would be provided by a third party and we would work with several mezz providers for the program.”

Loan Demand Raises Worry

Loan Demand Raises Worry

The Wall Street Journal
Jan 22, 2010
By MATTHIAS RIEKER

Banks keep giving evidence that losses from bad loans will abate soon. But in a worrisome sign for the economy, demand from consumers and commercial borrowers remains tepid—offering little opportunity for growth at the banks.

"Loan growth is going to be tough" this year, BB&T Corp. Chairman and Chief Executive Kelly King told investors during a conference call, a statement echoed by SunTrust Banks Inc. Chairman and Chief Executive Jim Wells and by many other bankers this week as they reported earnings.

While bankers say they there isn't appetite for loans, borrowers say banks just aren't lending—or are setting terms for loans that are too difficult.

That trend of slow loan growth, or even shrinking loan portfolios, will likely translate into a tough—albeit most likely profitable—2010.

Losses from borrowers who cannot pay back their loans may not rise much more, and banks will need to set aside less money to offset such losses. The number of borrowers falling behind on their payments has already eased.

For lenders like SunTrust, which has struggled with losses, earnings growth will come from lower credit costs rather than loan growth.

SunTrust said its fourth-quarter interest income, the revenue from lending, fell 2% from the third quarter and 18% from a year earlier, to $1.6 billion; though profits from lending increased because SunTrust, like most banks, has to pay less interest on deposits.

The Atlanta bank set aside $974 million for current and future loan losses, 14% less than in the third quarter.

SunTrust reported a quarterly loss of $248 million, compared with a $348 million loss a year earlier. The company's loans fell 10.5%, to $114 billion.

BB&T, a stronger bank, had fewer loan losses, so its earnings will get less of a lift from falling credit costs, said Kevin Fitzsimmons, an analyst with Sandler O'Neill & Partners LP.

BB&T's profit fell 36%, to $194 million. Its interest income rose 5%, to $1.5 billion, because it bought failed Colonial Bank last fall.

BB&T's loan book rose 7%, to $109.7 billion, but without the acquisition the portfolio would have shrunk, Mr. King said. The bank's loan-loss provision rose 37% to $725 million.

"I don't feel necessarily that you need to keep building" the loan-loss provision "at this point in the cycle," Mr. King said during a conference call.

Though higher profits are of course welcome to investors, it's better to have profits from core revenue growth than from lower loan-loss provisions.

Some banks, such as Huntington Bancshares Inc., which reported a fourth-quarter loss of $370 million, compared with a $417 million loss a year earlier, might grow by buying failed banks, which requires little capital, said Tony Davis, an analyst with Stifel Nicolaus.

"We would opportunistically look at acquiring with assisted transactions," Huntington Chairman and CEO Stephen Steinour said. But "our primary focus is getting to profitability, driving the core" earnings, he said

Write to Matthias Rieker at matthias.rieker@dowjones.com

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Big investors moving into CRE market

Distress Calls Begin to Go Out
Macklowe Moves to Regain Drake Hotel; Blackstone Buys In on a Flailing REIT

WSJ, Jan. 5, 2010

By LINGLING WEI, KRIS HUDSON and CHRISTINA S.N. LEWIS

Big-name investors have swooped in on two high-profile commercial real-estate assets in a sign that activity is returning to the investment-property market.

Private-equity firm CIM Group has teamed up with New York developer Harry Macklowe to help him regain control of what is regarded as one of the most valuable vacant lots in the world, according to people familiar with the matter. The site of the old Drake Hotel, in Midtown Manhattan at Park Avenue and 56th Street, has been under the cloud of foreclosure for about five months after the collapse of Mr. Macklowe's empire.

View Slideshow
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Noah Rabinowitz for The Wall Street Journal

The lot at Park Ave at 56th Street has been under a cloud of foreclosure for about 5 months.

In the other opportunistic move, private-equity giant Blackstone Group LP is making a grab for Highland Hospitality Corp., a real-estate investment trusts that owns 27 hotels. Highland has been struggling to restructure its $1.7 billion debt load amid the worst downturn for the hotel industry in decades.

Both Blackstone and the partnership of CIM and Mr. Macklowe are using a strategy that is expected to become increasingly popular this year: going after distressed commercial-property assets by buying debt or paying off creditors at a steep discount.

In the case of the Drake site, the partnership has signed a deal to pay off about 10 creditors that hold the $510 million loan the developer took out primarily to acquire the site. The creditors are getting paid as much as 90 cents on the dollar and as little as zero, the people with the knowledge of the matter said.

Deutsche Bank AG, which made the loan, sliced it into four tranches and then syndicated it to the investors. IStar Financial Inc. and Sorin Capital Management hold the senior-most slices of the debt and Realty Finance Corp., owns the junior-most piece. Representatives of Macklowe, CIM and the creditors declined to comment.

Meantime, Blackstone is aiming to control the restructuring Highland by buying a chunk of so-called mezzanine debt with a face value of about $320 million from Wachovia Corp. That piece of debt, in a key position between the equity and the first mortgage debt backed by the hotels, gives Blackstone a significant say in how any restructuring unfolds, people familiar with the matter said.
[REALDEALSJUMP] Underwood & Underwood/CORBIS

The Drake Hotel site in New York City has been facing foreclosure.

Blackstone also purchased the debt at a significant discount to its face value, according to a people familiar with the matter. Representatives at Blackstone and Wachovia declined comment.

Blackstone itself is trying to restructure the $20 billion in debt it took on when it bought hotel chain Hilton Worldwide Inc. in 2007 at the market peak.

The deals come as pressure builds in the commercial real-estate market with landlords struggling with rising vacancies, falling rents and heavy debt loads. According to Real Capital Analytics, a New York real-estate research firm, more than $160 billion of commercial properties in the U.S. are now in default, foreclosure or bankruptcy.

During most of 2009, opportunistic investors accumulated cash to go after distressed assets but there was very little deal activity primarily because lenders were unwilling to unload debt at distressed prices. But this year, more lenders are expected to take hits as the financing drought continues and rents and occupancy rates keep falling.

The amount of debt available for sale is skyrocketing. Many banks remain reluctant to sell at prices investors are demanding. But the government and servicers responsible for handling defaulted commercial mortgages that were packaged into bonds, known as commercial mortgage-backed securities, or CMBS, are emerging as big sellers.

Currently, the Federal Deposit Insurance Corp. has about $30 billion in real-estate debt that had been held by the scores of banks that have failed since the economic downturn, according to the agency. CMBS servicers also are emerging as sellers because, unlike banks, they have limited flexibility to extend or restructure troubled loans. Carlton Group, a loan-sale adviser in New York, is currently marketing $307 million CMBS loans in one of the largest sales by a nongovernmental agency.

Private-equity funds, sovereign-wealth funds and other investors have accumulated billions of dollars in the hope of taking advantage of the carnage in the same way that investors did during the last real-estate downturn.
Journal Community

* discuss

“ Bon appetit. It would appear a feeding frenzy awaits those who are properly positioned to pounce. Sad, but true. ”

—Dave Georgeson

"This is the first inning in a nine-inning game," said Keith Barket, head of the real-estate business at Angelo, Gordon & Co., a New York-based private-equity firm specializing in distressed investments. "It is going to take three to five years for the ownership of overleveraged properties to change hands to buyers with new equity." Since last summer, Mr. Barket's team has closed about a dozen transactions, totaling $500 million, where it acquired properties for about half of what they traded for two years ago.

But risks remain. The hotel industry continues to struggle although some analysts believe that a slight recovery may start later this year. Blackstone's effort to control Highland, by buying mezzanine debt, hinges on its expectation that the chain is still worth more than its $900 million in senior debt. If that calculation is wrong, Highland's senior creditors will likely wind up controlling the properties. The Highland portfolio, made up mostly of upscale hotels, includes the Hilton Boston Back Bay, the Renaissance Nashville and a Ritz-Carlton in downtown Atlanta.

If the Drake deal closes in two weeks as expected, CIM and Mr. Macklowe will own what may be the world's most valuable rubble-strewn lot, once the site of the Drake Hotel, which was built in 1926. Mr. Macklowe bought and then demolished the hotel in 2007, intending to build a major office tower atop a base of high-end stores.

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

Economic Update - Housing Treads on the Bottom?

Economic Update - Housing Treads on the Bottom?
Jul 24, 2009
By: Dees Stribling, Contributing Editor, Commercial Property News

Could spring 2009 have been the housing bottom everyone has been waiting for since the pop of the bubble? Residential real estate specialists hope so. According to the National Association of Realtors, U.S. existing home sales were up 3.6 percent in June to an annualized rate of 4.89 million. That's more than economists were predicting, and the most since October 2008.

Buyers who have the wherewithal seem to be taking advantage of prices driven lower by foreclosures, relatively low interest rates, and the first-time buyer tax credit. Even places such as central Florida, as well as southern and northern California--markets hit pretty hard by the popping of the bubble--showed sales increases.

Residential sales may be upticking, but values aren't moving in that direction very much. The Federal Housing Finance Agency reported this week that U.S. home prices were up 0.9 percent in May when compared with April, though that's a national average that obscures continuing declines in markets with high foreclosure rates, such as Las Vegas. The U.S. national average home price is down 5.6 percent from May 2008.

In other residential news, the Federal Reserve proposed new rules on Thursday that would change the way mortgage brokers operate. The key provision would ban the practice of compensating brokers based on the terms of the loan, including the rates. This idea has been kicking around for a while now, but in more flush times the mortgage brokers have made a lot of money that way, and have successfully put the kibosh on such restrictions.

Commercial real estate didn't have such a good week, with Moody's Investors Service reporting that office, retail and apartment property prices--to the extent that there's a market--dropped 7.6 percent from April to May. The only good news in that was that the drop from March to April was a record-breaking 8.6 percent. Commercial property is currently down nearly 35 percent from its bubble peak in the fall of 2007. according to Moody's.

The news out of New Jersey on Thursday--that is, mass arrests for corruption--had a real estate component in the form of a former real estate developer turned informant, who reportedly paid thousands in bribes to various officials who are now in the jug. In any case, Hoboken, Ridgefield and Secaucus (at least) will probably be looking for new mayors soon.

Wall Street had another up day on Thursday, with the Dow Jones Industrial Average ending over 9,000 points--up 2.12 percent--for the first time since very early this year. The S&P 500 was up 2.33 percent and the Nasdaq gained 2.45 percent.

Is East Asia's Vertical Retail Model Wave of Future for U.S.?

Is East Asia's Vertical Retail Model Wave of Future for U.S.?
Jul 22, 2009
By: Barbra Murray, Conributing Editor, Commercial Property News

Vertical retailing--building retail destinations higher instead of wider--has long been a success in cities like Hong Kong and Shanghai, but the trend has yet to catch on in the United States. However, given the country's growing population and dwindling pool of developable land in major cities, the time may be just right for the nation's metropolises to jump on the bandwagon, or so believes Charles Chan, president of commercial real estate brokerage firm Harvest International.

"It's a good model for places like New York, Chicago and San Francisco, where it's very densely populated and there's a limited amount of space," Chan told CPN. "I think this is a very timely model for future retailing because not only is space limited but rent, even though it's declining with the downtown of the economy, it's still expensive. So the only way to go is up... and going up, you can have an atrium, a level for food, a level for women's wear, a level for menswear--it's very easy to configure."

Indeed, the vertical retail premise has proven to be a winning endeavor in some major cities overseas. As real estate services firm Colliers International notes in a research paper on vertical retailing in Hong Kong, for retailers that rely on repeat clients--and are not dependent on the exposure a street-front location provides--the upper-floor retail unit is the most appropriate environment. Among the types of retailers that benefit the most from the arrangement are food and beverage businesses, salons and spas and learning centers.

The vertical mall concept certainly provides economic advantages for the retailer, but it presents coveted benefits for the shopper, too. "Nowadays when transportation is so expensive, you can shop and get your groceries at the same place," Chan said. "It's an easier way of living, and it's more cost effective. Additionally, it will work very well in very severe weather; you don't want to drive around and risk chances of getting in a traffic jam or getting hit by a car."

Harvest International is in the process of putting its money where its mouth is. The firm is planning to convert the former Caldor Department store building near Main Street and Roosevelt Avenue in Flushing, N.Y., into a vertical shopping center mecca. The 240,000-square-foot structure, located practically atop a subway terminal and fronting a bevy of bus lines, features four floors for retail space and a two-level underground parking facility. The project, tentatively named New World Mall, is expected to feature everything from a "hyper mega food mart" to a children's play center. "If you are a mother with a child and have only two hours to do your shopping, you can go to a vertical retailing location and within two hours, you can get things done without wasting gas," Chan explained. "You could pick up your groceries, pick up your child and get in and out."

Interior plans for New World Mall are currently being finalized, and once that activity is wrapped up, interior renovation of the building will commence, with a target completion date for early spring of 2010. Already, Chan said, "we've had lots of interest from retailers."

Economic Update - Green Shoots a Little Greener, but CRE Not Overjoyed

Economic Update - Green Shoots a Little Greener, but CRE Not Overjoyed
Jul 21, 2009
By: Dees Stribling, Contributing Editor, Commercial Property News

It was a good way to start the week, economically speaking. According to the Conference Board, the U.S. index of leading economic indicators rose 0.7 percent in June, marking the third rise in the index in as many months. In the first half of 2009, the index improved at an annualized rate of some 4.1 percent , a clear contrast to the way it shrank in the last half of 2008 at an annualized rate of 6.2 percent.

The latest survey from the National Association for Business Economics, also released Monday, posited that the U.S. economy is stabilizing, with nearly half of the more than 100 respondents--who are business economists--saying that the worst is over. Most believe the bottom will be in the second half of 2009, and that the U.S. gross domestic product will rise a tepid 1.2 percent in the second half. Which is better than contracting, anyway.

In a development that gives retailers a bit of a breather, CIT Group Inc. seemed to be on the verge of avoiding bankruptcy (for now) through a $3 billion bridge loan from some of its largest bondholders, according to Reuters, citing unnamed sources. The collapse of CIT, which forms an important source of short-term capital to many manufacturers who supply apparel retailers, would probably have damaged retail even further than its already sorry state.

Even Iceland seems to be on the mend a bit. The government of the island nation, infamous for how completely its financial system melted down last fall, has struck a deal to recapitalize the country's three largest banks, which were seized by the government in late 2008. The $2.1 billion repair of the banking system is an important step toward the disbursal to Iceland of monies from the International Monetary Fund, among other international lenders.

The U.S. economic green shoots aren't expected to affect U.S. employment, a noted lagging indicator, for some quarters to come. Likewise commercial real estate didn't have quite so much to cheer about on Monday.

According to Moody's Investor Service, commercial real estate prices fell 7.6 percent in May. From this time last year, office properties were down 29 percent in pricing, while industrial properties lost 12 percent in valuation.

Even more ominously, according to an analysis by the Wall Street Journal, banks are writing down commercial real estate loans at such a rapid clip that losses on loans tied to such properties could total $30 billion by the end of 2009. The newspaper based that estimate on date gleaned from 1Q09 financial reports published by more than 8,000 banks.

The biggest banks don't stand to be the biggest losers, however, the WSJ predicted. Regional banks, which have proportionally more exposure to commercial real estate loan losses, do.

Wall Street didn't seem to care much about problems in commercial real estate on Monday, with the Dow Jones Industrial Average gaining 104.21 points, or 1.19 percent. The S&P 500 was up 1.14 percent and the Nasdaq gained 1.2 percent. The S&P 500 plans to dump CIT and add Red Hat Inc., a software company.

CMBS Delinquencies Spike

Economic Update - CMBS Delinquencies Spike
Jul 14, 2009
By: Dees Stribling, Contributing Editor, Commercial Property News

U.S. Commercial mortgage-backed securities delinquencies grew in June by a record $2.2 billion, according to Fitch Ratings. Last month there was a 2.6 percent delinquency rate among U.S. CMBS, up 48 basis points from the previous month. In June, at least, problems in retail properties and the hospitality industry inspired much of the upward bounce in delinquencies. But there's more to come, especially in the beleaguered hotel sector.

Fitch said that two loans associated with mall properties owned by bankrupt REIT General Growth Properties Inc. defaulted: a $207.2 million loan tied to Woodbridge Center, and the $164.5 million Jordan Creek loan. As for the ailing hotel business, some 13 hotel loans totaling $596 million defaulted in June, according to Fitch.
"The newly defaulted hotels and the two new GGP loans which are not paying amortization represented almost half of the increase in the index,” Susan Merrick, managing director, Fitch Ratings, told CPN.

The struggling hotel sector looks especially worrisome. "Hotels represented 27 percent of the newly defaulted loans in June," Merrick continued. "This same is expected for July as over $600 million of hotel loans are already 30 days delinquent.”

CMBS problems are hardly confined to the United States, either. Fitch Ratings also said on Monday that 53 percent of loans underlying Japanese CMBS are in default. Japanese commercial real estate is facing a similar set of problems as American CRE: a trickle of financing and a weak economy all around.

Bloomberg, citing filings with the Security and Exchange Commission, has reported that Apollo Global Management L.L.C. plans to raise $600 million in a public offering of shares in its commercial property investment fund, Apollo Commercial Real Estate Finance Inc. The fund will be in the market for the sort of properties that owners really need to sell. That is, properties that can't be refinanced, and out of the $1 trillion-plus in commercial real estate loans maturing in the next three years, there are bound to be some of those.

The National Retail Federation lashed out at Wal-Mart on Monday for the retail giant's recent call for employer-mandated health insurance. (Wal-Mart is not a member of the organization.) Essentially, the NRF said, retailers can't afford it without shedding a lot of jobs.

"Employer mandates of any kind amount to a tax on jobs," Steve Pfister, NRF senior vice president for government relations, said in a statement. "We cannot afford to have new and existing jobs priced out of our collective reach because of mandated health coverage."

Apparently, the telegenic analyst Meredith Whitney helped move Wall Street in a positive direction on Monday with a "buy" recommendation for Goldman Sachs. Its shares and other financial stocks moved upward, helping push the Dow Jones Industrial Average up 185.16 points, or 2.27 percent. The S&P 500 rose 2.49 percent and the Nasdaq gained 2.12 percent.

U.S. commercial real estate woes continue to grow

U.S. commercial real estate woes continue to grow
Crippling » Just in the past year, delinquency rates have doubled on loans

By Alan Zibel, AP Real Estate Writer
Salt Lake Tribune
Updated:07/09/2009 06:47:12 PM MDT

Owners of shopping malls, hotels and offices are defaulting on their loans at an alarming rate, and the commercial real estate market is not expected to hit bottom for three more years, industry experts warned Thursday.

"The commercial real estate time bomb is ticking," said Rep. Carolyn Maloney, D-N.Y., who heads the congressional Joint Economic Committee.

Delinquency rates on commercial loans have doubled in the past year to 7 percent as more companies downsize and retailers close their doors, according to the Federal Reserve. Small and regional banks face the greatest risk of severe losses from commercial real estate loans.

Total losses in securities backed by commercial property loans could be as high as $90 billion in the coming years, according to Deutsche Bank analyst Richard Parkus. He says even more losses -- up to $140 billion -- are expected from construction loans made by regional and local banks, rather than those sold as securities held by investors.

"We believe the bottom is several years away," Parkus told lawmakers.

The commercial real estate market's fortunes are tied closely to the economy, especially unemployment, which hit 9.5 percent in June. As people lose their jobs, or have their hours reduced, they cut back on spending, which hurts retailers, and take fewer trips, which hits hotels.

Funding for commercial loans virtually shut down last year as the financial system unraveled. Industry executives say financing is still extremely difficult to obtain, even for financially healthy properties.

The pain is already spreading through the economy. In April, the second-largest owner of shopping malls in the nation, General Growth Properties Inc., buckled under $27 billion in debt and filed for Chapter 11 bankruptcy protection.

And GE Capital, the financial arm of the conglomerate General Electric Co., has seen its profits from commercial real estate snuffed out in recent quarters.

It went from making $476 million in the 2008 first quarter from its portfolio of office buildings, retail centers and manufacturing facilities to a loss of $173 million in the first quarter of this year and warned that losses on its commercial real estate loans and property holdings could reach $6 billion this year.

Apartments lead the U.S. property default parade

Apartments lead the U.S. property default parade

By Ilaina Jonas - Analysis
Wed Jun 17, 2009 3:53pm EDT

NEW YORK (Reuters) - The multifamily sector is leading all other types of U.S. commercial real estate in having the highest loan default rate but the others are likely to follow, experts say.

Defaulted apartment loans that back commercial mortgage backed securities (CMBS) in May surpassed 5 percent, while retail and lodging broke the 3 percent level and overall delinquencies were 2.77 percent, according to Trepp, which tracks CMBS issues.

Bank loans for apartment buildings defaulted at a rate of 2.45 percent in the second quarter, while those of all other commercial real estate mortgages held by depository institutions reached 2.25 percent, according to research firm Real Estate Econometrics.

Apartment building prices peaked in the fourth quarter 2006, according to research firm Real Capital Analytics. Peak prices for other classes of real estate followed -- hotels in the first quarter 2007, offices and retail in the second quarter 2007, and warehouses in the third quarter 2007.

"Because it peaked first, some of the deterioration has come on a little earlier," said Sam Chandan, Real Estate Econometrics president and chief economist said.

"You've got these waves of issues that are driving defaults for commercial," Chandan said."

Overly generous and plentiful loans pervaded across the U.S. commercial real estate sectors 2004 through 2007 and pushed up values. Getting a loan today is tough. Falling rents and occupancies along with fewer available and lower loans have pushed down values 35 percent to 40 percent. That has resulted in higher defaults.

The apartment sector usually is early to feel economic changes because of its short one-year leases. The default rate among hotels, which have one-night leases, is lower, but likely to surpass apartments soon, Chandan said.

Yet other factors have humbled the apartment sector.

In some markets, prices of many apartment buildings were driven up by investors planning to convert them into condominiums during the housing boom, which ended abruptly in 2006. When the housing market collapsed, condominiums for rent drove down market rents.

In other areas, some of the biggest deals involved pricing based on turning rent stabilized apartments into market rate apartments. That proved more difficult and sent some deals, such as the Riverton, a 12-building apartment complex in New York City's Harlem, into default.

The weak U.S. economy zapped job growth, the key driver of demand for apartments. The U.S. unemployment rate in May reached 9.5 percent. Among 18 to 24 year olds it was 15 percent. About 70 percent are apartment renters who are now doubling up or moving in with their parents.

Higher-end apartments no longer command top prices simply because of amenities.

"Most renters are paying for value, in absolute dollars," said Mike Kelly, president and co-founder of Caldera Asset Management. "They're not going to pay an extra 50 bucks because you have a cabinet in granite."

Caldera helps multifamily lenders maintain the value of properties in pre-foreclosure or throughout foreclosure.

Buyers of lower-end "C" low-rise apartment complexes were not professional real estate investors and were unable to navigate the economic downturn.

"They were thinking they could hire a management company and run a 'C' multi," said Michael Katz, a CMBS veteran and current director of Clark Street Capital, which helps link loan buyers and sellers via an online marketplace. "A 'C' multi is very much like a hotel. You have to know how to handle your clients. There's a lower level of consumer who really doesn't mind being late on their rent."

A large majority of the bank loans financed construction of new apartments and were issued to professional merchant builders, with track records of building new apartments and selling them to investors. Although their default rate is high, many of those floating-rate loans are still performing because they are based on LIBOR, which has tumbled.

"They've been able to offset the poor economics and poor property performance by not paying as much interest," Kelly said.

(Reporting by Ilaina Jonas)

© Thomson Reuters 2009. All rights reserved.

Global Picture Offers Hopeful Glimmers: Cushman & Wakefield

Jun 15, 2009
By: Paul Rosta, Senior Associate Editor, Commercial Property News

Signs that the global economic slowdown is easing could point to recovery starting late this year or in early 2010, according to new reports by Cushman & Wakefield Inc.

Still, the firm’s analysts warn against premature celebration. Referring to the United States, the report on North America states, “The best that can be said about the current environment is that it won’t get any worse, and is more likely to show improvement sometime in late 2009.” That said, the U.S. economy is showing signs of improvement on several fronts. The spread between the three-month LIBOR rate and Treasuries has shrunk from 4.57 percent last October to below 1 percent at most recent report. The housing market may be bottoming out, and consumer confidence is edging up. And surveys from such sources as the Federal Reserve and Moody’s economy suggest that the wave of pessimism among businesses is also subsiding.

Meanwhile, rising oil prices are benefiting several North American markets, particularly Houston, Mexico City and Alberta, Cushman & Wakefield notes. Among Mexico, Canada and the U.S., Canada is looking the strongest, thanks to a stable banking system, government stimulus and rising health care investment. Those conditions bode well for the nation’s real estate market; for example, government requirements for 3 million square feet of office space in Ottawa during the next several years will probably make that market one of the world’s tightest.

Cushman & Wakefield’s analysts also report seeing light at the end of the tunnel for Europe: “We have passed the nadir for the economic cycle in most countries, as the global trade slump eases and as policy measures to ward off financial market collapse take effect.”

Nevertheless, researchers also foresee another year of slow growth and the possibility of some countries backsliding. Greece, Norway and France will fare best among the Western European countries, whose aggregate gross domestic product is projected to decline 3.7 percent this year. In Eastern Europe, where GDP will slide 3.8 percent, standouts will include Poland, the Czech Republic, Slovakia and Bulgaria.
Regarding specific property sectors, the report speculates that the European office rents may soon be halfway through a projected 25 percent peak-to-trough decline in pricing. Moreover, today’s reduced office development pipeline could cause space shortages by 2011. On the investment front, transactions should pick up this year after investment sales volume tumbled 42 percent in the first quarter compared to the fourth quarter of 2008.

In Asia, China will lead economic expansion as government stimulus efforts and stabilizing demand for the nation’s exports boost its GDP growth to 7.5 percent this year. India, Indonesia, Vietnam and the Philippines are also expected to enjoy positive GDP. Japan’s GDP, by contrast, is on a path to shrink 6.1 percent, hampered by weak consumer spending and rising unemployment. Cushman & Wakefield projects that demand for office space by multinational corporations in Asia could start to rebound during the first quarter of 2010.

Citing figures from Real Capital Analytics Inc., the report notes that investment sales volume fell precipitously in Beijing, Hong Kong, South Korea, Shanghai, Singapore, Sydney and Tokyo from the first quarter of 2008 to the first quarter this year. However, investment sales advisers a report increased demand in some markets. And the standoff in one crucial area, yield pricing, may be easing. A gap between buyers and sellers that once reached 30 percent to 40 percent is now more likely in the 5 percent to 15 percent range--“narrow enough for a good (broker) to bridge a deal,” the report notes.

Economic Update – CRE Defaults Head for High Ground

Economic Update – CRE Defaults Head for High Ground

June 10, 2009
By: Dees Stribling, Contributing Correspondent, Commercial Property News

A new report by Real Estate Econometrics, based on FDIC data, puts the commercial real estate loan default rate at its highest level in more than a decade and a half, at least those loans held by regulated deposit-taking institutions—banks and thrifts, for the most part. The default rate soared from 1.62 percent in the last quarter of 2008 to 2.25 percent in the first quarter of 2009. That rate doesn’t include defaults on loans associated with multi-family rental properties, which Real Estate Econometrics put at 2.45 percent in the first quarter of 2009, up 68 basis points from the previous quarter.

The jump brings the commercial real estate default rate to its highest level since 1994, when the industry was last emerging from a severe downturn. There’s no indication this time around, however, that the industry is coming out of its troubles anytime soon. In fact, Real Estate Econometrics forecasts defaults to reach 5.2 percent by the end of 2010.

Currently banks and thrifts hold about half of all commercial real estate debt, representing about $1.6 trillion worth of outstanding loans. A major component of that total, roughly a quarter, is in the form of CMBS. A large share of the most troublesome loans—those at highest risk of default—were originated in 2006 and the first half of 2007, now known to be the most distended period of the real estate bubble, but back then still considered “let the good times roll.” Like so many Vegas McMansions, many of these commercial properties were valued far too highly in those days, and are now underwater.

“Increasingly, a challenge in refinancing these mortgages is that some lenders are seeking to diversify away from commercial real estate,” said the Real Estate Econometrics report. That, and the properties are underwater.

Big banks are lined up at the door of TARP, waiting to get out, according to the U.S. Treasury Department on Tuesday. Ten specific big banks, that is, and while the government did not say which ones they were, Chicago-based Northern Trust said it was one of them, and others likely include the biggest TARP recipients: JP Morgan Chase, Goldman Sachs, Morgan Stanley and that ilk.

If all the banks on the government’s short list were allowed to return their TARP funds, that would represent an influx of about $68 billion to the treasury (fully $25 billion of that would be from JP Morgan Chase, if indeed it’s on the list). So far a number of banks have been allowed to return TARP funds by the Treasury Department, but only relatively small community banks.

American retailers aren’t the only ones suffering from the worldwide economic downturn. German retail owner Arcandor, which owns the Karstadt chain of department stores in that country (as well as a controlling interest in Thomas Cook), has filed for bankruptcy after two requests for aid were turned down by the BRD government. The company had said that it needed help in the form of government guaranteed loans by Wednesday to renew credit lines totaling €710 million ($999 million), which would have kept it going for the next six months. Nein, said the government.

Wall Street turned in mixed results on Tuesday. The Dow Jones Industrial Average ended down 1.43 points, or 0.02 percent, while the S&P 500 was up 0.35 percent, and the Nasdaq gained 0.96 percent.

M-F Mortgage Delinquencies Increase in Q1, Says MBA

M-F Mortgage Delinquencies Increase in Q1, Says MBA

By: Anuradha Kher, Online News Editor, Multi-Housing News
June 3, 2009

The weakening economy and continued credit crunch led to increases in commercial/multifamily mortgage delinquencies during the first quarter of 2009, according to the latest Commercial/Multifamily Delinquency Report, released by the Mortgage Bankers Association.

"Multifamily mortgage delinquency rates continued to rise in the first quarter," says Jamie Woodwell, vice president of commercial real estate research at MBA. “Delinquency rates on multifamily mortgages held by banks and thrifts, by Fannie Mae and in commercial mortgage-backed securities (CMBS) are all now at levels higher than at any time since the 2001 recession. First quarter delinquency rates on commercial mortgages held by life insurance companies remained below the 2001 recession levels."

Between the fourth quarter of 2008 and first quarter of 2009, the 30+ day delinquency rate on loans held in commercial mortgage-backed securities (CMBS) rose 0.68 percentage points to 1.85 percent.

The 60+ day delinquency rate on loans held in life insurance company portfolios rose 0.05 percentage points to 0.12 percent and the 60+ day delinquency rate on multifamily loans held or insured by Fannie Mae rose 0.04 percentage points to 0.34 percent. The 90+ day delinquency rate on multifamily loans held or insured by Freddie Mac rose 0.08 percentage points to 0.09 percent. The 90+day delinquency rate on loans held by FDIC-insured banks and thrifts rose 0.66 percentage points to 2.28 percent.

The MBA analysis looks at commercial/multifamily delinquency rates for five of the largest investor-groups: commercial banks and thrifts, commercial mortgage-backed securities (CMBS), life insurance companies, Fannie Mae and Freddie Mac. Together these groups hold more than 80 percent of commercial/multifamily mortgage debt outstanding.

Based on the unpaid principal balance of loans (UPB), delinquency rates for each group at the end of the first quarter were as follows:

* CMBS: 1.85 percent (30+ days delinquent or in REO);
* Life company portfolios: 0.12 percent (60+days delinquent);
* Fannie Mae: 0.34 percent (60 or more days delinquent)
* Freddie Mac: 0.09 percent (90 or more days delinquent);
* Banks and thrifts: 2.28 percent (90 or more days delinquent or in non-accrual).

SOURCE: Multi-Housing News

Capital Markets’ Distress Mingles with Hints of Improvement

Capital Markets’ Distress Mingles with Hints of Improvement

June 1, 2009
By: Paul Rosta, Senior Associate Editor, Commercial Property News

Signs of growth in distressed properties are mixing with evidence that the U.S. and global real estate markets are starting to stabilize, according to a recent analysis by Jones Lang LaSalle Inc.

The issue of distressed assets in the United States presents a contradictory picture. Loan defaults are at an 11-year high, and lenders and borrowers face the daunting prospect of refinancing commercial real estate loans valued at $1.3 trillion over the next four years. By April, the unpaid balance of CMBS loans in special servicing hit $24.5 billion, a total 10 times as high as it was in March 2007.

Yet commercial real estate foreclosures totaled a surprisingly low $65 million in April--the latest indication that the level of distressed asset sales is much less than predicted by many experts. Jones Lang LaSalle’ analysts suggest that programs like the federal government’ s Term Asset-Backed Securities Loan Facility are encouraging private investors to buy bank whole loans and securities. That, in turn, is giving banks reason to move more on forced sales and foreclosures. Meanwhile, the decision to expand TALF to include new CMBS issues has helped to tighten spreads on AAA-rated CMBS to the 700 basis-point range.

Other trends also suggest that the real estate capital markets are getting on more solid ground. In early May, the Libor-OIS spread dropped to 75 basis points, a nine-month low. The spread between what the U.S. Treasury pays for three-month borrowing and what banks pay reached 77 basis points last month. As recently as last October, the TED spread was 464 basis points.

While some benchmark spreads continue to shrink, the value of REITs is increasing. Since the end of February, REIT market values have gained 60 percent, bouncing back from a dismal six-month stretch during which values slid 80 percent. Rising investor confidence has helped REITs jump $10.6 billion in the public market so far in 2009, a total that already approaches last year’s.

In markets outside the U.S., transaction activity remains relatively low, but Jones Lang LaSalle offers some deals and trends to watch. “All eyes are on Aviva Investors’ proposed sale of an £800 million diversified portfolio of 47 U.K. properties,” the report notes. “It could provide a good indication of the strength of domestic and foreign buyers’ interest in the market as well as a pricing barometer.”

Forced asset sales by private equity funds are increasing transaction volume in Asia. Nippon Life Insurance Co. is under contract for the $1.2 billion acquisition of American International Group Inc.’s Japanese headquarters. And in China, economic stimulus policies appear to be boosting the number of deals. By the end of April, the amount of space trading hands reached 176 million square meters, a 17.5 percent increase compared to the same period of 2008.

Economic Update - CRE Sees First-Quarter Downtick in Brokerage Activity

Economic Update - CRE Sees First-Quarter Downtick in Brokerage Activity

May 21, 2009
By: Dees Stribling, Contributing Editor, Commercial Property News

Commercial real estate has had that sinking feeling all year so far, and on Wednesday the National Association of Realtors quantified things: brokerage activity in the commercial sector dropped 4.8 percent in 1Q09 compared with 4Q08. Compared with the first quarter of 2008, brokerage activity is down 12.9 percent.

Moreover, the NAR is predicting down time for a while yet, since real estate is a lagging indicator behind a broader economy that's still lagging itself. "Because commercial real estate always lags an overall economic recovery, it will take some time for the commercial real estate market to rebound," said Lawrence Yun, the organization's chief economist, in an unsurprising statement.

NAR further posited that U.S. office vacancies will average 16.1 percent by the end of this year, up from 13.4 percent last year, and that retail vacancies will hit 15.8 percent by year's end. That's quite a jump: At the end of 2008, 9.7 percent of U.S. retail space was vacant, according to the NAR.

"Better than expected" struck again with Wednesday's quarterly numbers from Target Corp., which didn't show great or even improving sales, but instead profits that were "better than expected." Target has tightened its grip on expenses since last year and has started promoting itself as a discounter--a far cry from the days when Target wanted to be thought of as better than that Arkansas-based chain whose name starts with "W," but not necessarily as inexpensive.

But cheap is chic in our time. Gregg Steinhafel, Target chairman, president & CEO, said during the company's 1Q09 conference call on Wednesday that "our new broadcast campaign conveys the connection our guests feel towards 'expect more and pay less' and talks to them in an authentic Target voice that we believe will attract savvy price-sensitive consumers."

On the labor front, meanwhile, the Federal Reserve is now predicting an unemployment rate between 9.2 and 9.6 percent by the end of 2009, which replaces the central bank's embarrassingly optimistic prediction at the beginning of the year of an 8.5 to 8.8 percent jobless rate by year's end. The U.S. unemployment rate is currently 8.9 percent, and unless space aliens land and start recruiting human workers, the rate isn't going to go down this year.

The Fed has also re-adjusted its outlook for U.S. gross domestic product. Now it thinks GDP will contract as much as 2 percent this year, instead of the range it previously predicted, 0.5 to 1.3 percent. The central bank did not, at its April meeting, move its key interest rate from near 0 percent.

Wall Street was in positive territory most of the day Wednesday, but then dipped at the last minute, with the Dow Jones Industrial Average ending down 52.81 points, or 0.62 percent. The S&P 500 slid 0.51 percent and the Nasdaq lost 0.39 percent.

Fed expands real estate securities

Fed expands real estate securities

By Jeannine Aversa, Associated Press
Published: Tuesday, May 19, 2009 9:18 p.m. MDT

WASHINGTON — The Federal Reserve starting in July will include a wider variety of commercial real estate securities in a program that's intended to spark consumer and business lending.

Under the program begun in March, the Fed has provided $17 billion in loans to investors to buy newly issued securities backed by auto and student loans, credit cards, business equipment or guaranteed by the Small Business Administration.

The program already is scheduled to expand in June to include newly issued commercial real-estate securities. That could help prevent defaults on office parks and malls, and facilitate the sale of distressed properties.

The Fed said Tuesday the program would be expanded further to include existing high-quality commercial real-estate securities that were created years ago.

The latest change is designed to bolster the market for existing commercial real estate securities, which were hard hit by the financial crisis. It should ease pressure on banks and other financial institutions that hold these securities, the Fed said. That, in turn, should help borrowers finance new purchases of commercial properties or refinance existing mortgages on better terms.

Lawmakers and investors had urged the Fed to make the change.

The Treasury Department welcomed the move, saying it will help "small and midsize banks" and other holders of existing commercial mortgage-backed securities that want to "clear their balance sheet for new lending."

The program is called the Term-Asset-Backed Securities Loan Program, or TALF. It figures prominently in efforts by the Fed and the Obama administration to ease credit, stabilize the financial system and help end the recession. The TALF has the potential to generate up to $1 trillion in lending for households and businesses, according to the Fed.

Starting in July, the Fed will include existing commercial real-estate securities that were issued before Jan. 1, 2009. Those securities will need at least two AAA ratings from among the major ratings agencies, the Fed said. The agencies the Fed cited are: DBRS, Fitch Ratings, Moody's Investors Service, Realpoint or Standard & Poor's.

Lawmakers also have raised concerns about whether the Fed is ensuring that credit-rating agencies are accurately assessing collateral for the loans. Credit-rating failures contributed to the financial crisis that plunged the country into recession.

The Fed said Tuesday it's in the process of determining which agencies will be allowed to grade eligible collateral in an array of Fed programs designed to loosen credit.
© 2009 Deseret News Publishing Company | All rights reserved

What the Bank 'Stress Tests' Tell Us About Commercial Real Estate

What the Bank 'Stress Tests' Tell Us About Commercial Real Estate
Most Potential Harm Seen Coming From Housing, Consumer Loan Defaults, Not Office, Industrial and Retail Property Loans

By Mark Heschmeyer, CoStar
May 13, 2009

If the current economic malaise brings down any of the largest banks in the country, commercial real estate likely WON'T be the culprit. Office, industrial and retail properties specifically are even less likely to bring down the nation's top banks.

The 19 largest U.S. banks, which account for 70% of the bank holdings of this country, were the focus of the U.S. Federal Reserve 'stress tests' results released this past week. Under the worst case scenarios envisioned for the current recession, commercial real estate losses would cost those banks $53 billion in losses this year and next.

While that is a lot of money, it still pales in comparison with residential loan losses, which still would make up the bulk of the projected losses, $185.5 billion. In fact, exposure to commercial real estate loans falls way down the line in terms of producing projected losses for banks. Trading and counterparty investments would lose $99 billion; consumer loans $83.7 billion; credit card loans $82.4 billion; business loans, $60.1 billion; only then comes commercial real estate.

The two-year loss estimates totaled about $600 billion in the more adverse scenario for the 19 bank holding companies.

Estimated losses on residential mortgages are substantial over the two-year scenario, consistent with the sharp drop in residential house prices in the past two years and their projected continued steep fall in the more adverse scenario. The effects of reduced home prices on household wealth and the indirect effects through reduced economic activity, also push up estimated losses on consumer credit, including losses on credit cards and on other consumer loans. Together, residential mortgages and consumer loans (including credit card and other consumer loans) account for $322 billion, or 70% of the loan losses projected under the more adverse scenario.

Even in terms of percentages of losses, commercial real estate loans hold up better on the banks' books than its other assets and investments. About 22.5% each of residential real estate loans and credit card loans would go bad but only 8.5% of commercial real estate loans would go bad.

To cover those potential losses, the Federal Reserve has asked the 19 banks to raise $75 billion in additional common equity by next November.

"This was a carefully designed, credible test," said U.S. Treasury Secretary Tim Geithner. "Banks supervisors applied a historically high set of loss estimates on securities and loans, as well as a conservative view towards potential earnings that could act as a buffer against those losses."

"These are estimate of potential losses and earnings that could occur in the event of a more severe recession. They are not a prediction of where the economy is headed," Geithner added. "The results are less acute than some had expected, in part because concern about the risk of a more severe recession have diminished, market have improved, and banks, in anticipation of the release of the stress test, have acted in the last few months to increased capital."

The stress test process involved the projection of losses on loans and investment assets, as well as the firms' capacity to absorb losses. To analyze commercial real estate loans, the bank holding companies were asked to submit detailed portfolio information on property type, loan to value (LTV) ratios, debt service coverage ratios (DSCR), geography, and loan maturities.

Loss rates on commercial real estate loans reflected realized and projected substantial declines in real estate values. However, federal supervisors analyzed loans for construction (both residential and construction) and land development, multifamily property, and non-farm non-residential projects separately. And the bulk of the projected losses in the commercial real estate come from the construction and land development loans. Income producing properties fared much better.

The stress tests projected a baseline loss of 9% to 12% for construction loans and a worse case scenario of 15% to 18%; multifamily losses had a projected baseline loss of 3.5% to 6.5% and a worse case loss of 10% to 11%; office, industrial and retail properties had a projected baseline loss of 4% to 5% and worse case loss of 7% to 9%.

The results of the stress tests "were good news and were generally received as such, although it is important not to take excessive comfort from what remains essentially a highly educated guess as to the future of the banks in a very uncertain environment," concluded Douglas J. Elliott , a fellow in economic studies at The Brookings Institution. "The test appears to be somewhat tougher than the base case of the International Monetary Fund, but not nearly as harsh as the most pessimistic analyses."

"This implies that while we may well have turned the corner, we can be far from certain that the solvency crisis in banking is over," Elliott wrote in a paper this week. "Even if it is, the stubborn credit crunch will last for considerably longer. The banks will be in a better position to lend more freely as a result of the modest influx of new capital and the greater benefit of the confidence boost from passing the tests. However, the depth of this recession and the shattering of the securitization market will keep credit tight for some time."

One unintended side effect of the results of the stress test, Elliott said is that they will work against the government's plan to encourage investors to buy toxic assets from the banks.

"The government's reassurance that these banks have, or will soon have, the capital to handle even the stress scenario without selling their toxic assets makes it harder for the regulators to pressure the banks to actually sell," Elliott concluded. "This matters because the banks generally believe that even with government incentives the private investors are looking to pay unreasonably low prices for these assets."

The banks would generally prefer to hold onto the assets until they can get a better price, Elliott reasoned.

Generally across the board, the 19 bank holding companies put to the stress tests, said they believe the stress test assumptions were unreasonably conservative and actual losses will be far less than projected.

Regions Financial Corp. in Birmingham, AL, questioned whether it should be required to raise additional capital now to provide for a two-year adverse economic scenario, particularly in view of the fact that Federal Reserve Chairman Ben Bernanke this past week said that he expects the economy to begin recovering during 2009.

Regions said it believes that the stress test results do not accurately reflect the loan losses that Regions is likely to experience even in the "more adverse" economic scenario. In particular, the anticipated two-year cumulative loss ratio of 13.7% projected on its commercial real estate is sharply higher than Regions' actual annualized loss ratio on its portfolio in the first quarter and sharply higher than that projected for the other banking companies.

Bank of America Corp. in Charlotte, NC, was projected to have a 2-year loss rate on its commercial real estate loans of 7.4%, or 3.7% per year. Bank of America said its actual first quarter annualized loss rate on the equivalent portfolio was 1.68%. So, loss rates would have to more than double to 3.9% and remain there for the remaining seven quarters to reach the FRB's projections.

Additionally, the FRB's loss rate is well above the combined commercial and commercial real estate peak loss rate experienced by Bank of America in either the 1991 recession or the 2002 recession.

Individual CRE Stress Test Results

Company Est. Worse-Case CRE Loss As a % of Loans Bank of America $9.4 billion 9.1% Wells Fargo & Co. $8.4 billion 5.9% Regions Financial $4.9 billion 13.7% BB&T Corp. $4.5 billion 12.6% PNC Financial Services Group $4.5 billion 11.2% JPMorgan Chase & Co. $3.7 billion 5.5% U.S. Bancorp $3.2 billion 10.2% Fifth Third Bancorp $2.9 billion 13.9% SunTrust Banks $2.8 billion 10.6% Citigroup $2.7 billion 7.4% KeyCorp $2.3 billion 12.5% Capital One Financial $1.1 billion 6.0% MetLife Inc. $800 million 2.1% Morgan Stanley $600 million 45.2% GMAC $600 million 33.3% State Street $300 million 35.5% Bank of New York Mellon $200 million 9.9% American Express not applicable not applicable Goldman Sachs Group not applicable not applicable

Apartment Transactions Fall 86 Percent

Apartment Transactions Fall 86 Percent
Only 152 apartment properties sell nationally in the first quarter of 2009.

By: Les Shaver, Multifamily Executive

With fewer than 50 apartment properties trading hands each month, it's little surprise that apartment sales fell dramatically in the first quarter of 2009. Yet the scope of the fall is still staggering.

In the first quarter of '09, only $1.8 billion in apartment assets (totaling 152 properties) changed hands, according to Real Capital Analytics, a New York-based research firm that tracks commercial real estate. That’s a drop of 86 percent from a year ago. Volume fell 61 percent from the fourth quarter of 2008 and offerings outpaced closings by five to one.

“We’re basically at zero,” says Dan Fasulo, managing director at Real Capital Analytics.

Even in seemingly strong markets, such as the Washington D.C. metro area, things ground to a halt. The region saw its first large sale of the year last week—GlobeSt.com reported that Cambridge Court, a 544-unit garden and mid-rise apartment complex in White Marsh, Md., was sold for $65 million.

“It really has been quiet since the fourth quarter,” says Grant Montgomery, a vice president at Delta Associates, an Alexandria, Va.-based firm that tracks real estate in the Washington D.C. and Baltimore areas. “There were things on the market, and there were rumors, but nothing happened.”

Only Los Angeles (with more than $200 million in sales), Manhattan, Northern New Jersey, and Indianapolis (because of a large transaction by Denver-based REIT AIMCO) had more than $100 million in sales. Real Capital Analytics said most properties that did sell in the first quarter were between $5 million and $10 million. The firm attributes that to the continued presence of Fannie Mae and Freddie Mac in the sales of smaller assets. Cap rates for properties with a price tag of more than $30 million have risen 120 basis points, while they haven’t moved much for properties below that threshold. Only 8 percent of first quarter sales were for more than $50 million. Garden apartments pulled the market down, dropping 68 percent to only $1.3 million in volume from the fourth quarter of 2008.

“We’re seeing a crisis of confidence,” Fasulo says. “Investor confidence drives transactions. It’s not uncommon for there to be no investor confidence at the bottom.”

If Real Capital Analytics’ Troubled Assets Radar is any indication, we may soon hit that bottom. A whopping 420 properties (totaling $4.9 billion) pushed the total value of assets on the radar up by 50 percent. Real Capital Analytics says there were $11 billion worth of multifamily assets in default, foreclosure, or bankruptcy at the end of March.

Other research firms say the same thing. Reis said that CMBS delinquencies rose from 1.14 percent to 1.76 percent, or $10.7 billion, in the first quarter. It notes that a third of these loans were in multifamily. And once those distressed assets hit the market, experts say the numerous multifamily vulture funds waiting to finally jump into the market will do so And ultimately, that's what will finally push up transaction figures.

Small Banks Face Hits on Commercial Real Estate

Small Banks Face Hits on Commercial Real Estate

By LINGLING WEI, Wall Street Journal

Thursday's "stress-test" results will bring fresh scrutiny to the nation's biggest banks. They also are likely to highlight the woes from commercial real-estate loans that are piling up at large and small banks alike.

In the worst-case scenario, federal regulators examining the 19 largest U.S. banks are projecting losses of up to 12% on commercial real-estate loans over two years, according to a document viewed by The Wall Street Journal. The regulators are likely to cite commercial-property debt problems as a major reason why at least some of the large banks need additional capital.

Such losses likely would cause even deeper misery, and risk of failure, at small and medium banks because they tend to have disproportionally more exposure to commercial real-estate loans than giant institutions. While regulators have indicated they won't allow the 19 stress-tested banks to fail, that group doesn't include more than 500 banks with assets of less than $1 billion that have too much exposure to commercial real estate and are at the most risk of failing, according to an analysis by Foresight Analytics LLC.

During the housing boom, small and regional banks doubled down on lending to home builders and commercial-property developers and investors as they were largely squeezed out of the home mortgage market by large banks and Wall Street firms. Now many of those loans are going bad as vacancies rise, rents fall and developments open to anemic demand.

Analysts already had been forecasting hundreds of bank closures in the next five years. The stress-test assumptions, including a 10.3% jobless rate at the end of 2010, raise the specter that some of the failures could occur sooner.

The 12% loss rate being used by regulators to scrutinize commercial real-estate loans surprised some analysts because default rates on such debt remain lower than those on home mortgages. The loss rate implies that the nation's banks and thrifts, which hold $1.8 trillion of commercial real-estate debt on their books, would incur $216 billion in losses by the end of 2010.
[KeyCorp] Bloomberg News

KeyCorp is among 19 stress-tested banks with a large exposure to commercial real estate. Here, a KeyCorp branch in Upper Arlington, Ohio, in 2006.

With that loss rate, "you're talking about a depression in the U.S. economy and a major crisis in the banking system," says Richard Bove, an analyst at brokerage firm Rochdale Securities LLC.

In addition to the commercial real-estate loans clogging bank balance sheets, an additional $700 billion of those loans were packaged as securities and sold to investors. In light of plummeting property values and surging defaults, credit-rating firms have imposed downgrades on those securities. On Monday, Moody's Investors Service said it downgraded $52.9 billion in so-called collateralized debt obligations stuffed with commercial real-estate debt as part of its review of $83.1 billion in such CDOs amid worsening market conditions.

While bank regulators aren't immediately applying the stress-test criteria to small and midsize institutions, banks with high commercial real-estate exposures are drawing greater scrutiny from regulators. Nearly 3,000 banks and thrifts are estimated to have commercial real-estate loan portfolios that exceeded 300% of their total risk-based capital, according to Foresight. Regulators consider the 300% threshold as a red flag, although it doesn't necessarily mean all those banks are in danger of failing. Risk-based capital is a cushion that banks can dig into to cover losses.

While the failure of a single small bank is unlikely to cause systemic damage to the nation's financial system, such institutions could have a big impact as a whole. Banks with commercial real-estate loan portfolios exceeding 300% of their total risk-based capital have total assets of about $2 trillion, compared with $2.3 trillion in assets at Bank of America Corp.

Stress-tested banks that had a large exposure to commercial real-estate as of the end of 2008 include Regions Financial Corp., BB&T Corp., Fifth Third Bancorp and KeyCorp. "We are experiencing deterioration in other [commercial real-estate segments] such as the retail property group, which is dependent upon consumer spending to generally support rents," KeyCorp finance chief Jeffrey B. Weeden said in a conference call last month.

Commercial real-estate debt represented about 119% of the bank's total capital as of Dec. 31. "We remain well capitalized by any regulatory measure," Mr. Weeden said.

To be sure, banks wouldn't get hit as hard from commercial real-estate under rosier scenarios or if government programs succeed in pulling the U.S. economy out of its funk. The Federal Reserve, for example, announced on Friday new terms on one of its lending programs that officials hope will help revive the commercial real-estate market.

Since late 2007, 58 banks and savings institutions have failed, with assets totaling about $400 billion.

About a dozen of the failed banks, including Great Basin Bank of Nevada and First Bank of Idaho, had unusually high commercial-mortgage exposure, according to Foresight.

A bank currently on the ropes because of commercial real estate is Corus Bankshares Inc., a big condominium-construction lender. In a securities filing Friday, the Chicago-based lender said it was "undercapitalized" as of March 31. Regulators might place the bank "into conservatorship or receivership," according to the filing.

So far, banks have been generally reluctant to sell their troubled commercial-property loans partly because they would be insolvent if they sell at bargain prices being sought by investors. That might change if regulators put more pressure on banks to clean up their books.

From January 2008 to the end of February, the Federal Deposit Insurance Corp. sold about $1.16 billion of distressed real-estate and other types of commercial loans from failed banks for about 59 cents on the dollar, according to industry data.
—Damian Paletta and Nick Timiraos contributed to this article.

Write to Lingling Wei at lingling.wei@dowjones.com
Printed in The Wall Street Journal, page C1

Economic Update -- M-F Finance Deals Squeak Through

Economic Update -- M-F Finance Deals Squeak Through
May 4, 2009
By: Dees Stribling, Contributing Editor, Commercial Property News

Things are looking up a little for the U.S. apartment market, if the latest quarterly survey by the National Multi Housing Council, which queried 79 CEOs and other senior executives of apartment-related firms nationwide, is any indication. That isn't to say that conditions are strong in the multi-family rental segment--just better than in the early dark days of the Panic of 2008.

The NMHC's sales volume index, for instance, is at 30 as of April 2009, a considerable improvement from the October 2008 dismal reading of 4. A sales volume index reading above 50 means that sales volume around the country is increasing, while a reading below 50 indicates that sales volume is decreasing. A reading as low as 4 means boy, howdy, the market's tanked.

The organization's equity financial index likewise rose from 12 last October to 29 this April. The debt financing index fared even better, vaulting from 4 in October to 41 in April.

Still, lenders are a little leery about apartment lending. "The top concern among lenders right now is that there's going to be a further deterioration in revenue from multi-family properties, considering that there's downward pressure on occupancies and rents," Chris Black, vice president-loan origination with the Boston office of KeyBank Real Estate Capital, told CPN. "It's hard to know when the deterioration will stop, and in the meantime no one wants to catch a falling knife."

He adds that in spite of everything, there are strong multi-family rental properties out there. Recently KeyBank Real Estate Capital closed a $4.2 million Freddie Mac commercial mortgage to Truman Drive L.L.C. for Truman Park, a 284-unit apartment building built in 2002 in Largo, Md. Key provided a supplemental loan that allowed the owners to increase outstanding debt on the property, to take advantage of improved performance since the initial funding in 2004.

"The first note was conservative, and it's a well-located property," said Black. "And there hasn't been a dramatic drop in revenue. That's what lenders are looking for in apartment properties, and it isn't an impossible scenario, just a lot harder than it used to be."

Late last week, other closely-watched economic indices rose unexpectedly, thus entering the category of less-bad-than-previously. The Institute for Supply Management’s factory index rose from 36.3 in March to 40.1 in April, for one. Not only that, the Reuters/University of Michigan consumer sentiment index bounded upward by the most in more than two years, rising to 65.1.

Wall Street was indecisive on Friday, however, just barely ending in positive territory. The Dow Jones Industrial Average closed 44.29 points higher, or 0.54 percent, while the S&P 500 was also up 0.54 percent. The Nasdaq gained 0.11 percent.

Fed launching commercial real-estate lending program

Fed launching commercial real-estate lending program

The Associated Press
Updated: 05/01/2009 04:36:20 PM MDT

Washington » The Federal Reserve announced Friday that it will launch a much-awaited program in June to bolster commercial real-estate lending.

And to help make the program more attractive to investors, the Fed will provide longer, five-year loans.

Investors would use the money to buy securities backed by commercial real-estate loans.

The goal is to boost the availability of these loans, help prevent defaults on commercial properties like office parks and malls, and facilitate the sale of distressed properties, the Fed said.

The new commercial real-estate component is part of a broader program rolled out in March that aims to jump-start lending to consumers and small businesses called the Term Asset-Backed Securities Loan Facility, or TALF.

It figures prominently in efforts by the Fed and the Obama administration to ease credit stresses and stabilize the financial system. Those are critical elements needed to lift the country out of recession.

The TALF has the potential to generate up to $1 trillion in lending for households and businesses.

Earlier this year, the government said it planned to expand the TALF to include help for commercial real-estate lending.

"There's a looming crisis in commercial real estate whereby owners of shopping malls, hotels, rental properties and many other types of buildings are unable to refinance or to pay for new construction," Fed Chairman Ben Bernanke warned lawmakers on Capitol Hill in March.

The market for so-called commercial mortgage-backed securities, or CMBS, came to a "standstill in mid-2008," the Fed said Friday in announcing the launch of the new piece of the TALF program. The CMBS market accounted for almost half of new commercial mortgage originations in 2007, the Fed said.

Economic Update - Bear Stearns' Bum Real Estate, Revealed

Economic Update - Bear Stearns' Bum Real Estate, Revealed

April 24, 2009
By: Dees Stribling, Contributing Editor, Commercial Property News

Bear Sterns Cos. was in the news again Thursday, in case anyone remembers back far enough to recall the last time it was big news--a time when the disappearance of that company into JPMorgan Chase seemed unfortunate, but not necessarily a harbinger of vast financial problems ahead. Which, in fact, it turned out to be.

Now the Federal Reserve has released something of an autopsy for the company, detailing the kinds of assets it accepted from Bear Stearns (the ones JPMorgan didn't want) and which of them caused losses for the Fed since then.

The biggest losses in the former Bear Stearns portfolio, as of year-end 2008? Real estate. As of the end of last year, the central bank had written down the value of the former Bear Stearns commercial mortgage holdings to $5.6 billion, or down about 28 percent. The value of the former Bear Stearns residential mortgage holdings was written down 38 percent, to $937 million.

The latest monthly Moody’s/REAL National All Property Type Aggregate Index was also released on Thursday, indicating that the total value of U.S. commercial properties has retreated to where they were in March 2005. The index measures commercial valuation by surveying changes in sale prices, just as the Standard & Poors Case-Schiller Home Price index does for residential properties.

The latest Case-Schiller index put U.S. residential values back at October 2003, incidentally. Optimistic analysts say that means a bottom is near for housing; their more pessimistic colleagues say, are you kidding? No bottom yet.

In any case, the National Association of Realtors reported that existing house sales dropped 3 percent in March when compared with February, to a seasonally adjusted annual rate of 4.57 million units, and down 7.1 percent when compared with March 2008. The median price of houses that sold during March was $175,200, which was actually an uptick from February, when the median was $168,200. Compared with March 2008, however, the median price in March 2009 was down about 12 percent.

Under the radar screen, which seems to show little but bad news these days, some fairly large commercial property leasing deals are still getting done. For instance, Sanyo Logistics Corp., a logistics services provider and business unit of Sanyo Electric Co., inked a lease this week with landlord ProLogis for 215,000 square feet of recently completed distribution space in southwest suburban Romeoville, Ill., near Chicago. This followed a similarly sized deal in Japan between the two companies last month.

If anything, such deals show that real estate--always a game of relationships--is even more relationship-oriented in the depths of the recession. The Chicago lease is the seventh one between the two companies, and Sanyo now leases roughly 2 million square feet in ProLogis distribution facilities in Southern California, metro Chicago and various locations throughout Japan.

"Customer relationships are the backbone of our operations and have always been important," Doug Kiersey, senior vice president & Midwest regional director at ProLogis, told CPN. "But they're even more critical in this economic environment."

Wall Street had a zig-zag sort of day on Thursday, but the major indices eventually edged upward. The Dow Jones Industrial Average was up 70.49 points, or 0.89 percent, while the S&P 500 was up 0.99 percent and the Nasdaq up 0.37 percent.

CBRE: Property Values Down 20 Percent Since 4Q07

April 16, 2009
By: Tonie Auer, Contributing Correspondent, Commercial Property News

Since the fourth quarter of 2007, commercial real estate values have dropped about 20 percent altogether, a price decline worse than those in the early 1990s, said CB Richard Ellis analysts as part of a live web presentation Wednesday.

Between the fourth quarter of 2007 and the end of 2008, commercial real estate prices dropped 11.5 percent with preliminary indications for the first quarter of this year looking like another 10 to 12 percent decline adding up to a cumulative impact of around 20 percent, said Raymond Torto, global chief economist with CBRE Research and Consulting.

“By contrast to what happened in the 1990s, we’re within the first year of declines. Then, the first year’s decline was 4 percent. Things are dropping faster in the U.S. this time,” Torto noted.

And the falloff in prices has been widespread. In the United Kingdom, the decline in values is about 39 percent, which is also a faster decline than what occurred in the 1990s downturn, Torto added. “If you look at the U.K. decline versus the U.S. decline, they are similar if you compare the two of them. America is slow compared to the U.K.,” said Brian Stoffers, president of CBRE Capital Markets. “If you talk to the professionals, things are much more severe than what is shown the index at this juncture.”

Valuation levels are off today anywhere from 25 to 35 percent versus the peak pricing in 2007, said Greg Vorwaller, COO of CBRE Capital Markets.

“In the U.K., I think (the 39 percent drop in values) is on the button,” said Jonathan Hull, executive director of EMEA Capital Markets. “If you look at the market as a whole, different sectors and different countries are moving at different speeds. The correction in the prime markets may not be as severe as that, but in the secondary markets it may be even greater than 39 to 40 percent. It is mainly driven on the capital side.”

But London has seen faster correction than other markets and is leading the way in comparison to the U.S., Hull said. The correction in the U.K. during the course of this year is on the rental side more than the capital side.

“If you look at the London market today, there are more transactions as we speak,” Hull said. “Activity is improving. In the last two weeks of March, there were 700 million pounds of transactions into offer. That is a major movement compared to the rest of quarter," he noted, adding that capital in the London market is driven by German market funds along with some private equity.

CBRE: Property Values Down 20 Percent Since 4Q07

April 16, 2009
By: Tonie Auer, Contributing Correspondent, Commercial Property News

Since the fourth quarter of 2007, commercial real estate values have dropped about 20 percent altogether, a price decline worse than those in the early 1990s, said CB Richard Ellis analysts as part of a live web presentation Wednesday.

Between the fourth quarter of 2007 and the end of 2008, commercial real estate prices dropped 11.5 percent with preliminary indications for the first quarter of this year looking like another 10 to 12 percent decline adding up to a cumulative impact of around 20 percent, said Raymond Torto, global chief economist with CBRE Research and Consulting.

“By contrast to what happened in the 1990s, we’re within the first year of declines. Then, the first year’s decline was 4 percent. Things are dropping faster in the U.S. this time,” Torto noted.

And the falloff in prices has been widespread. In the United Kingdom, the decline in values is about 39 percent, which is also a faster decline than what occurred in the 1990s downturn, Torto added. “If you look at the U.K. decline versus the U.S. decline, they are similar if you compare the two of them. America is slow compared to the U.K.,” said Brian Stoffers, president of CBRE Capital Markets. “If you talk to the professionals, things are much more severe than what is shown the index at this juncture.”

Valuation levels are off today anywhere from 25 to 35 percent versus the peak pricing in 2007, said Greg Vorwaller, COO of CBRE Capital Markets.

“In the U.K., I think (the 39 percent drop in values) is on the button,” said Jonathan Hull, executive director of EMEA Capital Markets. “If you look at the market as a whole, different sectors and different countries are moving at different speeds. The correction in the prime markets may not be as severe as that, but in the secondary markets it may be even greater than 39 to 40 percent. It is mainly driven on the capital side.”

But London has seen faster correction than other markets and is leading the way in comparison to the U.S., Hull said. The correction in the U.K. during the course of this year is on the rental side more than the capital side.

“If you look at the London market today, there are more transactions as we speak,” Hull said. “Activity is improving. In the last two weeks of March, there were 700 million pounds of transactions into offer. That is a major movement compared to the rest of quarter," he noted, adding that capital in the London market is driven by German market funds along with some private equity.

Homebuilder sentiment index soars 5 points

Associated Press
Published: Wednesday, April 15, 2009 1:45 p.m. MDT

LOS ANGELES — Homebuilders are feeling a lot more optimistic that the worst housing downturn in decades may be finally starting to turn around.

An index of builders' confidence released Wednesday posted its biggest one-month jump in five years in April as many homebuyers seized on lower prices and incentives and took advantage of lower interest rates and tax credits.

The National Association of Home Builders/Wells Fargo housing market index climbed five points to 14. While still near historically low levels, the latest index reading is the highest since October.

"This is a very encouraging sign that we are at or near the bottom of the current housing depression," said David Crowe, chief economist for the Washington-based trade association.

The report reflects a survey of 360 residential developers nationwide, tracking builders' perceptions of market conditions. Index readings lower than 50 indicate negative sentiment about the market.

The index hit an all-time low of 8 in January as mounting layoffs, strict mortgage requirements and the worsening U.S. economy sapped demand for new homes.

In response, many builders stepped up sales incentives, slashed prices and trumpeted an $8,000 tax credit for homebuyers enacted in February as part of the Obama administration's economic stimulus package. Mortgage rates, meanwhile, have hovered below 5 percent for weeks, offering an additional inducement for would-be homebuyers.

As a result, homebuilders have reported an uptick in traffic in recent weeks. KB Home, a Los Angeles-based homebuilder, reported last month that new home orders jumped by 26 percent in its fiscal first quarter.

"Some of the most favorable buying conditions in a lifetime are now in place, and they are drawing more consumers back to the market," said NAHB Chairman Joe Robson, a homebuilder from Tulsa, Okla.

Joshua Shapiro, chief U.S. economist for the consulting firm MFR Inc., said the jump reflects the perception the market is improving, but cautioned some builders may be overly optimistic.

"The weakness that preceded it is so pronounced that I think you get a little bit of an exaggeration to people's responses to surveys like this," Shapiro said.

Regionally, builder confidence rose by eight points in the Northeast to 16 and by six points in the Midwest to 14. It climbed by five points in the South to 17 and by four points to 9 in the West.

Builders' gauge of current sales conditions climbed by five points to 13, while builders' expectation of buyer traffic also rose by five points to 14.

The biggest jump came in builders' outlook for sales over the next six months, which climbed 10 points to 25.

In California, a $10,000 tax credit for new home purchases also helped lift sales, according to a separate national survey homebuilders conducted by John Burns Real Estate Consulting

The firm's latest survey shows new home sales, buyer traffic and expectation of future sales all rose since March.

"We think the improvement is attributable primarily to improved affordability," said John Burns, the firm's chief executive. "The new home tax credit in California is also helping."

The improved industry outlook gave battered housing stocks a lift. Shares of Beazer Homes and Lennar got the biggest boost, climbing more than 13 percent in afternoon trading Wednesday.

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