CRE Distress is Still Out There................Lingering

Capital Scarcity Persists

There remains scheduled maturities in excess of $300 billion for each of the four years, 2014 through 2017. Most of this debt was underwritten during the peak of the last cycle from 2004 to 2007, when valuations were high and loan underwriting standards were loose, amortization disappeared and interest-only payment terms took its place. The majority of these loans are either under water (the loan is in excess of today's value of the property) or un-refinanceable, given today's lower asset valuations and more restrictive debt covenants. Additionally, a huge portion of the debt that matured during the 2009-2012 timeframe (per the graph below, in excess of $300 billion per year) has not yet been resolved.

Maturities Catalyze opportunity

It has been "extended and pretended" and still awaits recapitalization and resolution. In other words, the majority of the problem in CRE is still to be solved and the majority of the distress is still out there, lingering.

Because of this it is believed that this overhang of unresolved problems restrains CRE asset price appreciation and creates an opportunistic environment where current CRE owners are only very gradually having their day of reckoning, where they are forced to take painful write-downs or write-offs, as the rescue and refinancing capital is still too scarce and costly. The economy has simply not rebounded quickly enough or robustly enough to bail most of these overextended borrowers out of their positions.

Debt capital formation remains far below peak levels; and although interest rates are low, loan re-financing proceeds levels are insufficient to plug the balance sheet holes created by lower asset values. During the peak years of the last cycle, the CMBS market became, quite clearly, the "dumb money" in the CRE marketplace.

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