Bruce Norris is joined this week by the Senior Resident Fellow of Finance for the Urban Land Institute, Stephen Blank.
Bruce asked about the ULI Emerging Trends report and how long it’s been around. Stephen says it’s been around for 30 years and has always been national in scope. The report has gone through different partnerships but the report is now a joint venture between the Urban Land Institute and Price Waterhouse Cooper. The report interviews 100s of people in the real estate business and compiles their opinions. Interviewees include developers, private and public owners, advisors, institutional investors, service providers and lenders.
Stephen says the people that were interviewed in 2007 actually said they were expecting 2008 to be difficult. Emerging Trends is unique because of the process and the one-on-one interview process. These interviews tend to be very frank in nature. There is one writer and three editors to help put the report together. The real estate industry has been very supportive in being involved in this report.
Bruce asks Stephen where the blame is in his opinion. Stephen says there was a period of unparalleled liquidity. With that liquidity came an increasing need for income-producing assets and increased competition to lend money so interest rates were forced to low levels. Increased liquidity increased leverage pushing down rates of return.
The subprime market was unregulated and obviously became an issue. Mortgage bankers took these loans and then passed them on to Wall Street. Some argue the models that were used were too old and relied to heavily on ratings. There was a failure to do due diligence and it’s created a big mess. People ended up day trading condos.
Bruce says there’s been some confusion between investor and speculator. Now, we’ve assured ourselves the downturn because the investors are limited to the number of loans. Investors can’t 1031 exchange and investors can’t buy rentals due to limits put in place by lending institutions. Purchase prices are being driven down even further because of this issue and the government isn’t addressing it at this time.
Bruce asks if Stephen thinks the residential problem will move to commercial and if it will be as severe. Stephen says he doesn’t think they’re related and that an economic downturn needs to happen. Commercial is a lagging indicator. Residential could cause a downturn in the economy which would then spill over to commercial. Stephen says we didn’t build as much so we’re not going to have over supply meeting under demand like the last down market. Only some areas like Las Vegas and Florida will have issues because of over building.
Bruce asks if he sees commercial lenders taking back a glut of properties in the coming years. Stephen sees sharp increases in foreclosures for loans adjusting in 2009-2010. The loan-to-value ratios are going to be an issue unless their income has increased a great deal. Bruce and Stephen discuss if lenders could leave a loan in place to avoid taking back a building, also known as performing non-performing loans. The debt is still being paid. Lenders, if they can, would rather nurse these along until the market improves. Not all lenders can do that unfortunately.
Bruce asks if commercial lenders did the same kind of stated income programs that we saw in residential. Stephen says that as competition increased, banks started looking at other factors to base loan amounts on. Reserves were lowered. If the markets had continued to go up, the property could afford this new method. In a decline, it’s an issue.
Stephen sees cap rates going up. 15-20% price decline could occur because the cap rates are changing. Not as much personal guarantees are on commercial. Moving forward from now, more lenders are requiring personal guarantees.
Historically loans had an amortization with ten year term assuming a 25 year amortization period. In ten years you would historically amortize 12-13% of the loan which added protection for the lender, even if prices declined. As the market was more competitive, amortization period was eliminated and the loans were interest only. As these are refinanced, no equity exists.
Bruce asks about unemployment and commercial. Stephen says it will be an issue and vacancies will increase. Declining lease rates will also be an issue. Stephen says REITs are not originators of loans but purchase already existing debt. They may originate mezzanine loans but are not conventional lenders. REITs are owners of income producing properties. Primary lenders are commercial banks (40% of markets), insurance companies (20% of market), and commercial mortgage-backed securities (40% of market). Stephen says that the mortgage backed system is on life support. Insurance agencies are a major source now but it’s taking more time and they have the pick of the market.
For more information on the Urban Land Institute, visit uli.org.
Stephen R. Blank joined ULI-the Urban Land Institute (ULI) in December 1998 as Senior Resident Fellow, Finance. His primary responsibilities include: expanding ULI’s real estate capital markets information and education programs; authoring real estate capital market commentary for ULI’s web site (www.uli.org); participating as a principal researcher and adviser for the Emerging Trends in Real Estate series of publications; researching and authoring papers and articles on finance issues for Urban Land; and organizing and participating in real estate equity and debt capital markets programs at ULI’s Fall and Spring meetings, the McCoy Symposium on Real Estate Finance, District Council meetings, and ULI’s European, Asian, and Latin American Conferences, as well as participating in real estate industry meetings, seminars, and conferences.
Prior to joining ULI, Mr. Blank served from December 1993 to November 1998 as Managing Director, Real Estate Investment Banking of CIBC World Markets, the successor to Oppenheimer & Co., Inc. His responsibilities included: structuring, underwriting, and executing corporate financings including initial public offerings of common and preferred shares, unsecured debentures, and convertible bonds; property acquisitions, dispositions, and financing; and financial advisory services including mergers and acquisitions, corporate restructurings, and recapitalizations.
Prior to joining Oppenheimer & Co., Inc., Mr. Blank served from February 1989 to November 1993 as Managing Director of Cushman & Wakefield, Inc.’s Real Estate Corporate Finance Department, where he was responsible for property acquisitions, dispositions, and financings, as well as providing financial advisory services including mergers and acquisitions, restructurings, and recapitalizations.
From August 1979 to January 1989, Mr. Blank served as Managing Director, Real Estate Investment Banking, of Kidder, Peabody & Co., Inc. where his responsibilities included property acquisitions and dispositions, placement of mortgage financing, financial advisory services, and corporate financings. Additionally, Mr. Blank served as President of KP Realty Advisers, Inc., the firm’s real estate investment advisory subsidiary.
From August 1973 to July 1979, Mr. Blank was a Vice President, Corporate Finance, of Bache & Co., Incorporated, where he was responsible for transaction origination, due diligence, and structuring, marketing and closing, and post-offering supervision of SEC-registered and privately placed direct investments in real estate and other industries.
Mr. Blank is a member of The American Society of Real Estate Counselors (CRE designation), the National Association of Real Estate Investment Trusts, and ULI-the Urban Land Institute, and serves as a member of the board of directors and Chair, Audit Committee, of MFA Mortgage Investments, Inc., a member of the board of directors and the Audit Committee of Home Properties, Inc., and is a member of the board of trustees of Ramco-Gershenson Properties Trust where he serves as the Board’s Lead Trustee and Chair, Audit Committee. Additionally, Mr. Blank is a member of the Advisory Board of the Real Estate Research Institute, the editorial board of the Journal of Asia-Pacific Real Estate, and the Editorial Board of RERC Industry Outlook, a publication of the Real Estate Research Corporation. Further, Mr. Blank acts as ULI’s representative to the Green Building Finance Consortium.
Mr. Blank has participated as a Guest Lecturer at the Harvard University Graduate School of Design Advanced Management Development Program, the Boston College Graduate School of Business Administration, and the Cornell University Program in Real Estate.
Mr. Blank received his B.A. degree from Syracuse University and was awarded a M.B.A. degree from Adelphi University.
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