Biding their time
Sep 1, 2008 12:00 PM, By Elaine Misonzhnik
Whether the credit markets, and the commercial mortgage-backed securities (CMBS) sector in particular, will begin to thaw in the near future and how much their behavior will affect the number of retail foreclosures remains a mystery for most researchers. So far, default rates have remained minimal, says Mower, and not many people have had to refinance. As of the second quarter, only 4.1 percent of the $770 billion in outstanding CMBS debt needed to be refinanced, according to Reis, but the number will climb as maturities on loans made in 2006 and 2007 begin to come up.
Even if a significant number of owners have a hard time refinancing their properties, the banks might take a lenient stance towards them, according to Milston, because securitized loans, which cover a wide range of properties, can be so difficult to unwind.
“It's a more convoluted process now than it was in the 1990s,” he notes. “In some instances, lenders will want to force a sale, but in a lot of [cases] they will try to extend the loan without taking back the property.”
With few centers facing foreclosure, the retail sector might not see the kind of buying frenzy many are expecting, according to Walter. If this year's retail investment sales volume reaches a third of what it was in 2007, when transactions worth $65 billion closed, we should consider ourselves lucky, says Mason. And next year, everything will depend on what happens in the credit markets, a question that remains hard to answer at this point.
If the credit crisis is not resolved within the next 12 to 18 months, however, it could spur more activity. “When the CMBS refinancing deals start coming up, there might be more opportunities,” Walter says.
On the flip side, whether a property has debt in place also becomes an important factor in how much interest it gets from prospective buyers, according to Phil Voorhees, senior vice president of retail investments with global brokerage firm CB Richard Ellis.
With the lack of liquidity in the market, nobody wants to scramble for a loan. They would rather assume an existing mortgage that is likely to have more attractive terms than what a buyer can get from a lender today. Those centers that feature built-in financing can get 10 to 15 bidding offers, and those without often get none.
Everybody agrees, opportunistic buyers won't start aggressive acquisitions until the first quarter of 2009 and with few distressed assets, they could spend just a fraction of their money.
“There is a wide gap between buyers and sellers and that gap will close slowly,” says Bach. So what's a reasonable expectation? Bach says if volume of deals reaches 2005 levels — $47 billion — then 2009 would have to be considered a good year.
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