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Bank Closures Lead CRE Values to September Fall

MBA NewsLink

Volume 8 | Issue 141 | Friday, August 21, 2009

By: Murray, Michael

As bank closures increase, they are indirectly moving commercial real estate portfolio values lower, said Glenn Gray, president and CEO of Sunwest Bank, Tustin, Calif.

Based on Sunwest Bank's analysis, more banks holding toxic assets that include commercial real estate loans in default will likely fail in future months.

“We track banks that we think are failing or potentially can fail, and we are adding more to our list,” Gray said. “Our analysis is not unique. It's probably the same analysis that regulators are doing—and our list is growing.”The  

Federal Depost Insurance Corp.'s asset disposition process for a failed bank—if not acquired by another bank—consists of marketing those assets through a non-bank third-party.

“Individuals [or] investors can buy pools of loans and they will buy those loans at discounts,” Gray said. “Those properties will then start to move because somebody has a much lower basis in it, so I think it will depress prices for some time to come.”

One third-party includes DebtX, Boston, which announced a sale of $1 billion in loan participations from 15 banks in FDIC receivership. The portfolio consists primarily of CRE loan participations with concentrations in Georgia, Texas and the western United States. Bids are due by September 1.

“This will provide transparency in the markets that we're selling assets in,” said Kingsley Greenland, CEO of DebtX. “Will it have an impact on values? People may not like it. Frankly, though, you'll see that as every deal gets done, more people get comfortable and come in.”

Greenland said September's sale will reset the market, return capital flow faster to the market and create transparency. He “expects significant interest from banks seeking this type of product.”

“If that affects [property values] by bringing transparency then, yes, it will affect [values],” Greenland said. “I happen to believe that transparency has a positive effect because more people can get comfort that it's a real value and that they are not overpaying--so more people will buy. When people withhold buying it is because they are fearful that they are going to overpay, not underpay. By providing transparency, it gives more people comfort.”

Gray said third parties will affect value declines in the smaller real estate market, but not necessarily the larger market. In some cases, borrowers are walking away from larger properties. This month, the Wall Street Journal reported Maguire Properties Inc., Los Angeles, planned to hand over control of seven office buildings with high vacancies and nearly $1.06 billion in debt, and California Public Employees' Retirement System gave up its holding on the Koni Center, a large office tower in Portland, Ore.

“Nobody has a personal guarantee on this,” Gray said. “There is no recourse.”

Industry experts said some banks will attempt to hold onto undervalued assets rather than sell them to avoid taking losses. For smaller banks holding commercial mortgage maturities, they can extend loans or restructure non-maturing loans if borrowers have trouble making rent rolls.

"If a bank is not in a situation where it has to deal with [a maturity], there is no immediate pressure to have to mark-to-market,” Gray said.

However, Gray said non-bank third parties will likely affect price depression more than anything else, but those banks have also failed.

“That is what is ultimately going to have more of a dampening effect on prices,” Gray said. “It's an efficient-market theory. Those loans are going to get sold at a price that investors find acceptable to them. It is not going to go at the highest price.”