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UTPhil2006

By UTPhil2006
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Bozo_Casanova

Bozo_Casanova 25909

Posted
Posted (edited)
32 minutes ago, Wulaw Horn said:

I just told my friends that in a text that this was going in dry on the commercial guys.
First response back "Good, I'm in the market for a gently used patagonia fleece vest- this should soften that market up"

Don't know about CRE, but Finance and Techbros all seem to be downshifting to Cotopaxi. 

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alrighty...i haven't wanted to jinx anything so i've been pretty quiet... but we just closed on our new home in Denver this morning so i can now officially say YEAH! 😃 in a nutshell - we sold

Esque
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Thank you for this - gave me a good laugh.  But also a good reminder of how the general public does not understand what is going on in real estate and thus why so many get caught offsides when the tid

Neonmoon
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Realtor: You should list your house at 500K Client: But three houses down the street sold for 700K Realtor: Yeah, but those are overvalued due to pandemic Fed policy and institutional invest

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Esque

Esque 135

Posted
Posted
6 hours ago, bluto said:

Between office market turmoil and multi family speculative purchases on floating rates the last 18 months, commercial RE is about to get lit the f up. Shit tons of apartments underwritten with debt service that has ballooned 4x since purchase along with outrageous insurance premium bumps, and rental rates plateaued due to general inflationary pressures/job losses on renters. 

You have no idea.  Seeing some of these deals under "rescue capital" terms and even with super attractive terms wouldn't touch them with a 10 foot pole.  Some of these fools are still underwriting low 4% cap rates on deals when trying to raise capital to save deals.  It's going to be a mess.

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bluto

bluto 4819

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12 hours ago, Esque said:

You have no idea.  Seeing some of these deals under "rescue capital" terms and even with super attractive terms wouldn't touch them with a 10 foot pole.  Some of these fools are still underwriting low 4% cap rates on deals when trying to raise capital to save deals.  It's going to be a mess.

Meanwhile assessors valuing a class on sub 4caps in central Tx. Roll a closing statement into Harris cad for 20% below assessment and get ignored entirely. 

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Esque

Esque 135

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13 minutes ago, bluto said:

Meanwhile assessors valuing a class on sub 4caps in central Tx. Roll a closing statement into Harris cad for 20% below assessment and get ignored entirely. 

Yeah, lots of folks getting SMOKED on taxes and insurance y-o-y.  Going back and looking at some u/w versus actuals is sort of hilarious.

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Esque

Esque 135

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3 hours ago, Incredulity said:

When will the mainstream media and John Q Public findout?  Give it 6 months.

CRE bag holders are finding out NOW.

It all comes down to i) the lenders and ii) the government.  For the lenders, it is all game theory.  The more everyone can work out loans and kick the can, the better for all - until one person can't, they sell loans at a loss, and they effectively force a mark to market of everyone's loan books and you see more calling of lines of credits and loans from lenders.  I've been watching a few key assets for 24 months now and many of them have been able to roll and extend for 12 months, much to my surprise.  But many of these deals are dead - equity is for sure wiped out and debt may be sitting on 85/100, but marked 100/100.

This is all to say, you still have another 12 months or so.  The defaults in office are not going to surprise anyone.  The defaults in MF will and that is what will catch a lot of people offsides.  But will be a good time to pick up blue chip public REITs as NAV gets punished by short term market volatility - or so I guess.  In many ways the public markets have already front run the private markets.

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bluto

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Posted (edited)

Yep I’m trying to sort through where to put some cash on a REIT that is heavy cash currently as there could/should be some solid deals. still thinking the general supply demand fundamentals are still decent for Texas multi fam, but pricing needs a reset with the rate hikes.

 
heard from a buddy today that asset managers/owners he works with are giving strong consideration to handing the keys over to the bank. The sobering thing for me is my reference point is mainly Texas multi fam, and if these properties in this states economy/population growth are going under then the whole country must be in major danger. 

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Gil Bang

Gil Bang 25689

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On 5/26/2023 at 1:23 PM, bluto said:

Yep I’m trying to sort through where to put some cash on a REIT that is heavy cash currently as there could/should be some solid deals. still thinking the general supply demand fundamentals are still decent for Texas multi fam, but pricing needs a reset with the rate hikes.

 
heard from a buddy today that asset managers/owners he works with are giving strong consideration to handing the keys over to the bank. The sobering thing for me is my reference point is mainly Texas multi fam, and if these properties in this states economy/population growth are going under then the whole country must be in major danger. 

WTF are vacancy rates in that market?   If you've got tenants in a multi-family deal, you oughtta be able to  pull through.

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Esque

Esque 135

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2 hours ago, Gil Bang said:

WTF are vacancy rates in that market?   If you've got tenants in a multi-family deal, you oughtta be able to  pull through.

Thank you for this - gave me a good laugh.  But also a good reminder of how the general public does not understand what is going on in real estate and thus why so many get caught offsides when the tides go out.  Not even trying to make a dig, but will provide some insight below.  Keep in mind, keeping this very simple and high level.

Valuations

Commercial real estate valuations are based on capitalization rates, which are just inverse multiples.  So a 20x EM is the same as a 5.00% capitalization rate (1/20).  Capitalization rates for stabilized assets are generally priced on an equity risk premium spread to the risk free rate.  The US10Y is often used.  The capitalization rate is applied to net operating income which in its simplest terms is revenue minus expenses.

So let's make some basic assumptions: NOI is $10, NOI is flat y-o-y, and Class A MF in DF/W trades at 180 bps spread to the US10Y.  Well what just happened in the last 18 months?  The US10Y went from 1.5% to 3.8%.  So market capitalization rates went from 3.3% to 5.6%.  So the value of the property went from $300 to $180, (40%).  This is purely a function of the capital markets.

Net Operating Income

Market rent growth remains positive and vacancy remains very low.  But, many owners are getting killed by year-over-year increases in property tax and property insurance.  As a result, net operating income year-over-year is negative - further hurting valuations.

Financing

This is where the rubber meets the road.  Because all of the above is pure accounting and on paper until the property has a transaction.  If you're a current owner, why would you sell today unless you have to?  Well, here we go...

Commercial loans are term loans with covenants.  The most common terms are 3 and 5-years.  Lots and lots of transaction in 2020 and 2021 were done with 3-year term paper because a lot of buyers through rates would stay very, very low.  So let's say a buyer bought a property for $100 with $75 of debt and $25 of equity.  Today all of the equity is gone AND $15 / $75 is gone on the debt.  When the term matures, the lender comes and wants to be made whole.  The owner has two options.  First, they can do a "cash-in refinance" meaning they need to go back to their investors and ask them for a 60% ($15 / $25) equity injection via a capital call.  The second is they can't achieve this and they have to default.

The other issue with financing today is the same borrowers that were using high leverage, 3-year debt were the most likely to take on floating rate debt with rate caps.  As those rate caps have been expiring they have been seeing massive increases in their debt service because their effective rate went from say 3% to 8% overnight.  The property can not service the debt and they go into technical default, which then has to be worked out.

 

There's obviously much more to this.  But needless to say, these is a massive capital markets issue out in the market that isn't being discussed fully.  There's way too much on the shitty fundamentals of office and not enough people understand there's too much leverage in MF and industrial.  It takes time for this all to play out and as more borrowers come under pressure as their debt rolls over, the worse it will get.  The "maturity wall" as it was really kicks off later this year through 2025.

Hence you will have a new "survive to '25" mantra in CRE which was an inside joke back during the savings and loan crisis: "survive to '96".

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Esque

Esque 135

Posted
Posted
2 hours ago, UTPhil2006 said:

I was told there would be no math 

sad cotton candy GIF

Racoon = MF syndicator GP

Cotton Candy = Their investors' money

 

Goofballs like this are just the tip of the iceberg: https://www.wsj.com/articles/a-housing-bust-comes-for-thousands-of-small-time-investors-3934beb3

1. Purchased $300M of Houston B/C MF last year with $75M of equity.  And... it's gone.

2. Raised $12M for a deal and put it all down as EM.  And... it's gone.

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Chopper

Chopper 16692

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Posted (edited)

It's incredible that people were taking 3 year loans instead of 10, 15 or 30 when interest rates were just 3 percent because they expected rates to go lower. In Texas, no less, where there's far less room to maneuver because of very high property taxes.

Edited by Chopper
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bluto

bluto 4819

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Indeed. In talking with some of these investment shops there was the attitude “even if the risk free rate doubles this yr then we’ll be ok, and it’s never doubled in a single year in 30+ years so history was on our side” …. Well it more like went up 5x or whatever. So these speculative dipshits totally ignored the fact rates were at all time historical lows, only paying mind to historical rate growth. 

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Esque

Esque 135

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12 hours ago, bluto said:

Indeed. In talking with some of these investment shops there was the attitude “even if the risk free rate doubles this yr then we’ll be ok, and it’s never doubled in a single year in 30+ years so history was on our side” …. Well it more like went up 5x or whatever. So these speculative dipshits totally ignored the fact rates were at all time historical lows, only paying mind to historical rate growth. 

Honestly - and I don't want to get into too much of the details online - this was just the elevator / sales pitch to attract capital.  These syndicators were / are charging outrageous fees to unsophisticated LPs.  I saw a deal where day one the deal was carrying an acquisition fee, capital markets fee, platform fee, financing fee, guarantor fee, construction fee, asset management fee, leasing fee, property management fee, and some other unreal line items.  If you were a LP that invested $100 you lost $15 the day you stroked the cheque and the Sponsor pocketed that $$$.

So in the short-term, many of them have made millions and millions by fee chasing and in many cases defrauding investors.  Good for them.  But in the long term, their names will be destroyed and the investors will file numerous lawsuits once they realize their $500k, which is 50% of their retirement, is now worth $0.

As you may be able to tell, I'm extremely frustrated with the situation because these charlatans are going to end up decimating so many retirement accounts and I feel extremely sad for these LPs.  Especially given so many still don't really understand what they go themselves into. 

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gmr548

gmr548 16316

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Thank you for this - gave me a good laugh.  But also a good reminder of how the general public does not understand what is going on in real estate and thus why so many get caught offsides when the tides go out.  Not even trying to make a dig, but will provide some insight below.  Keep in mind, keeping this very simple and high level.
Valuations
Commercial real estate valuations are based on capitalization rates, which are just inverse multiples.  So a 20x EM is the same as a 5.00% capitalization rate (1/20).  Capitalization rates for stabilized assets are generally priced on an equity risk premium spread to the risk free rate.  The US10Y is often used.  The capitalization rate is applied to net operating income which in its simplest terms is revenue minus expenses.
So let's make some basic assumptions: NOI is $10, NOI is flat y-o-y, and Class A MF in DF/W trades at 180 bps spread to the US10Y.  Well what just happened in the last 18 months?  The US10Y went from 1.5% to 3.8%.  So market capitalization rates went from 3.3% to 5.6%.  So the value of the property went from $300 to $180, (40%).  This is purely a function of the capital markets.
Net Operating Income
Market rent growth remains positive and vacancy remains very low.  But, many owners are getting killed by year-over-year increases in property tax and property insurance.  As a result, net operating income year-over-year is negative - further hurting valuations.
Financing
This is where the rubber meets the road.  Because all of the above is pure accounting and on paper until the property has a transaction.  If you're a current owner, why would you sell today unless you have to?  Well, here we go...
Commercial loans are term loans with covenants.  The most common terms are 3 and 5-years.  Lots and lots of transaction in 2020 and 2021 were done with 3-year term paper because a lot of buyers through rates would stay very, very low.  So let's say a buyer bought a property for $100 with $75 of debt and $25 of equity.  Today all of the equity is gone AND $15 / $75 is gone on the debt.  When the term matures, the lender comes and wants to be made whole.  The owner has two options.  First, they can do a "cash-in refinance" meaning they need to go back to their investors and ask them for a 60% ($15 / $25) equity injection via a capital call.  The second is they can't achieve this and they have to default.
The other issue with financing today is the same borrowers that were using high leverage, 3-year debt were the most likely to take on floating rate debt with rate caps.  As those rate caps have been expiring they have been seeing massive increases in their debt service because their effective rate went from say 3% to 8% overnight.  The property can not service the debt and they go into technical default, which then has to be worked out.
 
There's obviously much more to this.  But needless to say, these is a massive capital markets issue out in the market that isn't being discussed fully.  There's way too much on the shitty fundamentals of office and not enough people understand there's too much leverage in MF and industrial.  It takes time for this all to play out and as more borrowers come under pressure as their debt rolls over, the worse it will get.  The "maturity wall" as it was really kicks off later this year through 2025.
Hence you will have a new "survive to '25" mantra in CRE which was an inside joke back during the savings and loan crisis: "survive to '96".

This is a good synopsis but I think it’s important to add that even though floating rate deals definitely saw an uptick in the past year or two, they are still a relatively small portion of the overall multifamily financing landscape. A lot of multifamily assets are on relatively low rate debt that isn’t going to mature until late 2020s/early 2030s.

I don’t disagree that there will be some pockets of distress - be it due to floating rate debt, buying at the top of the market in certain areas that are now seeing rents flatten or drop (Phoenix being the poster child), or lease up challenges - but I just don’t think what we’re seeing/will see in multifamily compares to office as has been implied.
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HamsterHookah

HamsterHookah 112

Posted
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On 5/26/2023 at 2:36 PM, Esque said:

It all comes down to i) the lenders and ii) the government.  For the lenders, it is all game theory.  The more everyone can work out loans and kick the can, the better for all - until one person can't, they sell loans at a loss, and they effectively force a mark to market of everyone's loan books and you see more calling of lines of credits and loans from lenders.  I've been watching a few key assets for 24 months now and many of them have been able to roll and extend for 12 months, much to my surprise.  But many of these deals are dead - equity is for sure wiped out and debt may be sitting on 85/100, but marked 100/100.

This is all to say, you still have another 12 months or so.  The defaults in office are not going to surprise anyone.  The defaults in MF will and that is what will catch a lot of people offsides.  But will be a good time to pick up blue chip public REITs as NAV gets punished by short term market volatility - or so I guess.  In many ways the public markets have already front run the private markets.

How can we make money on the upcoming disaster? I think I speak for everyone except you and bluto when I ask this.

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HamsterHookah

HamsterHookah 112

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On 6/2/2023 at 10:01 AM, HamsterHookah said:

How can we make money on the upcoming disaster? I think I speak for everyone except you and bluto when I ask this.

To reiterate, because as we know about history: one person’s chaos is another’s opportunity. These are the folks cashing in when things go wrong. Can we?

https://www.wsj.com/articles/black-swan-debt-ceiling-mark-spitznagel-nassim-nicholas-taleb-18bb38f1?

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Esque

Esque 135

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@Chopper -

CRE debt is usually 2, 3, 5, 7, or 10 year terms.  The longer the term, the more punitive the pre-payment penalty.  Lots of GPs took on short-term debt in hopes of a quick exit and now find themselves caught in a rate hike cycle.

@gmr548 -

There's going to be different types of distress in different product types.  As you stated, office has some fundamental headwinds.  Meanwhile, multifamily and industrial have capital markets headwinds as a result of GPs paying too much for assets and being far too aggressive in financing.  These dynamics are infrequent, perhaps even say rare, in higher quality Class A multifamily where institutional players sit.  However, there were a lot of GPs syndicating retail capital and buying assets at ridiculous prices in B and C multifamily and industrial and those are who will be squeezed the hardest and wiped out.

@HamsterHookah -

The hell if I know.  I guess in the short term - stay liquid.  RE is an incredibly slow moving ship and you'll likely see opportunities in the public markets before you see meaningful distress in real estate.  If you have the risk appetite and the abilities to complete due diligence on the capital stack of these poorly positioned GPs, there's probably a play there.  Figure out who the debt is and who will be taking credit losses and look to bet against them via a shot, put contract, default swap, or other such similar means.  I'm too much of an alpha head and really want to stick to fundamentals or special situations.  Getting into the short side of things just isn't in my personality to dig into it.

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Incredulity

Incredulity 11197

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SF Hilton building owner to lender.

 

"take the keys"

 

https://www.cnn.com/2023/06/06/business/san-francisco-hotels-loan/index.html

 

Park Hotels and Resorts, the investment firm that owns Hilton San Francisco Union Square and Parc 55 hotels, said Monday that is has ceased payments on a $725 million loan as looks to reduce its presence in the city. The hotels have nearly 3,000 rooms, combined.

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Chewbacca

Chewbacca 7629

Posted
Posted
On 5/27/2023 at 9:22 PM, Esque said:

Thank you for this - gave me a good laugh.  But also a good reminder of how the general public does not understand what is going on in real estate and thus why so many get caught offsides when the tides go out.  Not even trying to make a dig, but will provide some insight below.  Keep in mind, keeping this very simple and high level.

Valuations

Commercial real estate valuations are based on capitalization rates, which are just inverse multiples.  So a 20x EM is the same as a 5.00% capitalization rate (1/20).  Capitalization rates for stabilized assets are generally priced on an equity risk premium spread to the risk free rate.  The US10Y is often used.  The capitalization rate is applied to net operating income which in its simplest terms is revenue minus expenses.

So let's make some basic assumptions: NOI is $10, NOI is flat y-o-y, and Class A MF in DF/W trades at 180 bps spread to the US10Y.  Well what just happened in the last 18 months?  The US10Y went from 1.5% to 3.8%.  So market capitalization rates went from 3.3% to 5.6%.  So the value of the property went from $300 to $180, (40%).  This is purely a function of the capital markets.

Net Operating Income

Market rent growth remains positive and vacancy remains very low.  But, many owners are getting killed by year-over-year increases in property tax and property insurance.  As a result, net operating income year-over-year is negative - further hurting valuations.

Financing

This is where the rubber meets the road.  Because all of the above is pure accounting and on paper until the property has a transaction.  If you're a current owner, why would you sell today unless you have to?  Well, here we go...

Commercial loans are term loans with covenants.  The most common terms are 3 and 5-years.  Lots and lots of transaction in 2020 and 2021 were done with 3-year term paper because a lot of buyers through rates would stay very, very low.  So let's say a buyer bought a property for $100 with $75 of debt and $25 of equity.  Today all of the equity is gone AND $15 / $75 is gone on the debt.  When the term matures, the lender comes and wants to be made whole.  The owner has two options.  First, they can do a "cash-in refinance" meaning they need to go back to their investors and ask them for a 60% ($15 / $25) equity injection via a capital call.  The second is they can't achieve this and they have to default.

The other issue with financing today is the same borrowers that were using high leverage, 3-year debt were the most likely to take on floating rate debt with rate caps.  As those rate caps have been expiring they have been seeing massive increases in their debt service because their effective rate went from say 3% to 8% overnight.  The property can not service the debt and they go into technical default, which then has to be worked out.

 

There's obviously much more to this.  But needless to say, these is a massive capital markets issue out in the market that isn't being discussed fully.  There's way too much on the shitty fundamentals of office and not enough people understand there's too much leverage in MF and industrial.  It takes time for this all to play out and as more borrowers come under pressure as their debt rolls over, the worse it will get.  The "maturity wall" as it was really kicks off later this year through 2025.

Hence you will have a new "survive to '25" mantra in CRE which was an inside joke back during the savings and loan crisis: "survive to '96".

Very well said.  But yes, the combination of rates going through the roof and operating expenses also increasing materially is going to fuck an awful lot of CRE owners.

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Chewbacca

Chewbacca 7629

Posted
Posted
On 5/29/2023 at 10:50 PM, Chopper said:

It's incredible that people were taking 3 year loans instead of 10, 15 or 30 when interest rates were just 3 percent because they expected rates to go lower. In Texas, no less, where there's far less room to maneuver because of very high property taxes.

There are very few fully amortizing options for CRE.  Most lenders don't want to go longer than 10-15 (with the exception of agency loans which are expensive, slow and a PITA to do).

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Neonmoon

Neonmoon 38126

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ME: The Fed is speaking right now. The bonds are dropping as we speak. Do you want to lock this in now?

Buyer: Let me talk to my wife first

(Reprice for the worse)

ME: (fuck my life)

(before anyone says "I would have just locked them in anyway" this person already got mad at me for doing something smart but not getting approval first)

 

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Incredulity

Incredulity 11197

Posted
Posted

The hits just keep on coming

 

https://www.sfchronicle.com/bayarea/article/westfield-giving-san-francisco-mall-18148102.php

 

The company stopped making payments on a $558 million loan, and Westfield and its partner, Brookfield Properties, started the process of transferring control of the mall at 865 Market St. this month.

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LCHorn

LCHorn 2564

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Posted
2 hours ago, Neonmoon said:

ME: The Fed is speaking right now. The bonds are dropping as we speak. Do you want to lock this in now?

Buyer: Let me talk to my wife first

(Reprice for the worse)

ME: (fuck my life)

(before anyone says "I would have just locked them in anyway" this person already got mad at me for doing something smart but not getting approval first)

 

I pretty much tell borrowers I will lock them when they go under contract and they can take it or leave it.  The only people that don’t appreciate it tend to be ruthless rate shoppers anyway.  

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