Stalled GDP, unemployment put brakes on commercial market recovery.

The global economic slowdown, combined with a "modest" supply of new space coming to the market and low demand, could delay or hamper the commercial real estate market's recovery, reported Knight Frank LLP, London.

For U.S. markets in particular, Knight Frank's Global Real Estate Markets Annual Review and Outlook said continued short-term declines in gross domestic product (GDP) and lagging indicators such as unemployment will likely contribute to higher vacancy rates and prime rents. But the report also noted that the recession's impact has become "truly worldwide," spreading even to regions which initially seemed well-placed to weather the storm--such as Asia-Pacific and the Middle East.

"Global demand for office space is down, with international companies reassessing their property requirements as they cut costs and reduce work forces," the report said. "In most major markets, vacancy rates have started to rise and prime rents are falling. These trends will only continue in 2009. Globally, commercial real estate is in the midst of a period of significant repricing. In a challenging market, investors will need to keep clear heads to be able to assess when and where opportunities and value might arise during 2009."

For the Americas and the U.S. markets, recovery in GDP and significant gains in employment levels are unlikely to occur before 2010. The report notes capital spending budgets for 2009 have been reduced and forward bookings for travel and vacations in the first half of 2009 were down sharply.

"For the property markets, however, the situation could be worse," the report said. "In most U.S. regional markets and for most property sectors, the supply of new space that will be coming to market will be modest by historical standards. In the 1970s, 1980s and 1990s, weakness on the demand side was commonly accompanied by a massive injection of new space. It often took the property markets years to recover from the overhang of empty space. This time if demand can be rekindled, it will be less difficult to get a rebound in the property markets."

The report cited a primary reason for this relative absence of new supply being a slowdown in the economy and a reduction in the demand for additional space, which started to appear in early 2007 in many regional markets. In the United States, the level of total employment started to decline in the early months of 2008; from the beginning of 2003 through the end of 2006, total retail sales in the United States increased at an average annual rate of about 5.5 percent. From the first quarter of 2007 through the first quarter of 2008, however, the increase was less than half that rate. Retailers and real estate developers began to recognize in 2007 that demand was starting to falter and that the need for additional space was evaporating.

"There actually is relatively little disagreement about the diagnosis of the country's economic ailments," the report said. "However, there is considerable doubt about the ability to actually get the transformation done to get the economy back on track. Assuming that the U.S. does succeed even partially in moving toward those long-term structural changes, there are important implications about the future performance of the various property types and regional markets."

Regionally, the report said the reversal of fortunes for the New York City office market "is shaping up to be fairly dramatic." By late in 2008, the recorded vacancy rate was still slightly below 7 percent--not high by historical standards for that market or for any other major regional market in the United States. "The vacancy rate, however, is a lagging indicator of the true demand/supply balance when economic and business conditions are deteriorating or improving rapidly," the report said. "During those periods, the vacancy rate doesn't capture the intensity with which space is being utilized."

"The question for the New York City market is how quickly and robustly does it recover when the national and global economies start to rebound in 2010? If the previously mentioned restructuring of the U.S. economy begins to take hold, then New York City's financial sector will see a tepid but steady revival," the report said. "The demand for office space will reflect the subdued recovery. Rents might not begin to increase until 2011, and then at only roughly the rate of inflation."

In Washington, D.C., the good news is that the size of the federal government is increasing and a significant portion of that growth, especially in terms of staffing levels, will occur. But the reports said on the negative side, 13.5 million square feet of office space is under construction in Washington, D.C., meaning office-sector employment would need to increase in the 20,000 to 25,000 range in both 2009 and 2010 in order to absorb that amount of new space.

"These are ambitious numbers even for the Washington, D.C., metro market," the report said. "The average vacancy rate in the District itself remained under 10 percent in 2008, but it appears that it will move close to 11 percent in 2009."

While Texas regional markets performed quite well in 2006, 2007 and into 2008, in Houston, the stock of space could increase by more than 4 percent in the next 12 to 18 months; in Dallas the increase could be closer to 3 percent. "These are large gains in new supply and will put upward pressure on vacancy rates and downward pressure on lease rates," the report said. "The office vacancy rate in Houston will likely move close to 14 percent by the end of 2009 or early 2010."

The South Florida market has been hit very hard by the housing crisis and the contraction in real consumer disposable income, the report said, noting that the supply of empty residential units is in the "tens of thousands. The office sector has the same problem." The supply of new office space could increase by 5 percent in Dade County over the next 18 months, and the supply situation is only marginally better in Palm Beach County, where the supply might jump by 3 percent."

"The retail sector also faces a difficult 2009," the report said. "South Florida will report one of the weakest retail environments in the U.S. in 2009. It could be 2011 before the level of retail sales in South Florida again matches the 2007 level. Compounding the problem is the fact that more retail space will come onto the market in 2009, with the supply up close to 2 percent."

Reversals in the major California regional markets are on a par with what the New York City market is experiencing, the report said. The vacancy rate in Orange County has doubled in the last two years. For class-A space the vacancy rate was about 14 percent and close to 18 percent for the market as a whole at the end of 2008. Additional increases are likely in 2009.

The report said engines of growth for Los Angeles slowed in late 2007 and early 2008. "The global recession is hitting this market hard, with employment contracting," it said. "The vacancy rate here is close to 10 percent and will move well above that level in 2009. Retail sales growth was slow over the last year, increasing by about 1 percent. The outlook for the year is for a decline of about 6 percent. The vacancy rate is still low, but numerous business failures are likely, putting more space on the market."

San Francisco, the report said, did fine through the first half of 2008. "Then the global demand for high-tech started to slip. Capital equipment orders have collapsed, and funding is difficult to find for emerging companies or even mergers and acquisitions. Market valuations of properties or rental rates have yet to fully reflect this erosion in fundamentals."

MBA joins letter to Federal Reserve supporting expansion of TALF 

On July 2, the Mortgage Bankers Association (MBA) joined a letter sent by a group of financial services trade associations to Federal Reserve Chair Ben Bernanke commending the recent expansion of the Term Asset-Backed Securities Loan Facility (TALF) to include legacy commercial mortgage-backed securities (CMBS).

The letter also encourages the Federal Reserve to similarly expand TALF to include certain legacy, non-agency residential mortgage-backed securities (RMBS). The trade associations note that including legacy RMBS would attract additional private capital to the market and ultimately generate liquidity in the RMBS market.

Banking agencies publish comment request on funding and liquidity risk management

On June 30, the federal banking agencies released a request for comment on the banking agencies' proposed Interagency Guidance on Funding and Liquidity Risk Management. The proposed guidance seeks to develop expectations on sound practices for the management of funding and liquidity risks.

The proposed guidance also affirms the importance of cashflow projections, diversified funding sources, stress testing, a cushion of liquid assets and a well-developed contingency plan for liquidity risk.

Comments on the proposed guidance are requested within 60 days after its publication in the Federal Register. The proposed interagency guidance can be found at www.federalreserve.gov/newsevents/press/bcreg/bcreg20090630a1.pdf.

Supreme Court allows states to enforce state law against national banks

On June 29, the Supreme Court held in Cuomo v. The Clearing House Association LLC that states have the power to enforce state laws against national banks through the judicial process, but they lack the authority to examine banks or subpoena documents or other information without judicial process. This decision argues against national bank pre-emption and provides state attorneys general with additional authority to enforce their own states' laws to federally chartered banks of all types.

S&P publishes final CMBS ratings methodology

On June 26, New York-based Standard and Poor's (S&P) published its final rating methodology and a list of commercial mortgage-backed securities it was placing on review for downgrade. S&P intends for the new rating methodology to bring into alignment the risk profile of rated securities across all asset categories and reflects a fundamental shift in its approach for rating CMBS.

S&P's new methodology will lead to significant downgrades of super-senior AAA bonds, as well as nearly all mezzanine and junior AAA bonds. In fact, S&P placed nearly all 2007-2008 last-cash-flow super senior AAA classes on Credit Watch, but only 60 percent and 20 percent of 2006 and 2005 last-cash-flow AAAs, respectively. MBA commented on this proposal in a June 9 letter.

CWCapital acquires assets of Sierra Capital Partners

CWCapital, Needham, Massachusetts, announced it acquired the origination and servicing assets of Sierra Capital Partners, Irvine, California. Terms of the acquisition were not disclosed; CWCapital has closed more than $10 billion in loans since 2002 and currently services a portfolio of $11 billion in loans in 48 states.

CWCapital President and Chief Executive Officer Michael Berman, CMB, who also serves as chairman-elect of the Mortgage Bankers Association, said the acquisition gives CWCapital an additional presence on the West Coast.

"We considered many alternatives as to how to expand our platform on the West Coast," Berman said. "When we met with [Sierra founders] Bryan [Brooks] and Trent [Frazier], we knew their business philosophy and deep client relationships were a solid fit, making the decision to join our platforms an obvious one."

Brooks and Frazier will remain as senior executives at CWCapital, along with 12 Sierra Capital employees. Brooks and Frazier founded Sierra Capital in 2003; over the past 15 years they have been directly involved in providing more than $12 billion in multifamily financing, with a focus on conventional and tax-exempt debt financing, throughout California and the West Coast.

Prior to co-founding Sierra Capital, Brooks served as president and chief credit officer of Bankers Mutual, a California-based lender specializing in Freddie Mac and Fannie Mae Delegated Underwriting and Servicing (DUS[TM]) multifamily financing. He twice served as chair of the Freddie Mac Program Plus[R] Advisory Council; as chair of the Fannie Mae DUS Advisory Council; and as a past member of the MBA Steering Committee. He will now serve as managing director and a member of the CWCapital Loan Committee.

Frazier previously served as president of Berkshire Mortgage Finance's West Coast platform, where he was responsible for all operational functions. Prior to that, he was executive vice president of Bankers Mutual, where he was responsible for all origination activities and served as a member of the executive and strategic planning committees. He has served on the Freddie Mac Program Plus Advisory Council, the Fannie Mae DUS Advisory Council and the board of directors of the National Multi Housing Council (NMHC). He will now serve as managing director at CWCapital.

"Trent, Bryan and Sierra are well-known and well-respected by borrowers, the agencies and competitors," Berman said. "They and many members of their staff have extensive tenure in this industry--much like our CW staff--and we feel very confident that their relationships and reputation will be a tremendous asset as we further develop a leading full-service West Coast lending platform."

With the acquisition, the CW agency lending platform employs 130 professionals in 10 locations.

Fitch: 'Higher regional market volatility' in U.S. CRE markets

Fitch Ratings, New York, reported continued signs of stress in U.S. commercial real estate (CRE) markets, noting "higher regional market volatility" across all major sector types. Fitch's annual U.S. Property Metric report noted that with the average cash-flow volatility score rising to 3.62 last year from 2.98 in 2007, volatility in U.S. commercial real estate reached its highest levels since Fitch launched such scores in 2000.

"While the increase in cash-flow volatility was expected, what is noteworthy is the size of the increase, since historic changes in PMM [Property Market Metric] scores are generally small," said Fitch Managing Director Bob Vrchota.

"With more than 50 percent of the PMM scores showing greater volatility compared to just 10 percent in previous years, the magnitude of change reflects challenging forecasts for all commercial real estate property types across all U.S. markets," the report stated.

The report cited the office sector as particularly hard-hit, with the average volatility score jumping to 3.68 last year from 2.62 in 2007, following four years of improvement. Primary office markets that showed greater volatility in 2008 include the United States' three largest metropolitan statistical areas (MSAs)--New York, Chicago and Los Angeles.

Multifamily properties deteriorated for the second straight year, with average volatility scores jumping to 3.15 in 2008 from 2.5 in 2007. San Francisco, Phoenix and Miami showed most volatility, the report said. PMM scores for retail markets also reflected more volatility with a 3.7 average score last year compared with 3.12 in 2007. The report cited Dallas-Fort Worth and Houston as hard-hit retail markets.

"On the positive side, U.S. CMBS multi-borrower transactions benefit from property type and geographic diversity, so more-volatile PMM scores in and of themselves will not result in rating actions," Vrchota said. "However, the rise in volatility is another indicator of the challenges facing commercial real estate."

TD Wood secures nearly $16.9 million in financing in Nevada, Florida

Thomas D. Wood and Co., Coral Gables, Florida, secured nearly $16.9 million in financing for office, retail and medical center properties in Nevada and Florida.

Steve Wood, chief operating officer at TD Wood, and Tony Castrignano, principal at Sky Mesa Capital, Las Vegas, financed $2.55 million for Sierra Quail Office in Reno, Nevada, through Standard Life Insurance Co., New York, at a 6.625 percent interest rate and a five-year loan that can reset every five years. Based on a 25-year amortization, the loan-to-value (LTV) ratio is 63.75 percent.

Major tenants include United Healthcare Group and Career Choices of Nevada. Sierra Quail, built in 1995, consists of 30,486 square feet.

Wood and Castrignano also financed $2.7 million through Standard Life for Quail Medical Center in Reno. The 6.625 Percent rate also carries a five-year loan term that can reset every five years with a 25-year amortization and a 57.45 percent LTV. The 23,140-square-foot office building's major tenants include Reno Neurological Associates and Sierra Regional. Quail Medical Center was built in 1996.

John Worrell, assistant vice president at TD Wood, financed $1.65 million for Green Medical Center in Haines City, Florida, through Standard Life at a 7.125 percent rate and a 70 percent LTV. The seven-year loan term can be reset every seven years, based on a 25-year amortization.

Major tenants in the 20,700-square-foot medical office include the U.S. Department of Agriculture and Pediatrics Health Choice. Green Medical Center was built in 1966 and renovated in 2006.

Joe Dear, vice president at TD Wood, financed $950,000 for a CVS Pharmacy in Perry, Florida, also through Standard Life. The five-year term and 25-year amortization carries a 6.75 percent rate with a 62 percent LTV. The single-tenant retail store was built in 1996.

Patrick Madore, vice president at TD Wood, financed more than $5 million for the Commons at Abacoa II in Jupiter, Florida, and $4 million for Driftwood Plaza, also in Jupiter. A regional bank funded both loans at a 6.5 percent interest rate and a 10-year term with a five-year rate review and 25-year amortization. The Commons at Abacoa II carries a 65 percent LTV. The 29,461-square-foot office building was built in 2007 and has Health Care REIT as a major tenant. Driftwood Plaza has a 40 percent LTV loan secured by a 46,000-square-foot unanchored retail center built in 1994.

Michael Sorohan is editor and Michael Murray is editorial manager for MBA Commercial/Multifamily NewsLink. To subscribe to NewsLink. visit www.mortgagebankers.org/getnewslink.