It's as if the Market has been "holding its breath" for the last several weeks... basically since the Bear Stearns collapse. (You may have noticed this in your neck of the woods)
The nationwide market for Multifamily Properties is still strong in the face of the residential real estate collapse. Occupancies are stable in most markets and rents are keeping pace with inflation. But not very many properties are being bought and sold this quarter.
Here is the reason... I call it the "Securitization Slow-Down"
Used to be that a lender would write a loan and then quickly get that loan off their books through Securitization. The Securitization process bundled a bunch of loans into a larger "Security" and sold those to other entities as a safe way to make good income. Things just didn't quite work out that way when the underlying loans went sour.
Securitization allowed lenders to make more money by writing more loans and shift the risk to other entities. As the loans started to go bad it was the owners of the securitized loans that were left holding the empty sack ... not the ones who originated the loans. So now nobody trusts a Securitized Investment. No one wants to take on problem loans that another institution originated.
According to the Wall Street Journal ... In just the last year total assets in US Banks have risen by $1.2 Trillion ... mostly because of the Securitization Slow-Down. Lenders are not able to securitize ... so the loans stay on the books.
Why is this Important? Well ... when a lender writes a loan they intend to keep, they go about the process differently than if they intend to Securitize it. They are more careful at every stage of the loan process. This new caution has a negative affect on your Return on Investment.
The Lenders are doing two basic things differently now
1) Lower LTV's - Average LTV's have fallen from the 80% of the last several years to the current 75% or less. So, buyers have to put more cash into the deal.
2) More Conservative Underwriting - The Lenders are moving expense estimates up and income estimates down across the board. This "new math" lowers the Net Operating Income (NOI) projections from your property ... Which lowers the Debt Coverage Ratio ... Which lowers the amount they will lend to the buyer. So, buyers have to put more cash into the deal.
More Cash Please ... The Double Whammy of lower LTV and lower NOI from more conservative underwriting ... means it will take a significantly larger pile of cash to buy the same building now than it did just a few short months ago.
Less Leverage = Lower Returns - With more cash into the deal ... any Buyer's Return on Investment is lowered.
This naturally lowers the price any Buyer is willing to pay. Sellers who have been used to top dollar for their properties are holding off on their sale because top dollar is significantly lower in this market than before the Credit Crunch.
The New Old - This new, more conservative environment isn't "New" at all. It's actually a return to what is historically normal. Just like the way Price/Earnings Ratios returned to more normal following the DotCom bust. What has been distinctly abnormal is the superleveraged environment of the last several years. Lenders writing loans willy nilly knowing that they would have them Securitized and sold to someone else in a matter of weeks.
So this is not a new phase. It is more like the fashion world ... what was old is now new again. The bell bottom jeans of my high school days are back in style.
Look for properties to begin coming back on the market and seller flexibility to return in the next several months as we all get used to this New-Old state of affairs. Sooner or later everyone - even the Sellers - will realize the days of easy credit and fat underwriting are over and prices will find a new level that makes sense in today's environment.
Won't be long before the market starts to breathe again.
0 comments:
Post a Comment