NEWS

• Risky or Not, Lenders Slowly Opening Vaults to CRE Lending Again 
  Loan Renewals, New CRE Lending Jump in December
   

   
  By Mark Heschmeyer
   
  Even as banking regulators and politicians deal with the fallout from the collapse of commercial real estate values and the subsequent impact on the banking systems, it appears that an increasing number of lenders are more inclined to jump back into the sector.
  
  Total renewals of existing commercial real estate accounts increased 57% from November to December of last year, according to numbers released this week by the U.S. Department of Treasury. Treasury completes a monthly tally of lending activity of the nation's 20 largest bank, which control 57% of all U.S. banking assets.
  
  While seasonality contributed to the increase -- as year-end is an active time for renewals -- new lending also more doubled in December from the previous month. Total new commercial real estate commitments increased 157%. That was the first increase in four months.
  
  Citigroup's new CRE lending increased eightfold in December to $294.4 million. Loan renewals more than doubled to $282.3 million, reflecting an increase in capital?raising activities by real estate investment trusts, Citigroup said.
  
  Even with new and renewals increasing, the big banks also increased their disposal of CRE assets on their books. Citigroup noted, for example, that its average total CRE loan and lease balances totaled $22.8 billion at the end of December, 3% lower than it was in November. The outstanding balance of CRE loans of all respondents fell 1% in December, and the median change in outstanding balances was a decrease of 1%.
  
  Fifth Third Bancorp's average CRE balances decreased by approximately 1.3% in December compared to November. New CRE commitments originated in December 2009 were $196 million, which was up almost 50% from $132 million in November 2009. Renewal levels for existing accounts increased significantly in December 2009 to $1.2 billion versus November 2009 at $471 million due to normal year-end seasonal trends.
  
  Even though Fifth Third's combined originations and renewals were higher in December than November, payments and dispositions of troubled CRE outpaced the higher levels of activity causing the overall balances to continue to decline. As commercial vacancy rates continue to rise, Fifth Third said it continues to monitor the CRE portfolios and continues to suspend lending on new non?owner occupied properties and on new homebuilder and developer projects in order to manage existing portfolio positions.
  
  "We feel this is prudent given that we do not believe added exposure in those sectors is warranted given our expectations for continued elevated loss trends in the performance of those portfolios," Fifth Third reported.
  
  Other Banks Follow Lead
  
  What is happening among the majors also seems to be the route other banks say they will be more willing to take this year. According to findings from Jones Lang LaSalle's annual 2010 Lenders' Production Expectations Survey, bankers are predicting that loan production will increase this year.
  
  The number of respondents that said they expect their loan production to range from $2 billion to $4 billion in 2010 doubled from last year to 43%. Showing even more future optimism, nearly 70% of respondents said their loan production will ramp up to $2 billion to 4 billion in 2011. In another encouraging metric, the number of lenders that expect to lend more than $4 billion jumped up 6% from 9.3% in 2009 to 15.2% in 2010.
  
  "Lenders we spoke with say they'll be giving borrowers 24+ month extensions in order to avoid foreclosure on high quality, well-located assets," said Bart Steinfeld, Jones Lang LaSalle's managing director of the real estate investment banking practice. "With more than $1 trillion worth of commercial real estate loans expected to mature between now and 2013, it's no surprise that a majority of borrowers are placing significant importance on restructuring those loans. However, many financial institutions don't want to hold on to assets and now are coming to terms with the fact that they can no longer 'extend and pretend.' They're now realizing it makes good sense to move these assets off their balance sheets to create greater ability to originate loans this year."
  
  The number of lenders willing to lend greater sums toward single-asset acquisitions is also shifting. In 2009, the majority of respondents indicated they would lend only $10 to 25 million on a single asset acquisition. In 2010, the greatest percentage of respondents was split evenly at 28% each among those willing to lend $50 million to $100 million and $100+ million (hence 56% will lend $50 million and more for single-asset purchases). In 2011, the number of lenders willing to lend $50 to $100+ million rises by 8% to 64% of respondents.
  
  "A few life companies and investment banks we spoke with indicated that they're willing to lend $150 [million] to $500 million on large, single-asset acquisitions in 2010," said David Hendrickson, managing director of Jones Lang LaSalle's real estate investment banking practice.
  
  Approaching maturities will continue to share the stage in 2010, with more than 67% of life company respondents acknowledging 40% to 60% of their portfolios will be allocated to the refinancing of maturing loans.
  
  While liquidity within the capital markets is expected to turn from a trickle to a slow-but-steady flow in 2010, borrowers can expect the same tightened underwriting standards they experienced from life company lenders in 2009.
  
  Loan to value ratios in 2010 will fall predominantly in the 50% to 70% range, according to more than 74% of life company respondents, and that number is expected to remain steady in 2011.
  
  As for new conventional commercial real estate loans in 2010, 59% say most loan terms will range five years or greater, with an additional 28% indicating a preference for three to five year terms.
  
  As for the sectors that lenders would most prefer to lend, a majority of respondents (27%) said they would single out multifamily for their loan dollars, while another 21% said they would focus on the office sector in 2010. The hotel sector stood out as the sector to which lenders are least likely to lend.
  
  There was a significant increase in the number of lenders who said they are selling performing and non-performing loans. In addition, these lenders said they are prepared to accept significant discounts in 2010 to create liquidity and to rid themselves of these non-core or problem assets. For performing loans, 29% of respondents indicated they are selling performing notes at 90 cents on the dollar and another 24% are selling performing loans between 70 cents and 80 cents on the dollar.
  
  "There is also increased interest in selling sub-performing, or "scratch and dent" loans," said Noble Carpenter, managing director of Jones Lang LaSalle's real estate investment banking practice. "Depending on the remaining term, interest rate, property type and market, over 45% of survey respondents indicated a willingness to sell these loans below 0.60 cents on the dollar.
  
  Many lenders also said they have started or are considering asset, REO and loan sales.
  
  "We're definitely seeing the bid-ask spread between buyer and seller narrow, and in many cases reach equilibrium. That alignment should be the impetus many lenders need to bring large and small balance loans and REO to market," added Wes Boatwright, managing director of Jones Lang LaSalle's real estate investment banking team.
   

• Movie Gallery Files Bankruptcy, Closing Stores
   
  Movie Rental Retailer Files Bankruptcy Again, Plans to Close 856 Stores
   
  By Sasha M Pardy
   
  February 3, 2010
  Late Tuesday night, the country's second largest movie rental chain, Movie Gallery, brought to fruition circulating rumors that it would file Chapter 11.
  
  Like most retailers, Movie Gallery was hit hard from lack of consumer demand during the recession, but in addition, it has been struggling to keep its foothold in a marketplace where consumers can rent movies through so many other outlets -- from mail order to kiosks and direct downloads. On top of this, Movie Gallery is underwater with more than $540 million in debt that was primarily created from its 2005 acquisition of Hollywood Entertainment Corp, which it acquired for $800 million.
  
  This is the second bankruptcy filing for Movie Gallery. The retailer first filed Chapter 11 on October 16, 2007 when it operated 4,430 stores. In May 2008, Movie Gallery emerged from bankruptcy much lighter -- with 3,300 stores.
  
  Since, Movie Gallery has closed another 700 stores; as it reported in Tuesday's Chapter 11 filing that it currently operates 2,600 stores under banners Movie Gallery, Hollywood Video and Game Crazy. Of these stores, 184 are operated by Movie Gallery Canada, which has been excluded from this bankruptcy filing. Movie Gallery reported $1.4 billion in annual revenues (down from $2 billion in 2008) and said 19,082 people are employed by the company.
  
  As part of its reorganization efforts, Movie Gallery has requested the cancellation of 856 store leases. Follow this link to download the list, which is weighted with more Hollywood Video closures than Movie Gallery closures. Gordon Brothers Group has been selected to help liquidate the closing stores.
  
  According to CoStar Tenant, the typical Movie Gallery is between 4,000 and 5,000 square feet, while the typical Hollywood Video is between 5,000 and 7,000 square feet

• Dollar General to Open 600 New Stores in 2010
   
  Capitalizing on Consumers' Tight Pockets, Dollar Store Retailer Staying Agressive in 2010
   
  By Sasha M Pardy
   
  Dollar General Corporation (NYSE: DG) recently reported that for the first nine months of this year, the company reported a 296% increase in net income from 2008 to $63.7 million. Dollar General said a significant increase in customer traffic and average transaction amount drove a 10.3% increase in same store sales for the period -- remarkable in comparison to the sales performance of most other retailers this year.
  
  During 2010, Dollar General plans to open 600 new stores, as well as remodel or relocate 500 stores. This follows 500 new store openings and 450 remodels or relocations carried out during 2009. The retailer currently operates 8,720 stores in 35 states.
  
  Dollar General's preferred site criteria provides for a 9,014-square-foot building with a minimum of 30 parking spaces and accessible truck delivery, plus availability of pylon signage. The company looks for high visibility and full ingress / egress at a location along a retail corridor with good traffic -- it considers both shopping center and freestanding opportunities.
   

• Banking Regulations Provide More Certainty For CRE
   
  This week The Wall Street Journal and other media outlets reported that banks are moving quickly to restructure commercial mortgages under new U.S. guidelines issued on October 30. These guidelines look beyond property values and maturity defaults to help banks avoid bigger losses and preserve capital.  It is estimated that the flexibility extended by regulators could apply to as much as $130 billion of commercial real estate-backed loans coming due in the next several years. 

   

  ICSC has met repeatedly with various U.S. bank regulatory agencies to encourage these guidelines, which we believe will help banks decipher the mixed messages they have been receiving from regulators for the last several months.  During these meetings it was clear that agencies are looking at all bank loan portfolios very closely and we do not believe that these guidelines will change the level of scrutiny being applied to the banks or the write-downs that will have to be made.

  Analysis suggests that many commercial real estate properties are still producing enough income to cover debt service ratios, even if the current market value of the property is underwater.  More problematic are defaulted construction loans or loans backed by raw land. 

  Regional and small banks are the most likely financial institutions to benefit from the guidelines because of their exposure to commercial real estate. More than 2,600 banks and thrifts have commercial real estate loan portfolios that exceed 300% of total risk-based capital, according to an analysis of regulatory filings by The Wall Street Journal. Nearly all of those institutions have less than $5 billion in assets.

  Critics of the new guidelines argue that the government is prolonging the financial crisis by not dealing with distressed assets immediately, leaving troubled loans on banks balance sheets and cutting in to future lending capability.  Many believe a better solution would be similar to the approach regulators took during the commercial real estate crash of the early 1990s when they created the Resolution Trust Corporation – but with incorporating what was learned from that experience. Several reports point to pools of capital on the sidelines waiting for distressed assets to be unloaded at steep discounts. 
   

• Pain Persists, But Worst May Be Over for Nation's Industrial Real Estate Market
  Tenants Have Shed Nearly 200 Million Square Feet of Warehouse, Factory and Flex Space Over the Past Five Quarters
   
  By Randyl Drummer
   
  The vacancy rate for U.S. industrial space eclipsed 10% and negative absorption topped 44 million square feet in the third quarter of this year as companies continued to shed warehouse, flex and manufacturing space in the face of continuing job losses.
  
  But the most precipitous of the occupancy losses may be over, according to CoStar Group's Third Quarter 2009 Industrial Review. Looking ahead to next year, CoStar forecasts that, although the national industrial vacancy will rise as high at 11%, the amount of net vacant space on the market should begin to taper off over the next two quarters.
  
  The vacancy rate jumped to 10.2% in the third quarter -- a 180-basis-point increase from the 8.4% reported during the same quarter last year and up from 9.8% at midyear 2009, according to the third-quarter industrial review delivered by Jay Spivey, CoStar's senior director of research and analytics, in an Oct. 20 webinar. The additional 44.1 million square feet of negative net absorption brings the year-to-date total to 147 million.
  
  CoStar and economists at Property Portfolio and Research, Inc. (PPR), the global real estate analysis firm acquired by CoStar in July, project another two quarters of continued but moderating levels of negative absorption. By mid-2010, (barring a double-dip recession) the industrial market is expected to slowly resume leasing activity generating fairly robust quarterly positive absorption through 2013.
  
  With new construction on industrial property largely in check, CoStar forecasts that the national vacancy rate should peak at around 11% next year, though rents are not expected to start climbing again until 2012-13. Net operating income (NOI) growth for industrial building owners, which flattened last year and had fallen nearly 6% as of midyear 2009, will continue to decline through 2011.
  
  "The bad news is, we've got a little bit more to come in terms of rising vacancies. The good news is, we believe most of the negative absorption is behind us," Spivey said.
  
  Between mid-2001 and mid-2002 following the collapse of e-commerce and other dot-com companies, which especially affected office buildings, the industrial market recorded 70 million square feet of negative absorption during four quarters, with no more than 30 million square feet given back in the worst quarter. The current downturn is clearly much worse by comparison, Spivey observed.
  
  "This [recession], we've had five quarters of negative absorption totaling 194 million square feet, and we're probably not completely done yet," Spivey said.
  
  Editor's note: A recorded version of the "The State of the U.S. Industrial Market: Third Quarter 2009 Review" webinar and a PDF of the slide presentation is available to CoStar subscribers by clicking the Knowledge Center tab on the CoStar home page and going to the Webinar Archives section.