Loan Workouts Are Surging - The Debt Markets Are Showing Real Signs of Recovery

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We've all watched and some have suffered as the commercial market suffered through the markets trough and the very weak lending environment that surrounded it. In the past few weeks CMBS began showing life. $6.3 billion new loans fell into distress in June. This is the smallest monthly increase since October 2008. The peak was April 2009 when the loans falling into distress exceeded $20 billion dollars. This month was only half of the previous month. At last there are signs of returning strength. In fact the $56.8 billion in loans that moved to special servicing is a 24% decrease from the first half of 2009. The amount resolved in the first half of $14.6 billion is a 272% surge of the first half of 2009.

The core assets in primary markets have recovered much of the lost value since the credit crisis onset and recession. This too is making workouts easier for lenders. Recovered value makes bringing new partners a much more easily achieved goal. For example, there have been trades in San Francisco, Chicago, and Washington, DC recently that were at or near the pre recession values and capitalization rates. Undeveloped land or buildings with high vacancy rates continue to struggle producing a clear floor. The undeveloped land and construction assets are hitting regional and local banks harder where recovery rates on under performing loans is 64% of the unpaid balance compared to 71% for national banks and 77% for international banks. CMBS special service have suffered the greatest with 64% of the new distress in total dollars. Only 45% of these have reached workouts.

Investors need to understand that the percentage of distressed loans continue to grow. July was an all time high. However, the increases have begun to slow dramatically and at last there are signs that the banking industry is beginning to catch up with the backlog. Before year end at the current trend, the banking industry will begin to reduce the percentages. At the current acceleration, the possibility within the next quarter the amount of loans in distress will begin to fall on a real basis. This event will likely be the first strong signal for banks to begin to enter the market and lend again. The importance of differing performance between the varying lending sources is that this will be the likely reentry order. International banks, national banks, regional and local banks and CMBS will begin lending in that order. This is why the signs of some CMBS lending is so significant as this indicates some individual sources have already reached this point.

Blake Ratcliff (US Naval Academy Graduate & Marine Officer, Serial startup entrepreneur, COO/CEO, multifamily / residential investment founder, and property manager).

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