SOURCE: The Wall Street Journal

The massive market for debt tied to commercial real estate is beginning to thaw as investors flush with cash are starting to buy up billions of dollars in mortgages and securities that had been stuck on the books of banks. Investors are beginning to buy mortgages and securities which are discounted from 5 - 20%. Even though there are discounts to be had, the banks aren't selling off at fire-sale prices.

One of the reasons that banks aren't in too big a hurry to dump these types of inventory is because the default rate on commercial real estate is remaining low by historical standards. In the past four weeks, banks have gone to market with four CMBS issues, with a total balance of $4.9 billion... That is a dramatic improvement from early this year.

Lenders are beginning to sell debt both as whole loans as well as CMBSs. Buyers are investing more frequently due to the growing trading volume of CMBSs in the secondary market. This is reducing the spread between these securities and the U.S. Treasury's.

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SOURCE: Forbes

Financial troubles have turned net-leases into a high-yield way to get into commercial real estate. Net leases involve a building owner or a multiple building owner that sells off the buildings as a way to raise cash. They then lease back the building as tenants which makes for a steady and well-protected income stream for 20 to 30 years.

"Now's a good time to be a buyer," says Michael Houge, a principal at Upland Real Estate Group in Minneapolis. "I have twice as much retail property for sale as six months ago, with higher-quality tenants, better locations and more aggressive sellers."

Buying specialized real estate investment trusts (REITs) that own buildings rather than mortgages is another way to get into commercial real estate. Net-lease REITs do much better than equity based REITs.

Most sale-leasebacks involve deals with values greater than $20 million and this is too expensive for most individuals. They can still participate by piggybacking since REITs and other institutional net-lease buyers often sell off some of their properties to turn a profit or balance holdings geographically. Nationwide there are 11,000 single-tenant retail outlets with 60% of them priced below $2 million.

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SOURCE: Trading Markets

The U.S. economy has shown signs of an easing credit crunch since the Federal Reserve's rescue of investment bank Bear Stearns in mid-March, but capital will continue to be tight. The commercial real estate industry has been affected due to the lack of capital. As well, the inability to sell loans to investors has also prompted a slowdown.

Even with the challenges, small, simple commercial real estate deals are able to find their capital. That said, larger more complex deals are still having a difficult time. The lenders that are active are private investors, pension funds, and insurance companies.

It is felt that the commercial mortgage-securities market won't really bounce back fully until the volatility reduces and the more serious bond buyers return to the market. Even though things are difficult now, there are signs beginning to show that may mean a change is coming.

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SOURCE: The Motley Fool

While investors have fretted about the implosion of the housing market, the commercial real estate market has continued to reach new heights. Several factors are contributing to the vigor in commercial real estate and that is boding well for upcoming earnings reports.

Modest interest rates are helping to keep commercial real estate a target of investors. More new investors are also being lured into real estate investing as they become more familiar with how real estate investment trusts (REITs) work and the structure involved. In fact more 401(k) pension funds have added REIT investment options and are increasing their real estate allocation.

As always though, savvy investors look for areas in which office space remains in high demand. These markets which include New York, California, and metro D.C are bearing witness to the tight supply and rental increases that are taking place. Strength is likely to be reported by companies that are focusing their investments in these areas.

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SOURCE: The Washington Post

Foreign investors are taking advantage of the lack of competition in the U.S. commercial real estate market. According to a first-quarter survey by the Association of Foreign Investors in Real Estate (AFIRE), their international investors rank the U.S. as the most attractive market in the world.

The lack of competition in the U.S. market is being driven largely because private U.S. buyers are hard pressed to find money due to the credit crunch. Also, more conservative investors are waiting for prices to continue falling. This combined with the fact that the inventory of upper echelon Class A commercial buildings is relatively small is making for some record breaking deals.

The foreign investors aren't getting bargains. They are paying a premium price for a solid tenant base. These properties are typically fully leased with long term, credit-worthy tenants. This is a great hedge to have against the volatile market that the U.S. is experiencing.

Foreign investors are finding that now there are fewer domestic investors due to loans being scarce, they have the time needed to familiarize themselves with the commercial real estate market. With the dollar worth less compared to many foreign currencies and the market down, foreign investors could be getting a double discount on U.S. real estate.

SOURCE: GlobeSt.com

Multifamily investors have a somewhat reliable avenue to obtain capital with the government-sponsored entities such as Fannie Mae and Freddie Mac. Many investors that are active in this sector of commercial real estate make their first capital shopping stop with them when they are obtaining money for acquisitions or new projects. The Mortgage Bankers Association has released figures showing that the GSEs and Ginnie Mae are the holders of the largest share of multifamily mortgages. Real Capital Analytics reports that government agencies have increased their multifamily financing by 103%. This is felt to be an unprecedented market share fore these agencies.

"While some sectors such as CMBS slowed down in the second half of 2007 compared to the second half of 2006," says Jamie Woodwell, senior director of research for commercial/multifamily for locally based MBA. "Fannie and Freddie were running 50% ahead of what they had in 2006--there was certainly strong origination volume there in the second half of the year. Additionally, counter to what we've been hearing, the fourth quarter actually saw record increases in the amount of multifamily mortgage debt outstanding, and about 88% of that came from the GSEs--be it through their portfolios or mortgage-backed securities."

There are some characteristics of these agencies financing policies that make it very appealing to borrowers. One of the key characteristics is that the seller-servicer remains the same for the entire life of the loan rather than being sold off. Another incentive to dealing with Fannie and Freddie is that if supplemental financing is needed, the borrower can return several times to obtain the money needed. Most conduit type loans do not provide that opportunity.

Even though the agencies have become more discerning in what they will finance, they are gaining market share fairly aggressively. With this they are encouraging the return to sound underwriting principles and rational pricing. They have begun to raise prices and tighten credit in recent months. This is reflecting the trend which many financial companies are seeing, a higher cost for capital.

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SOURCE: SFGate

Throughout the wide range of financial companies which include banks, brokerage firms, money managers, insurers and real estate investment trusts (REITs), they have all been hurt to some degree by the credit crunch. There has been one underlying conclusion though - the further away a company was from housing and residential mortgages the better it has done over the past year.

For example, even though Wells Fargo was a major originator of subprime loans during the housing boom, most were immediately sold to others and never made it to Wells Fargo's balance sheet. This has made it so they have largely avoided the land mines that have blow up other mortgage lenders.

As well, in many regions, especially the Bay area, commercial real estate has held up much better than housing and that has helped REITs. For example, Essex Realty Trust which invests in multi-family housing has done relatively well due to its large exposure to the Bay area and Seattle. These are just two of the nation's best apartment markets.

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