Commercial property capitulation underway: Dechert

NEW YORK Mon Jun 22, 2009 7:12pm EDT

NEW YORK (Reuters) - Borrowers in the market for office, retail and apartment buildings are beginning to come to terms with lost value in commercial real estate, portending a capitulation required for a market rebound, a top industry lawyer said on Monday.

The commercial real estate market for the past year has been marked by battles over the fate of its loans as maturities arise and borrowers need refinancing.

The seizure of credit markets since mid-2008 has led borrowers to look for extensions of loans, hoping that the availability of funding would improve in a year. But the U.S. recession has worsened the outlook for the sector, forcing borrowers into a standoff with lenders that are demanding owners increase their risk in order to keep the property.

Now, realities are finally sinking in for borrowers who are faced with adverse rental and vacancy trends that determine the value of their properties, Richard Jones, co-chair of the Dechert, LLP, finance and real estate group told the Reuters Global Real Estate Summit in New York.

"You could make a decent argument that there is in the last month to month-and-a-half, that there has been a change in views that it's not going to get better," said Jones, whose clients include both lenders and borrowers.

Moody's Investors Service on Monday also reported a capitulation appears to be underway, as illustrated by a 8.6 percent drop in its U.S. commercial property price indices in April. It was the largest decline since the inception of the Moody's indices in December 2000.

The velocity of calls to Dechert "where something gets done" between parties in a commercial real estate transaction is up over the past six weeks, he said. Capitulation by sellers could actually invite more rational approaches from buyers who heretofore offered only deeply distressed prices, he said.

Myriad government programs that offered hopes for an improved real estate market have slowed the process by creating excuses for people not to trade, Jones asserted.

The recent skepticism over the success of the Federal Reserve's Term Asset-Backed Securities Loan Facility for existing commercial mortgage-backed securities may be aiding the perceived change in borrower attitudes, he said.

TALF "legacy" and new issue programs are part of a $1 trillion plan aimed at lowering costs for borrowing in asset-backed securities markets, and preventing a steeper market downturns that could exacerbate the U.S. recession. Under the program, investors apply for Fed funding for purchases of eligible securities.

But a proposed change in rating models by Standard & Poor's may result in downgrades of a vast number of CMBS, possibly crippling the central bank's efforts, according to analysts.

And market hopes that the Fed will revise its guidelines to allow for downgraded securities is fading.

"I would view that as good news," if the Fed does change terms for legacy TALF, Jones said. "It means (for the Fed) that this program is not critical anymore."

The TALF for newly issued CMBS can "carve a channel" for a revival in securitizations, however, he said.

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