Modest job growth throughout the year will help rescue Houston’s real estate market, Houston economist Barton Smith said today at what was his last symposium speech as head of the University of Houston’s Institute for Regional Forecasting.
Houston is working its way out of the recession quicker than he and most other observers thought would be the case, said the longtime UH economics professor, who is retiring at the end of the summer.
“The old wisdom that because Houston was so late in getting into the recession that it would be late in getting out of it simply proved to be wrong,” he said in the Imperial Ballroom of downtown’s Hyatt Regency Houston Hotel.
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Some interesting articles about luxury apartments and how they are being marketed. In the “olden days”, these prime properties were eagerly awaited; units were snapped up prior to the general opening and waiting lists ensued. Obviously those days are over – not only is the economy working against high-end properties, there is now a glut of these luxury high-rises on the market and not enough renters.
Well the units still have to be rented. Some companies choose to use the glitzy coming-out party, highlighting the fantasy of what these luxury units bring to prospective renters. Other property groups have to choose another route: turning over management of an apartment building to a separate company.
It will interesting to learn the results of both marketing methods down the road.
Over the past couple of months, we have been hearing a lot about “Pretend and Extend” in the industry. This phrase describes the state of our $2 trillion commercial real estate loan debacle of how some banks are handling distressed assets and defaulted loans. Pretend and Extend allows banks to provide their best borrowers an opportunity to extend maturities to work out the current loan difficulties.
In reality, the loan balances for most of these outstanding and maturing loans are deeply underwater. If one would wait it out and hold the loans until revenue is sufficient to provide the planned investment return, the wait could be over in three years, based upon effective rents in today’s market. With concessions and occupancies at record highs, it may take years to fully recover. Let’s look closer: losses mounting for three to five years to reach exit-level could mean increasing a loan balance from $50M to $54M. as a result, it would take a much longer term or significant change in revenue to reach profitability.
If banks were to foreclose quickly and take the short-term hit, there is a strong chance that losses can be limited to 15 to 25% of the loan balance. In some recent cases, distressed property disposition have returned 90-100% of the loan balance. Current demand for apartment product is reducing the depreciation of distressed asset value. clearly, it appears that banks would be better off liquidating their assets and taking the quick hit that prolonging the inevitable of mounting debt balances.
On the other hand, I must credit the general savvy of special servicers for ther controlled disposition process to date. We all expected the faucet to flow with distressed deals starting in 2009, but very little product was released. that was smart judgment: setting the reset button on all REO assets would cause a deluge of distressed inventory and collapse in market value.
A carefully planned release of distressed assets creates a much better disposition environment. Timed release allows the market time to absorb assets with heightened demand from many buyers. If this process is continued over the next 3 years, we could gradually reduce overall commercial loan exposure and minimize loss in values simultaneously.