Real Insight. Real Estate.

Real questions…

…like, what to do with the inevitable?

Do you remember the opening war sequence, from Saving Private Ryan? (see here) The guys are on the landing craft headed toward Omaha Beach. They’ve already been through a long, tough ride. They don’t know exactly what’s in store, but they know it’s likely to be really bad…

A little dramatic, perhaps, but I can’t help but be reminded of that scene when I read articles like this one in Forbes (see here). “…$750 billion in refinancing needed over the next 24 months…” Ouch.

In an NREIONLINE article form Feb of ’09 (see here) we learn the following: “The market is at a seven-month standstill that capped issuance at $12.1 billion in 2008, down more than 90% from the $230 billion that the sector issued in 2007.”

So, if the industry needs to finance $325 a year for the next two years, it’s going to need to do 1.4 times the volume last seen during the apogee of the biggest credit bubble in the last 70 years. No easy task, given the current state of the markets.

This does not account for the effect of potential FOMC rate increases. As you can see form the LIBOR futures curve, the market is trying to tell us something. Ask yourself how many deals out there are limping along because LIBOR is allowing floating rate deals to reset at less than 1%. Then add those deals to the number of projected defaults based on LIBOR roughly following the path on the right. Not pretty.

It seems we are beginning to see how the pervasive ‘bid/offer problem’ is going to be resolved. Banks and servicers are going to convert REO into cash by ‘hitting the bid’. Prices, as they were during the bubble, will be determined by available financing. Cash flow in place with a healthy DSCR coverage will be the standard; as opposed to perceived value per SFT. As for land… well, good luck!

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