In the Tank

And I thought the second quarter was bad.

One-Month LIBOR shot up overnight to 5.54%, crushing DSCRs on floating rate deals that -- until today -- were the only reliable way to finance large transactions. Forget finding fixed-rate financing -- 3Cap's friends at Deutsche, Wachovia, LaSalle, and Credit Suisse aren't even quoting. The few, the brave few who ARE quoting are giving notice that their quotes are good for about 24-hours, and any terms provided are subject to market conditions.

A good friend at Citigroup has sized up 2 deals since the weekend. Neither are likely to transact.

And now, I'm sure you've read that BNP Paribas has frozen 3 funds, a la Bear Stearns, citing the "fact" that they couldn't "fairly" value their holdings.

Rumor has it that Wachovia may report sizable losses in its CMBS lending and securitization operations from aggressive loans that they haven't been able to securitize. But given that Wachovia is one of the faster banks on the street to clear loans off their shelves, I find it hard to believe that there won't be several others (if the rumor is true, of course).

Most b-note players are out on the golf course for the rest of the month, as subordinate financing becomes more scarce by the day. No one can finance their originations via CDOs, so why bother?

I keep hearing the first-year guys and summer associates yell in delight about how the 10-yr Treasury yield has fallen 10 bps this morning, as if the 10-year matters right now.

The New York Sun says the mayhem may actually be good for the markets. Wha? In what time frame? And for whom? Certainly lower leveraged pension funds, maybe insurance companies and balance sheet guys in the short term. But long term? How is it "good for the markets" when you cut transactions by at LEAST 50% over the course of at least the next year??

It's a New Dawn, It's a New Day

After the busiest three weeks of my life, I'm trying to get back into the routine of posting here. Oh, how much has changed in the past 17 days...

Forget what you thought you learned about today's CMBS world during the last 18 to 24 months - it's been flipped faster than the EOP portfolio. With the subprime meltdown, ratings agency warnings, and activist CMBS buyers at all levels serving as catalysts, the CMBS market underwent an enormous adjustment seemingly overnight. Banks re-traded loan apps on their some of their most successful and profitable clients, several banks made it be known that they are out of the 10-year interest-only lending business for good, some borrowers unable to obtain financing walked away from hard deposits, and one of the go-to funding sources for large deal financings went POOF -- literally -- overnight.

Some of the biggest news items since the hiatus:

CMBS Spreads Widen from Top to Bottom (IPG/CRE News [$])
From the top classes to the B-Pieces, CMBS spreads widened. Most see it as a result of S&P and Fitch warnings about law underwriting and new ratings standards. Some point to the subprime mortgage fallout for why CMBS buyers are feeling a little jittery. Either way, it's affecting everyone from the borrowers to banks with un-securitized loans still on their books.

Institutional Real Estate Cap Rates Hit Record Lows (IPG/CRE News [$])
Something has to give, but it didn't happen in the first quarter, as cap rates dropped even further across all property types, according to Bank of America. Marketwide, the average cap rate hit 5.61%, which continued a now 9-quarter decline. For those scoring at home, that's a less than a 100-bp spread on today's Ten-Year at 4.652%. Fantastic.

60 Wall Trades for $1.18 Billion (Reuters - FREE!)
Paramount takes the downtown asset that's been on the market since November 2006. Something may have changed since I last looked at the deal, but the net rentable are should still be 1,625,483 sf, meaning the price was $738 psf, considered a bargain in New York these days. My last underwriting pegged the initial year's NOI at about $64.5 million, which hints at a 5.47% cap rate. That could be off though, since I haven't seen the deal in about 6 months. Looks as though DB got their target price... less about $20 million (only a 1.7% haircut).

There's no real articles on the on-going CMBS adjustments and how it's affecting the market (that I've seen), except for the pay publications like Commercial Mortgage Alert, which is proving to be a priceless resource right now.

Hoping to find time to post more regularly....

3.0%

Dillon Read - DONE!?!

Can't post much now, but the word is that Dillon Read Capital, a subsidiary of UBS, apparently gathered their employees in the ballroom this afternoon and shut everything down at 5:00 pm... Told everyone not to come to work in the morning. Would be HUGE news in the morning.

Rumor goes that they lost a billion dollars plus in the last couple of weeks. I'm sure more info will slowly leak out if proven out, but this is definitely the biggest news in a week that's been full of news (that I haven't had time to post about).

Update Thursday, 9:35 AM: It sounds like the amount lost noted above was overblown by *just a bit* but the media caught wind of this around 4:30 AM this morning. Click for stories from Forbes and Bloomberg.

Update Thursday, 5:10 PM: Although not reported anywhere (that I have been able to find), today's rumor is that Dillon Read was a significant financial backer of New Century, the now-defunct subprime group. This was supposedly responsible for a large chunk of DR's losses.

According to CRE/IPG, Brian Harris, the BSD of the commercial real estate group will take a similar position with UBS.

** ThreeCap's site traffic/visitor count has exploded today due to the news and this post being the first to post anything about it on the web yesterday evening (even though no one wants to leave comments). Welcome to all the new readers - now, don't you all have work you should be doing??

Subprime Silver Lining?

Abnormal Returns says savvy investors may have their chance to capitalize on the subprime mortgage market fallout, as plans are announced by Newcastle to take down a bucket for $1.7 billion.

Pricing wasn't revealed, but Kenneth Riis, Newcastle CEO and president, said in a statement. “We have underwritten this investment to generate an attractive return on capital using conservative default and loss assumptions."

So as these lending groups go bust, who stands to gain the most? It soon won't be the big buyers, who will all soon be chasing the same pile of broken portfolios (if the past 24 months have proven anything, it's that supply of capital available for deployment in real estate assets and securities still outweighs the supply of investment opportunities), and probably underwriting too thin a default rate under pressure to deploy capital before it's "too late."

It will be whomever is engaged to transact the sales. Get in, collect your fees, get out, move on.

Remember 2005? Up and down the east coast, and throughout SoCal, it was condo conversions. Today, even the "can't miss" 95% LTV financings are being restructured (some for the second or third time), if the lender hasn't yet foreclosed.

Long term, I'll bet on the high-yield/subordinate debt funds (mezz lenders, b-note buyers, etc.) to make the most out of the opportunity. According to Commercial Real Estate Alert, CMBS mezz spreads widened by about 40 bps last week as more subprime shops went belly-up... music to the ears of RAIT, GCC and the like. Should that continue for another week or two, these groups could see returns on these types of core-strategy investments increase by up to 10%-15%, virtually overnight.