Tuesday, January 25, 2011

Houston Apartments
Back during the tenant in common boom of 2005 to 2007, it seemed like every other TIC deal was a Houston apartment complex.   I'm sure that most of the debt on these TIC transactions ended up in CMBS.  TIC sponsors, apparently, weren't the only people who thought Houston apartments were strong investments, as there is $777 million of seriously impaired loans (see article below) in Houston.  Here is a National Real Estate Investor article on the "sky-high" delinquency rate of loans tied to Houston apartments.   Houston's apartment loan delinquency rate is 21.5%,  higher than the national average of 16.5%.  Here is a strong takeaway from the article:
Of the $777 million in seriously impaired loans in the Houston apartment market today, lenders originated 71% of that volume during the notoriously lax underwriting period of 2005 through 2007, reports Trepp. That’s when the economy was booming and commercial real estate was riding high.

Local broker Jeffrey Fript, a senior associate in the National Multi Housing Group of Marcus & Millichap, says Houston’s high CMBS apartment loan delinquency rate doesn’t surprise him. After all, Houston is the fourth largest city in America based on population. 

Houston also was one of the most active markets for CMBS loan originations from 2005 to 2007, says Fript. “It’s a big market, and a lot of people refinanced with CMBS. Along with that comes a high delinquency rate.”
I will never cease to be amazed at the lemming nature of sponsors and investors.   They must think that if everyone is doing it, it must be OK.   It is so much easier to follow the easy money flow than to seek out other investment alternatives.  This follow-the-herd mentality is a problem with sponsors and investors.  Sponsors want an easy sale and investors want to invest where it is popular.  Throughout history this type of thinking (or not thinking) has been the source of bubbles, ponzi and pyramid schemes, and now "seriously impaired loans" sitting in troubled CMBS.


Anonymous said...

Dont forget the broker/dealers....their historical and recent follow the herd mentality has cost them hundreds of thousands in arbitration $ yet little seems to change.

Rational Realist said...

You're right. Unfortunately, too many broker / dealers are lead by sponsors and clients, because that is the easiest way to do business. Sometimes it is more costly in the long run.