ensuing damage. In the wake of this damage to property values and businesses everywhere are the individuals and families struggling to survive these conditions. Also included here are steps you can take to keep your family together through tough times. The fi nal result of the conditions outlined in this book will be revealed over the coming months and years. Heeding the advice and guidance of the contributors in this book will benefi t anyone navigating these turbulent wa- ters and help lead them to higher ground. TONY WOOD is an award- winning veteran of the commercial real estate industry. With over thirty years’ experience, and a successful track record as a commercial real estate broker and consultant, Wood has worked with all types of commercial property with a wide range of client profi les. His resume includes the valuation, leasing, sales, and management of offi ce, retail, industrial, and residential income properties throughout the Western United States. Wood has been retained as a consultant to law and accounting fi rms and also represents lending institutions in the evaluation and disposition of their special assets and commercial REOs. He is an active leader in the commercial real estate industry and is an invited guest speaker and contributor to numerous media outlets. Wood lives in Northern California with his wife, Donna, and their three children. Jacket Design: Leiva-Sposato Jacket Photograph: © iStockphoto $49.95 USA/$59.95 CAN T he more than $1 trillion of commercial real estate loan maturities between 2010 through 2013, combined with the com- mercial real estate markets being battered in recent years, will result in conditions the mar- ketplace has never seen before. The collapse of our economy late in 2008, and the resulting fall of commercial real estate values, has left us with the majority of commercial real es- tate loans maturing in the next few years—and great challenges to refi nance them. While “tsu- nami” may seem like a rather dramatic term to use for the title of this book, the analogy is precise: a tsunami is an event that is typically unseen and unexpected until it’s too late, then hits with such ferocity that anyone caught in its path has little chance of survival. The Commer- cial Real Estate Tsunami addresses the issues at hand and what is likely ahead. Never before has such a group of experts from varied sectors of the commercial real estate in- dustry come together to provide insights and solutions for the anticipated wave of commer- cial real estate debt maturities, the resulting foreclosures, loss of value, and the battered commercial real estate marketplace. Author Tony Wood—himself a veteran of the commer- cial real estate industry with over thirty years’ experience—draws on the expertise of many other recognized industry leaders to explain what actions you can take to protect yourself and your company against the hazards that the marketplace now faces. The author and his contributors describe each phase of this “tsunami,” from its initia- tion in 2005–2007 to its potential run-up in 2010–2013—which will create an historic level of havoc and destruction throughout the mar- kets—and offer up strategies to survive the (continued on back flap) (continued from front flap) wileyfi nance.com WOOD The Commercial Real Estate Tsunami The Commercial Real Estate Tsunami TONY WOOD Foreword by Matthew Anderson, Foresight Analytics A Survival Guide for Lenders, Owners, Buyers, and Brokers “A clear and concise analysis of the current commercial real estate crisis.” —Bill Hoffman, CEO, Trigild Incorporated “The book offers a wealth of critical views, engaging reportage, and hard-hitting data from leading professionals at the front lines. [Wood includes] timely advice, perspectives, and pragmatic techniques for coping with and capitalizing on this massive debt dislocation.” —David J. Lynn, PhD, Managing Director, ING Clarion Partners “The Commercial Real Estate Tsunami should have a lasting place on any commercial real estate professional’s bookshelf.” —Michael Gottlieb, Editor, California Real Estate Journal “Those directly engaged in commercial property markets on any level will fi nd many practical suggestions in this book to cope with these dire future events.” —Anthony Downs, Senior Fellow, Metropolitan Policy Department, Brookings Institution, author of Real Estate and the Financial Crisis “What makes this book stand out is that it is more than just a warning of a challenging market, but an invaluable road map that offers specifi c strategies to guide brokers, clients, and others through this crisis.” —Doug Frye, President and CEO, Colliers International An in-depth look at why a commercial real estate collapse is inevitable— and how to survive it The Commercial Real Estate Tsunami is the fi rst book to address the phenomenon of the pending wave of commercial debt maturities coming in the next fi ve years, and the impact those maturities will have on the commercial real estate markets when combined with the historic economic crisis the world is experiencing at this time. Drawing on the knowledge of recognized experts in the commercial real estate industry and fi nancial markets, this vital guide not only explores the causes of this crisis, but offers concrete solutions and ways to mitigate the hazards that lie ahead. Praise for The Commercial Real Estate Tsunami EAN: 9780470626825 ISBN: 978-0-470-62682-5 Mac McClure, CCIM Institute Maura O’Connor, Seyfarth Shaw LLP Dr. Sam Chandan, RE Econometrics Eric von Berg, Newmark Realty Capital Cynthia Shelton, Colliers Arnold Tom Loeswick, Shirlaws International Donna Wood, MFT, FamilyBroke.com TRI Commercial CORFAC International With contributions from: Market survey data provided by CoStar Group bindex.indd 218bindex.indd 218 3/17/10 2:09:23 PM3/17/10 2:09:23 PM Additional Praise for The Commercial Real Estate Tsunami “Tony Wood has compiled more than just valuable information about com- mercial real estate; this book shares actionable insights that will inform both commercial real estate professionals as well as their business owner clients. What makes this book standout is that it is more than just a warning of a challenging market, but an invaluable roadmap that offers specifi c strategies to guide brokers, clients and others through this crisis.” —Doug Frye, President and CEO, CMN, Inc., Colliers International “The coming wave of loan defaults in commercial real estate deals will create major downward pressures on the general recovery of the U.S. economy. Many borrowers will lose their properties and many lenders will lose money. Those directly engaged in commercial property markets on any level will fi nd many practical suggestions in this book to cope with these dire future events.” —Anthony Downs, Senior Fellow, Metropolitan Policy Department, Brookings Institution, Author, Real Estate and the Financial Crisis “The Commercial Real Estate Tsunami should have a lasting place on any commercial real estate professional’s bookshelf not just for managing today’s investment real estate bust but also for recognizing the signs of the next, inevitable real estate investment boom and to better position yourself and your business to avoid getting caught up in the tides of this cyclical marketplace.” —Michael Gottlieb, Editor, California Real Estate Journal “Tony’s book goes beyond a traditional analytical framework by placing elements of the commercial real estate fi nance crisis under a microscope and pairs market observations with actionable strategies to operate in challeng- ing times. He covers the spectrum from underlying fundamentals through loan triage for lenders to strategies for borrowers to best-practices for brokers . . . all delivered with relevant support from industry experts. A sturdy guide for diffi cult times.” —Owen Rouse, President, CORFAC International “Mr. Wood does an excellent job of revealing not only the probable crisis in commercial real estate but most importantly the danger and fallacy of any policy that allows those who overpaid or lent too much to ‘extend and pretend.’ ” —Christopher N. Macke, Chief Executive Offi cer, General Equity Real Estate ffirs.indd iffirs.indd i 3/17/10 2:07:53 PM3/17/10 2:07:53 PM “. . . a thorough effort in understanding the current size and scope of the issues facing the CRE Industry, its economic importance in the overall econ- omy, along with some very practical and real world ideas for improving the current situation and surviving the inevitable shock for all interested parties. Opportunity favors the prepared mind and Tony helps clear away the fear by preparing a playbook for the eventual long range investment opportuni- ties that will arise when the Tsunami waters recede. Very nice work!” —Jim McCarthy, Chief Operating Offi cer, Legacy Capital Management, Inc. “The meltdown of commercial real estate will affect our country for years to come and cost owners and lenders hundreds of billions of dollars in losses. This is a must read for developers, professionals, lenders, brokers, investors and business owners everywhere.” —Michael Hawes, CPA and Principal, Michael Hawes & Associates “The pending commercial lending debacle will have a tremendous impact on the economy unless we take preemptive measures. Tony Wood is an insightful real estate broker and has encapsulated the issue for the layman to understand.” —Mark Giovanzana, Senior Vice President, Colliers International “Tony does a fi ne job of presenting a well documented anthology of the events and causes leading up to The Commercial Real Estate Tsunami as well as provides a must read ‘Survival Guide’ for all of the professions that have a ‘seat at the table’ of Commercial Investment Real Estate.” —Robert B. Toothaker, CPM, Chairman, CB Richard Ellis Bradley; National Association of Realtors, 2009 Chair of The Realtors Commercial Alliance ffirs.indd iiffirs.indd ii 3/17/10 2:07:54 PM3/17/10 2:07:54 PM The Commercial Real Estate Tsunami ffirs.indd iiiffirs.indd iii 3/17/10 2:07:54 PM3/17/10 2:07:54 PM Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offi ces in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Finance series contains books written specifi cally for fi nance and investment professionals as well as sophisticated individual investors and their fi nancial advisors. Book topics range from portfolio management to e- commerce, risk management, fi nancial engineering, valuation, and fi nancial instrument analysis, as well as much more. For a list of available titles, visit our Web site at www.WileyFinance.com. ffirs.indd ivffirs.indd iv 3/17/10 2:07:54 PM3/17/10 2:07:54 PM The Commercial Real Estate Tsunami A Survival Guide for Lenders, Owners, Buyers, and Brokers TONY WOOD Foreword by Matthew Anderson, Foresight Analytics John Wiley & Sons, Inc. ffirs.indd vffirs.indd v 3/17/10 2:07:54 PM3/17/10 2:07:54 PM Copyright © 2010 by Tony Wood. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. Market Survey Data Provided by CoStar Group No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Wood, Tony. The commercial real estate tsunami : a survival guide for lenders, owners, buyers, and brokers / Tony Wood ; foreword by Matthew Anderson. p. cm. Includes index. ISBN 978-0-470-62682-5 (cloth) 1. Commercial real estate—United States. 2. Commercial loans—United States. 3. Mortgage loans—United States. I. Title. HD1393.58.U6W66 2011 333.33'870973—dc22 2009054064 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 ffirs.indd viffirs.indd vi 3/17/10 2:07:55 PM3/17/10 2:07:55 PM To my wife, Donna, and our three children, Campbell, Aidan, and Aspen: Waves of joy and inspiration follow wherever you go, making life better for those in your wake. ffirs.indd viiffirs.indd vii 3/17/10 2:07:55 PM3/17/10 2:07:55 PM ffirs.indd viiiffirs.indd viii 3/17/10 2:07:55 PM3/17/10 2:07:55 PM [...]... company based in Addison, Texas, part of the Dallas-Fort Worth metroplex Mac entered the real estate profession in 1975 and was President and co-founder of TIG Real Estate Services, Inc., of Dallas, a real estate holding company set up to manage, lease, and develop real estate for pension funds, REITs, and insurance companies During his 34-year real estate career, Mr McClure has closed more than $1... one approach to value, which has really messed the entire market up We have the building being appraised with three approaches and the underlying loan with one approach—does that make sense? Hell, no TW: So the appraisal of the loan has no correlation with the real estate As you said, real estate appraisers use the standard three approaches of comparable sales, replacement cost, and income approach,... commercial real estate marketplace Commercial real estate foreclosures and REOs (Real Estate Owned by lenders taken back in foreclosures), commercial loan modifications and loan workouts, new investor expectations, and property management challenges combined with the survival of commercial real estate firms across the country will all be major issues to contend with in the months and years ahead The psychological... billion of real estate transactions and negotiated over $500 million in lease transactions Mac is a licensed real estate broker in the state of Texas and holds both the prestigious CCIM and CRE designations Mr McClure has authored numerous articles on commercial real estate, is a nationally known speaker on the subject, and has managed, leased, and developed for and consulted with many of the largest pension... this tsunami of debt threatens to derail a nascent economic recovery and hit the financial markets with a second round of losses This book arrives then as the commercial real estate industry is staggering under the weight of debt amassed during a commercial real estate boom, not unlike the residential real estate boom -and- bust that has laid waste to the national, regional, and local economies We are still... of the largest commercial real estate databases in the United States, has ever provided its market survey data for a book Never before has such a group of experts from varied sectors of the commercial real estate industry come together to provide insights and solutions for the anticipated wave of commercial real estate debt maturities, the resulting foreclosures, loss of value, and the battered commercial. .. CMBS Market The Case of Peter Cooper Village and Stuyvesant Town Bank Lending Agency Financing The Next Year 79 80 81 83 85 87 PART THREE Mitigation of Risks and Hazards: Survival Guide for Lenders, Owners, Buyers, and Commercial Real Estate Brokers CHAPTER 6 Lenders: Prepare for Impact When the Wave Hits Survival Skills—Eric Von Berg, Newmark Realty Capital, Inc Motivations of the Special Servicer Commercial. .. different approach to value by the accountants, then we have a disconnect from the marketplace So the appraisal for the underlying loan says you will use the sales comparable approach and maybe you can use some observable market data, and maybe you can use Phase One: Initiation (2005–2007) 11 some discounted cash flow, but you really need to use active trading market Well, there was no active trading market... what lies ahead if we do nothing at all Acknowledgments want to thank my wife, Donna Wood, who is a writer and family therapist, and whose expert guidance and support was crucial to the writing and publishing of this book This book was first conceived in a conversation between Donna and me as we discussed the national wave of commercial real estate debt I saw headed our way and the disastrous impact it... vehicle for the residential and commercial real estate markets FASB 157 set the standards that said that you had to use only one approach to value under FASB’s “fair accounting value.” Or, stated differently, an auditor who audits a pool of loans securing CMBS bonds for a pension fund, insurance company, or bank will evaluate with only one approach to value, which is the sales comparison approach—in FASB . by Matthew Anderson, Foresight Analytics A Survival Guide for Lenders, Owners, Buyers, and Brokers A clear and concise analysis of the current commercial real estate crisis.” —Bill Hoffman,. www.wiley.com. Library of Congress Cataloging-in-Publication Data: Wood, Tony. The commercial real estate tsunami : a survival guide for lenders, owners, buyers, and brokers / Tony Wood ; foreword by Matthew. staggering under the weight of debt amassed during a commer- cial real estate boom, not unlike the residential real estate boom - and - bust that has laid waste to the national, regional, and