Welcome to the real estate blog of Aminoff & Co. Realty Advisors, Inc. The mission of this blog is to provide meaningful and useful information on the real estate and financial markets.  It is our intent to keep you informed about what is going on in the markets and how government actions can affect your investments.

We will also, from time to time, announce real estate opportunities that we think are good property investments.

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By Natalie Dolce,  GlobeSt.com

ENCINO, CA- On a recent apartment webcast, 57% of participants predict that renter demand will get stronger in 2012, while 2% says it will be weaker, with 40% saying it will stay the same. The 2012 Apartment Market Outlook Video Webcast was put on by Marcus & Millichap Real Estate Investment Services, and was generally optimistic in the sector’s “continuation of modest growth in 2012.”

According to William Hughes, managing director of Marcus & Millichap Capital Corp., from a lenders standpoint, the improving apartment fundamentals have supported their level of confidence in the marketplace. “It has been easy to finance core assets all the way down to C assets across the board,” he said. “It becomes a little choppy as you move into tertiary and smaller assets, but even those are being financed by local and regional banks.”  

It should be abundantly clear and obvious that thegovernment and Wall Street want nothing more than to keep home prices inflated and are sticking out a giant middle finger to the majority of Americans.

You might have missed the glorious news that our stunningly cunning Senate decided to reinstate the heightened loan limits for Fannie Mae, Freddie Mac, and the FHA (aka the entire stinking mortgage market).  Of course the lobbying arms of the housing industry went gaga for this policy even though it keeps prices further inflated in bubble states like California and New York.  Good job politicians, I’m sure the checks from the FIRE industry will come in just in time for the 2012 election!

Since our politicians care so deeply about working Americans, they are also examining a push at giving residential visas to foreigners looking to buy at least $500,000 in real estate.  Forget about the fact that the median home in the U.S. costs more like $170,000 to $180,000.  Then we have the Federal Reserve artificially keeping mortgage rates at historic lows and you hit the trifecta of housing welfare for expensive bubble ridden states while the overall economy falters.

Latest Results:

At 9 a.m. this morning, S&P Indices released the latest results of the
S&P/Case-Shiller Home Price Indices. To access the press release,
please click here.  

Net leased investments remove a lot of the complexity from individual property investing by focusing on properties which in many ways manage themselves. Still, administrative burdens and complexities exist and to the uninitiated it can be daunting.

Tenants in net leased properties are responsible for most of the onsite maintenance and upkeep of the property. However, there is still a need to collect the rent, pay some bills, keep a set of books, get the tax return prepared, make distributions and prepare for a re-sale when the current tenant’s lease expires, or sooner.

An asset manager can add significant value by dealing with these issues. The cost of an asset manager is relatively low based on the services provided.  An asset manager will handle all of the day to day details associated with the property like collecting rent, paying bills, including the mortgage payment, providing monthly reports, arranging for tax return preparation, and making the required cash distributions. They can also provide guidance and insight as to current market conditions, transaction support and due diligence in the acquisition and disposition of the property itself, and sound advice on the positioning of the property throughout its holding period.

Professional asset managers can provide advice as to when the optimum time to sell is, and whether there are other net leased property opportunities that might provide a better return.

Net leased properties are one of the most passive real estate investments in the market. However, like all investments, proper management is needed to ensure a stable and substantial payoff.

We would be happy to discuss our professional asset management services.

The worst housing crash since the Great Depression just got worse. What happens when home values pop in other bubble metro areas? New home sales fall 82 percent from peak versus 80 percent during the Great Depression

This is reposted from an article at DoctorHousingBubble.com.

This is likely to be the first ever global economic disaster caused by real estate sponsored by big banks.  During the Great Depression real estate values collapsed as the economy contracted and millions lost their jobs.  That is the typical pattern of real estate bubbles bursting.  Something in the economy creates a vision of a new paradigm and money starts flowing into real estate as a consequence of this euphoria.  This happened inJapan as their economy and stock market frothed over with mania.  There is no time in history that the entire world from the U.S. to Canada to Australia to Spain to China suddenly went into a massive trance and believed that real estate suddenly would carry the weight of every single economy forward.  Of course what we are seeing is the unraveling of this system.  The bubble has burst.  Yet the banking system that relied on real estate as their game of choice in the casino cannot come to terms with reality because it would render them insolvent (which they are by the way).  So instead, the charade continues yet the public is catching on to this mass deception.  What happens when the worst housing crash since the Great Depression gets worse?

Deepest fall in new home sales ever

There is little demand for new home sales because the public with weak incomes and an economy that is still struggling has little appetite for overpriced homes.  Even if the appetite were there, the incomes are certainly not.  The juice that kept the game going was debt.  As we have seen with the debt ceiling bread and circus we might be reaching a limit in regards to what we can take on without adding on subsequent real growth.  I know when the contraction started occurring some could not envision the correction lasting longer than a year or two.  People have been conditioned to quick changes and have a hard time realizing that the housing market of the 2000s was a historical mania.  That is it.  It is done for a generation just like Tulip mania or any other mass delusion.  The fact that home prices are now inching closer to early 2000 price levels simply does not jive with the religion many believe.  During the Great Depression, new home sales fell 80 percent from peak to trough.  In this crisis we have fallen 82 percent.

The chart above is rather startling but makes sense given that we have 6 million homes lingering in theshadow inventory.  The way banks are leaking out inventory we are bound to have a lost decade (or two) in our books.  Unless something radically changes the policy is to bleed the productive economy for the ill-gotten gains of the big bankers running this country.  This is why after trillions of dollars funneled to the banking sector little has been done in terms of boosting incomes or home prices.  Where do you think the money went?  It certainly didn’t go to adding jobs:

This is a troubling chart.  The civilian employment-population ratio is a better measure of employment success in our economy.  We are now back to early 1980s levels.  What is more troubling is the jump from the early 1950s on had to two with the rise of two income households.  The two main driving forces for this reversal are a poor economy and demographics.  How can people look at these trends and think things will reverse?  Even if things do change the demographic change is built into the system.  Some point to wealthy immigrants as the catalyst for rising home prices but we are unable at the moment to provide quality jobs to the masses of the unemployed.  Unless we find an age reversing pill this trend is sticking around for years.  There are limits in life even though Hollywood and Wall Street would like to convince people otherwise.

Bubble still going on in many U.S. areas

The general collapse in home values has left many believing that the housing market has reached a trough simply by default.  That may be the case in many states where home values never really had excessive bubbles yet many highly populated metro areas are still in significant bubbles.  When these bubbles burst financial losses will be large yet again and you can expect the financial system to dig deep into the pockets of struggling Americans.  What happens when these places pop as they will?  Let us look at some of those overpriced regions:

Source:  Fiserv

This data is current and you can see even after major price corrections these areas are overvalued.  On both coasts, these bubbles still rage but California is still the leader in bubble metro areas.  Folks are delusional thinking this is sustainable.  These bubbles will pop.  It can happen quickly or drag out for years.  The above ratios are flat out unsustainable.  Just take a look at the median home price to median income ratio.  This will pop.  In addition, many of these areas have high unemployment rates.  Take a look at San Diego that nearly has a double-digit unemployment rate for the county.

What is important to also note is that these prices have already fallen by 10, 20, and even 30 percent in many cases from their peak.  They are still inflated.  The shadow inventory in these markets is dramatic.  At a certain point reality will need to be faced and when that day comes, you will see prices moving lower.  That is the only way out or we can grow household incomes and double it in the next few years but do you see that happening?  I would love to see evidence that our financial system would reward productive behavior instead of putting all the money into the hands of the banking system that largely operates like a vampire on the productive side of the economy.  We do need banks, but investment banks should be spun off and allowed to make their own non-systemic destabilizing bets.  At the moment the financial system is simply looking for ways to pilfer funds from the majority of Americans.  If they could find a method to profit from slamming Americans lower they would do it.  Many a hedge fund made billions by gambling and speculating on the failure of American homeowners.

So what happens next?  It is an interesting side note that during the typically hot summer selling season with mortgage rates at all-time lows that home sales are weak.  Why?  At a certain point it boils down to income.  Many that have their brains cleansed by the 1984 media machine think that just because many people have luxury cars or dress a certain way they are wealthy.  They are not. The data does not back up this phony studio set and many are starting to realize that the financial Wizard of Oz is more smoke and mirrors than anything real or tangible.  Certainly there is tremendous wealth in the country but not enough to support entire metro areas with inflated prices.  Just because the mainstream press isn’t reporting this next bubble bursting doesn’t mean it won’t happen.  Heck, they didn’t start talking about the most obvious housing bubble in generations until it blew up in their face.

By Hessam Nadji

After climbing in early 2010, home prices have dropped once again, and have reached a new eight-year low. According to data from the S&P Case-Shiller Index, prices are down by 3.5% year-over-year, and by 32% from their peak in 2006. Sales activity is also down, by 12.9% year-over-year, albeit from a high level in 2010 that was stimulated by a home-buyer tax credit. The nation’s homeownership rate has dropped from a peak of 69% in 2006 to 66.4% as of Q1 2011, a rapid decline drop in such a short time period.

Los Angeles-Long Beach Housing Price Index

What is driving this downturn?  Two dominant factors: Negative consumer psychology and still-high foreclosure activity.

Households that are under water with their existing mortgage or that have recently been foreclosed upon are not in a good position to purchase a new home at this time. Millions of homeowners whose credit scores dropped during the Great Recession and no longer meet toughened mortgage-lending requirements are also not in a position to buy a new home. Still others look at their finances – or in many cases financial losses – and at the headlines regarding home depreciation, and say “Not now.”

Foreclosure activity remains disturbingly high, despite a drop of 36% in the past year and 45% since the peak in Q1 2009 in sale of homes either owned by banks or in some stage or foreclosure, according to data from RealtyTrac. While the number of distressed sales is down, so is the number of total sales, keeping the percentage that is distressed at 28% according to the most recent data, down from 32% a year ago. And it appears that the distressed-sale factor will remain with us through at least year-end 2012, placing a damper on price appreciation.

The downturn in the housing sector is placing a clear drag on the nation’s general economy. Profits and job growth remain weak in sectors that are related to housing, including construction, building materials, real-estate finance, architecture, engineering and real-estate brokerage. Manufacturers and retailers of appliances, furniture and garden equipment have also been negatively impacted. According to Moody’s, cuts in spending in residential fixed investments accounted for more than 30% of the decline in the GDP in recent years.

But is it all bad news?

Not completely.  We are making progress on clearing the inventory of distressed loans.  The market is finding a new equilibrium. In addition, prices have dropped and fundamentals have improved to the point where the market is now under-priced. For-sale housing costs, which take mortgage rates and prices into account, are low relative to long-term relationships between for-sale housing costs and: (1) incomes and (2) rents.  Total vacancy rates are currently low to moderate, and appear likely to drop into very tight territory in coming years due to a dearth of construction activity. In addition, employment growth is taking place once again.

The for-sale housing market will inevitably correct upward to reflect the new fundamentals. However, we have to wait until consumer sentiment turns positive and/or the inventory of foreclosure product is substantially reduced before we see any major improvement. This could take well into the second half of 2012 and even 2013, assuming job growth returns back to a healthier 200,000 positions a month. At this still lackluster pace, the economy won’t be expanding sharply, but enough demand will be released from demographics-based household growth to improve sales and pricing.

The implications from the recent double dip in the housing market include less-than-normal growth in the economy and in CRE demand during the early recovery years (i.e., 2010, 2011 and into early 2012). However, once the housing market finally begins its recovery, it could stimulate above-normal growth in the economy and in demand for CRE late in the recovery cycle: 2012, 2013 and into 2014. This is a very different pattern from previous recovery periods and will likely be amplified for CRE product that is sensitive to the real estate market, including home-improvement stores, appliance stores and office and retail space geared toward real-estate industry-dependent tenants.  It also will likely be amplified in development-prone communities, such as Las Vegas, Phoenix, the Inland Empire, and parts of Texas and Florida.

Hessam Nadji is managing director, research and advisory services, for Marcus & Millichap Real Estate Investment Services. Contact him at hessam.nadji@marcusmillichap.com.

While commercial real estate continues to burden the nation’s 7,584 insured banks and thrifts, the severity of the CRE-related impairment is gradually decreasing. Most of the recuperation is stemming from write-downs and attrition in construction and development loans, the dearth of new lending and from improvement in the multifamily sector.

As deteriorating conditions lessen, the amount of capital that banks have available to loan should increase. Banks are already setting aside fewer dollars to deal with the losses, according to the FDIC. New provisions for loan losses fell to $20.7 billion in the first quarter from $51.6 billion a year earlier. This marks the sixth quarter in a row that loss provisions have had a year-over-year decline. It is the smallest quarterly loss provision for the industry since third quarter 2007.

“Certainly this has been aided significantly through the continued low interest rates engineered by the Federal Reserve,” noted CoStar Group Senior Real Estate Strategist Christopher N. Macke. “If the termination of QE II or some other factor leads to rising interest rates, banks will have to rely on strengthening property fundamentals to offset the rising rates – commercial real estate’s version of “The Amazing Race.”

The total amount of CRE loans outstanding fell by $32.3 billion (2%) during the first quarter. At the end of March, insured institutions reported holding $1.58 trillion in CRE-related loans, down from $1.61 trillion at the end of 2010.

The total amount of construction and development loans on bank books fell by $25.9 billion (8%) to $295.6 billion.

The total amount of nonresidential loans (including owner-occupied buildings) on bank books fell by $6 billion (less than 1%) to $1.07 trillion.

However, the total amount of multifamily loans on bank books was flat falling by just $300 million to $214.5 billion.

The total amount of distressed CRE assets (delinquent loans, foreclosed assets and restructured loans) at banks stood at $170.9 billion, just 1.3% of all outstanding bank assets.

Total delinquent CRE loan balances (loans 30 days or more past due or in nonaccrual status) fell by $3.5 billion (2.8%) during the first quarter. At the end of March, banks and thrifts reported $121.6 billion in delinquent CRE-related loans, down from $125.1 billion at the end of 2010.

Delinquent construction and development loans fell by $4 billion (6.9%) to $53.8 billion.

Delinquent multifamily loans fell by $400 million (3.8%) to $10 billion.

However, delinquent nonresidential loans grew by $900 million (a 1.6% increase) to $57.8 billion.

The balances of foreclosed assets continued to grow at the nation’s banks from $30.9 billion at the end of the year to $31.2 billion as of March 31. All of that increase was in nonresidential properties, which grew by $500 million to $10.7 billion.

The amount of foreclosed construction and development projects fell about $100 million to $18 billion; and foreclosed multifamily properties also fell by about $100 million to $2.5 billion.

The total amount of restructured CRE loans at the end of the first quarter stood at $34.9 billion, (the amounts are not available for previous quarters). Of those restructured loans, $16.7 billion (48%) were again delinquent or in nonaccrual status.

The number of insured commercial banks and savings institutions reporting financial results in the first quarter declined from 7,658 to 7,574 in the first quarter. One new reporting institution was added during the quarter, while 56 institutions were absorbed through mergers and 26 institutions failed.

From the big picture of gradual recuperation in CRE bank assets, we’ve pulled together some of the highlights from the individual bank numbers.

• The number of institutions on the FDIC’s “Problem List” increased from 884 to 888 during the quarter. Assets of “problem” institutions increased from $390 billion to $397 billion.

• Of the 7,584 insured banks in the country as of March 31, distressed CRE assets made up 1% or less of total assets at 4,298 banks.

• 566 banks out of the total of 7,584 (7.4%) hold more than 80% of the distressed commercial real estate on bank books. The 10 largest banks in the country hold $49.4 billion in delinquent, foreclosed or restructured assets (29%).

• Wells Fargo Bank holds $2.24 billion of commercial real estate properties on which it has foreclosed, including $1.14 billion in construction and development properties and $868 million in nonresidential properties. Citibank holds the largest amount of foreclosed multifamily properties at $710 million. While high in dollar amounts, the total amount of CRE distress at these two banks is 1% or less of their total assets.

• Distressed CRE assets make up more than one-third of total assets at five banks: Builders Bank, Chicago, IL; First Choice Community Bank, Dallas, GA; High Trust Bank, Stockbridge, GA; Security Exchange Bank, Marietta, GA; and Cortez Community Bank, Brooksville, FL.

A Housing Apocapyse is Coming

Source:  Dr. Housing Bubble

There will be no sustainable housing recovery until the shadow inventory is cleared out.  As of April with the latest data close to 6.4 million loans are delinquent or in foreclosure.  This is a massive number of homes.  What is downright disturbing of the 2.2 million homes in foreclosure you have 675,000 homes (31 percent of the pool) that have not made a payment in over two years.  That is right, two full years.  Apparently one-third of the bank’s strategy in dealing with foreclosures is simply to ignore missed payments.  Glad it took them giant bailouts and four years to figure that one out.  The housing crisis strategy is really a banking-centric one and that is why nothing has really been resolved since the crisis started.  Banks are dictating the movement going forward so the idea of keeping prices inflated is simply one to protect banking interests.  Since the market has very little desire for inflated real estate, banks just slip it under the rug for another day.  Keep in mind that many Americans are seeing lower wages so lower home prices are actually good for their bottom line since it eats away less of their hard earned income.  Plus, one-third own their home outright and another 30 percent rent.  So this idea of keeping home prices high just for the sake of keeping them high is a ploy that comes out of the suspension of mark-to-market logic.  Do people finally get that home prices have to fall to reflect local area incomes?

The state of distress in U.S. housing

First, it is probably useful to get a sense of the entire potential shadow inventory out in the market:

Source:  Calculated Risk

According to CR we have the following:

-2.24 million loans less than 90 days delinquent.
-1.96 million loans 90+ days delinquent.
-2.18 million loans in foreclosure process.

-For a total of 6.39 million loans delinquent or in foreclosure in April.

That is a large number of homes.  Now keep in mind many foreclosures are now starting to make their way onto the MLS since banks are actually taking full possession of the homes (although the reality that 675,000 people have not made a single payment in two years tells you where things stand).  Think about the above data; you have roughly 600,000 to 800,000 as current REOs (all the way through the foreclosure process) but you also have 675,000+ people in foreclosure who haven’t made a payment in two years:

I’ve seen some pundits argue that many of these loans will cure.  We know for a hardcore fact that if you are behind on your payments for two years it is likely that your home is going to move from the shadow inventory into the REO pipeline.  This also doesn’t examine the fact that we have close to 2.2 million homes in foreclosure.  How many have made no payment in one year?  Keep in mind we are only looking at the foreclosure category so far.  So the entire U.S. banking system is being overwhelmed with 600,000 to 800,000 active REOs yet we have that many in foreclosure without two years of payments.  Here is a good estimate of REO data in the U.S.

Source:  Tom Lawler via Calcualted Risk

The above doesn’t cover the entire universe of REOs but does a good job.  I went ahead and took a quick look at active foreclosures in the state of California and found the following:

Depending on what data source you look at California has roughly 80,000 to 89,000 homes that are REOs and ready for sale.  That still leaves another 600,000 to 700,000 REOs across the country that need to be sold.  You also have to wonder of the 675,000 foreclosures with two years of missed payments how many are in massively overpriced bubble states like California or New York?  Well I can tell you that California currently has 157,000 homes in the foreclosure process that have yet to go REO.  The bottom line is you have a massive pipeline of distressed properties waiting to make their entrance on the MLS stage.

And the foreclosures will work through the system like a rabbit filtering through a python.  We have another 4.2 million homes delinquent where the foreclosure process hasn’t even started (1.96 million of the loans 90+ days late).  Don’t fool yourself because many of these will end up as REOs at some point (could be years down the road given the absurd timeline we are experiencing).  It can’t be stated enough that keeping the process slow and providing banks with trillions of dollars of bailout money is simply a method of clogging the financial pipes so the FIRE economy can figure out what other sector to gut and inflate into a bubble.  In the end it is the taxpayer that will foot the bill unless something radical changes.

I wanted to draw the current distress universe to show how little of the shadow inventory is being shown to the public:

The bars are drawn to scale to show actual magnitude relative to other buckets.  The only homes the public is viewing are those in the purple box above.  But look at what we have coming down the pipeline.  Things don’t seem to be changing so it is looking more and more likely that we will witness a Japan like real estate market with zombie banks walking the Earth in search of easy capital brains.

It is extremely troubling that we have so much money being lobbed at the banks with such horrible results.  But what do you expect?  Someone was going to pay for this decade long orgy in real estate.  As it turns out it is the prudent public and middle class.  The people living rent free are simply the other side of the coin to the morally bankrupt financial sector.  We have to go back to watching archived films to remember a time when banking and finance actually carried a positive connotation.

I’m curious to know how many people are living in million dollar homes rent free.  We’ve seen homes in foreclosure in Beverly Hills so it is certainly happening and readers have sent over confirmation of this in their own neighborhoods.  Talk about a giant mess.  The New York Times had an interesting graph showing how long it would take to move 872,000 foreclosures:

Source:  New York Times

It would take roughly 40 months to clear the current foreclosure inventory (aka the tiny blue rectangle in our earlier chart).  And more will be coming into the pipeline but banks are trying to make their speculative gains in other bubbles to soften the blow here.  After all, they wouldn’t want to spoil the trillions in loot they have stolen from Americans.

Two years ago, the real estate investment market was completely shut down. Nobody expected to see pre-recessionary cap rates again for many years. Over the next year, capital started to flow into the sector, hoping to capitalize on the market’s distress. However, the anticipated level of distress never materialized and investors needed to adjust their return expectations. As financing became available, underwriting standards loosened, and interest rates came down, more capital flowed into the real estate sector. The fundamentals side of the market, however, has been moving considerably slower, focusing investors and lenders on Class A product in Class A locations. The accompanying chart segments markets into three tiers: Tier 1 consists of the nation’s top five investment markets, Los Angeles, Chicago, New Jersey, Atlanta and Dallas; Tier 2 includes the next 11, mostly primary markets, such as Houston, Miami and Seattle; Tier 3 covers 15 secondary markets, such as Denver, Minneapolis and Ohio. While cap rates in Tier 1 markets are already back to their pre-recessionary levels, Tier 2 markets still have about 50 basis points to decline, and Tier 3 markets remain 100 to 150 basis points above their peaks.

The two primary drivers of this aggressive decline in cap rates are the low cost of capital and rent growth expectations. Today, a private REIT that is paying a 6.5-percent dividend yield can offer sub 6-percent cap rates and still cover its cost of capital. Stronger rent growth that will follow the unprecedented declines of the last two years can elevate 6-percent cap rates to double-digit unleveraged IRRs. However, cap rates in Tier 1 markets are approaching the floor and the increasing spread over Tier 2 and 3 markets is becoming very attractive. Expect this spread to narrow by the end of 2011.

Source: RCA, Grubb & Ellis

Big Lenders and Big Borrowers Will Be the First in Line as Credit Returns to the Economy
By Mark Heschmeyer

These are the best of times for cash-rich borrowers and lenders, but they continue to be tough times for less well-funded borrowers and lenders. Just as the investment markets are bifurcated with top-notch properties in top-tier cities commanding escalating prices and lower tier properties and cities still fighting uphill climbs, so too does it appear that the capital markets are split between the haves and have-nots.

“There seems to be a dam that is keeping the flood of capital provided by the Federal Reserve from flowing to smaller real estate borrowers and properties,” said Chris Macke, senior real estate strategist for CoStar Group. “Expanding the recovery in commercial real estate hinges on breaking this dam.”

The split between cash-rich businesses and those in need of capital has set the stage for a bifurcated economy, with growing challenges for small- and medium-sized companies.

“Depending on where you stand, the debt maturity crunch ahead could either look like a crack in the pavement or the entrance to the Grand Canyon,” Deloitte LLP reported in a new paper this week entitled: A Tale of Two Capital Markets.

In it, lead researcher Dr. Ajit Kambil, research director, CFO Program, Deloitte United States, reported that cash is also unevenly distributed across industries, not just among companies within a particular sector. Unless the financial services industry lends or invests its cash in varied industries, companies outside of financial services could face potentially severe credit constraints.

Deloitte said the convergence of growing demand for debt with supply constraints has created a new normal in the capital markets. A more accurate descriptor would be two new normals – reflecting dramatic differences between cash-rich and cash-challenged companies. Competition for capital will most likely favor investment grade companies over non-investment grade companies as both seek to refinance debt obligations.

What is true across industries is also true within the commercial real estate industry, according to CoStar Group. Last September, CoStar’s Property & Portfolio Research (PPR) subsidiary “delved into how larger banks are much better positioned than smaller banks to “earn their way out” of the current cycle,” said Mark Fitzgerald, a CoStar debt strategist. “And as they recover, with life insurers in better shape as well, this contributes to the bifurcated market, as both of these sources of capital tend to lend on larger, coastal assets, whereas small banks are in worse shape, and this will hurt the recovery in secondary and tertiary markets.”

Since the downturn began, earnings for larger banks, while far from strong, have outperformed their smaller counterparts, CoStar reported. Perhaps the most important reason why this is so is the portfolio composition for larger institutions. The 20 largest banks hold 61% of all bank assets but are underexposed to commercial real estate loans. The bigger banks also have been more aggressive in taking write-downs.

CoStar’s Fitzgerald projected that large banks will “earn their way out” of the Recession in about two years, while regional and community banks could take two to four times as long.

As the economic recovery develops, CoStar Group projects that it will bring mixed blessings to CRE investors.

On the one hand, economic recovery enables banks to earn their way out faster, achieve better execution on poorly underwritten or nonperforming loans, and therefore sell distressed CRE assets at a faster pace.

On the other hand, such economic recovery minimizes the attractiveness of the distressed asset opportunity, as pricing is firmer and disposition of assets is likely to be at a controlled pace.

Furthermore, the modest pace at which banks return to health will minimize the amount of “fuel” (leverage) available to propel a robust rebound in asset values.

With limited leverage, borrower liquidity now also matters. And in that regard, big firms hold the edge. The 9,000 largest companies hold $9 trillion in cash reserves and that level of liquidity makes them more fundable.

An analysis of non-investment grade debt and changing credit spreads finds smaller companies are especially vulnerable to increasing spreads and volatility in credit markets. Differences in cost or difficulties in access to capital can be a key source of competitive disadvantage.

Deloitte research said that most non-investment grade debt is generally concentrated among small companies with market capitalization of less than $5 billion while larger companies’ debt is almost completely investment grade. For the most part, smaller companies tend to have lower credit ratings and company size is a key variable in credit ratings.

Deloitte research found that prior to the recession, companies in the aggregate were accumulating cash in excess of what they needed to grow. This was fortunate as many companies entered the recent recession with unprecedented amounts of cash on their balance sheets – allowing them the flexibility to navigate the worst of the credit crisis.

These cash reserves are unevenly distributed and mainly reside in the financial services industry, with about $2 trillion of cash outside financial services. Unless this cash is deployed to refinance companies, there is a potential deficit in refinancing non-financial service industry debt.