Consider that Massey Knakal’s Special Assets Group has completed the valuation of nearly 1,200 pieces of underlying collateral for suspect loans on behalf of lenders and special servicers thus far in this cycle. From September 2008 through September 2009, we obtained just 12 disposition assignments within this sector. Since then, we have been retained to sell 78 distressed assets. These assignments have included note sales, short sales and REO sales. Clearly, this increase in distressed-asset flow is palpable.
THE REASONS FOR THIS increased flow are numerous. Profits at banks have been enormous, as the Fed’s highly accommodative monetary policy is allowing for the recapitalization of the banking industry. These profits have allowed lenders to incrementally write down bad loans, making it less painful to dispose of distressed assets.
As we have been in the downswing of the cycle for more than two years now, we are seeing advantageous loan terms burning off, prompting action. Many foreclosure actions are beginning to run their course, allowing lenders to offer deeds on their distressed assets. Note sales are also gaining in popularity, as lenders and special servicers are becoming increasingly frustrated with the cumbersome foreclosure process in New York. This can take two, three or even four years to complete. Lenders and special servicers that operate in states like Texas and Georgia, where the foreclosure process can be completed in 30 to 90 days, can’t fathom the length of the process here. When they become aware of the significant recoveries possible relative to collateral value, a note sale becomes an easy decision.
While we are seeing a solid increase in the supply of distressed assets, we believe this flow could increase substantially if interest rates rise. Many economists argue that the Fed’s exit from the marketplace would increase rates. When the Fed ceased its asset-buying program, which created $1.25 trillion of mortgage-backed securities and treasury sales, we saw the 10-year T-bill rise from about 3.5 percent to more than 4 percent. About two weeks ago, the Fed announced that a second method of exit would begin soon, as it embarks on a program to sell nearly $1 trillion of assets over an extended period. This would normally exert upward pressure on rates.
Today, the 10-year has settled back down at 3.6 percent, as the turmoil overseas in Portugal, Ireland, Italy, Greece and Spain has created a flight to safety, and the U.S. T-bill is at the top of that list. It will be interesting to see if the recent announcement of an E.U. bailout abates some of this demand for quality and safety.
The fundamentals within the market appear to be improving, as positive absorption in residential and commercial buildings have caused concessions to be reduced, and rents have appeared to stabilize. These improving fundamentals have created incentive for some discretionary sellers to add to the supply of available properties for sale. We are seeing the results of this discretionary selling reflected in the increase in 1031 exchange activity. Distressed selling produces no 1031 activity, as there is simply no equity to reinvest. Discretionary selling produces residual equity, which produces exchange transactions. This activity had all but evaporated over the past couple of years, but has come roaring back based upon the return of discretionary sellers to the market.
The increases in the supply of properties available for sale, from both distressed and discretionary sellers, have thus far been met step-for-step by the excessive demand present in the market. New York families and high-net-worth investors, both domestic and foreign, have been joined by a resurgence of institutional capital, creating tremendous demand. Now, 1031 buyers have joined the party.
These dynamics bode well for the balance of 2010 and substantiates the projection we made at the end of last year, that sales activity would increase by at least 40 percent this year. This would be a welcome occurrence for those of us who lived through 2009 and rely on transaction volume for our livelihood.
Robert Knakal is the chairman and founding partner of Massey Knakal Realty Services and has brokered the sale of more than 1,050 properties in his career.