Thursday, May 3, 2007

Rating agencies taking a stand

Yesterday's New York Times reports that the rating agencies are fearful of too many risky loans coming into the CMBS market and that they will adjust their ratings accordingly. They are concerned that lenders are becoming too lax in underwriting.

The difference is, as the story points out, that unlike residential, defaults are at an all-time low. And money keeps pouring in from private equity and foreign markets. (You see a little of that in the residential market, with Europeans buying houses here because they are so relatively cheap.)

There has been a lot of money chasing deals, resulting in some lax underwriting and cheap money. And a lack of equity in the game is always troublesome, especially in a non-recourse deal. But I don't think we have a full blown crisis here. Unlike the residential market, there's no sign of the train even slowing down let alone stopping, at least on the acquisition front.

There are two scary parts to this, however, that could be of concern. One is a decline in demand that some (but not all) brokers are seeing. The other is that "Huge deals are being concluded with great haste, leaving little time to research the buildings thoroughly....Macklowe Properties, a Manhattan company, took only 10 business days to complete its $7.25 billion purchase of eight Midtown office buildings that had belonged to Equity Office Properties before Equity was sold to the Blackstone Group in what was then the largest leveraged buyout ever. The average annual rent for the buildings is $55 to $59 a square foot, but the deal was underwritten with projections of future rents of $100 a square foot or more."

Wow. I have to question the value, and two weeks to do a deal of that size just isn't sufficient to conduct any due diligence unless the buyer relied on any diligence performed by Blackstone in the EOP acquisition. That's neither due nor diligent.