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Inside Trax 4Q12 Template

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Inside Trax 4Q12 Template

  1. 1. Can banks finally afford to be banks again? As the market shows signs of improvement, Financial Institutions will need to focus on growing their business and position themselves to capitalize on this recovery. While there are signs showing a recovery that is gaining some momentum, it is still very tentative. We believe banks will continue to manage their business with extreme caution and not grow their workforce much, if any. What banks need to do is focus less human capital on managing their non-performing assets, day to day, and more on growing their business. Banks that have been holding on to their non-performing assets in hopes the market would rapidly recover are expected to begin shifting back into a “sales mode”. Many of the assets have had significant write downs, thus giving many banks the ability to trade those non- performing assets. Many banks are ready to move forward but are still in need of a capital infusion and a balance sheet cleanup before they can get back to doing business as usual. However, adding capital to a bank without fully underwriting it’s assets creates a serious risk for any investor attempting to stabilize a bank. "I think it's continuing problems. I don't think it's new loans they're putting on their books, but I think it's banks that had troubled assets or non-performing assets that are still a drain on the operations of the banks," says Randy Dennis heads DD&F consulting, which advises troubled banks. Regulators have held out hope that bad loans might recover some value, but it's still not happening in some of the hardest-hit places. "Things are improving somewhat across the country, but I don't know that I would say we're having a robust recovery," says Dennis. The Federal Deposit Insurance Corp. reported 51 bank closures in 2012, compared to 92 in 2011 and 157 in 2010. Fewer bank failures are expected in 2013, however there are 838 banks on Calculated Risk's unofficial problem bank list. Some banks have been able to correct their problems and get the regulators to terminate the enforcement action. Others have arranged to be acquired by other banks without help from the FDIC. Regardless there is still much clean-up to be done and Trax is in great position to assist banks in this process. Trax can purchase all of the classified assets from a bank and provide much needed capital, or debt, to allow them to begin growing again. By combining our underwriting expertise with our ability to raise capital, Trax is positioned to play a significant role in bank acquisition, mergers and stabilization going forward. INSIDE TRAX INSIDE TRAX 4th QUARTER 2012 Quarterly Review 4th Quarter 2012
  2. 2. The overall U.S. commercial real estate market fundamentals continue to show positive signs. The majority of the activity is occurring in primary markets where as secondary and tertiary markets continue to struggle. Office Based on our research, the fourth quarter net absorption for the U.S. office market was a positive 27.2 million sq. ft., up from 15.5 million sq. ft. in third quarter. The impact of that positive net absorption lowered the vacancy rate to 11.9% from the 12.0% seen in the previous quarter. Lease rates increased 1.0% in the fourth quarter to $21.63 per sq. ft. from $21.42 per sq. ft. in the previous quarter. According to CoStar, the cap rate for U.S. office properties in 2012 averaged 7.91%, a decrease of 20 basis points for the same period in 2011. As business leaders gain more confidence, economic-driven employment decision are expected to positively impact market fundamentals. One of the largest sales of the fourth quarter occurred in Seattle at 1201 Third Ave. The 87% occupied 1.19 million SF class A office building, sold in late October at a 4.25% cap rate to MetLife Real Estate Investments and Clarion Partners for $548.8 million ($461 per sq. ft.). As investors seek to increase returns, investment activity is expected to increase in the secondary and tertiary office markets. Industrial Vacancy rates for the U.S. industrial market continued to decline in the fourth quarter of 2012 to 8.8% from 9.1% in the previous quarter, continuing a declining trend from 9.5% in the fourth quarter of 2011. Net absorption was a positive 70.4 million sq. ft., increasing from a positive 28.9 million sq. ft. in the previous quarter. Compared to the previous quarter, lease rates increased by $0.04 to $5.18 per sq. ft. in the fourth quarter. The average cap rate for U.S. industrial properties in 2012 is 8.21%, down 9 basis points from 8.3% for the same period a year ago. One of the largest transactions of the fourth quarter in the industrial real estate market occurred in southeast Metro Atlanta. A USAA Real Estate Co. affiliate paid $106.88 million ($38 per sq. ft.) for the fully-leased 1.2 million sq. ft. Home Depot distribution center. According to CoStar, Prologis sold the building as part of a larger 2.8 million sq. ft. portfolio. As manufacturing continues to drive the economic recovery, market fundamentals for the industrial sector are expected to continue to strengthen. Retail For retail properties the third quarter net absorption was a positive 27 million sq. ft., up from 11 million sq. ft. in the third quarter of 2012. However, the impact of the positive net absorption was not enough to impact the national vacancy rate which for the past year remained unchanged at 6.8%. Quoted rents ended the fourth quarter 2012 at $14.43 per sq. ft. per year. That compares to $14.48 per sq. ft. in the third quarter 2012, and $14.55 per sq. ft. at the end of the first quarter 2012. This represents a 0.3% decrease in rental rates in the current quarter, and a 0.83% decrease from four quarters ago. Cap rates for U.S. retail properties in 2012 averaged 8.01%, a decline of 16 basis points from for the same period in 2011. As demand for class A retail space increases, credit retailers are expected to continue to pay premium rents instead of relocating to secondary markets. Real Estate Outlook INSIDE TRAX 4th QUARTER 2012
  3. 3. Hospitality According to the Marcus & Millichap Fourth Quarter 2012 Hospitality Report, cap rates for quality limited-service and select-service flags start in the mid-8% range. Economic growth is expected to stimulate demand in 2013. U.S. GDP is expected to grow 2% in 2013 –providing an estimated 2.5 million jobs. Flagged economy hotels led the hotel investment market in Q4, with deal flow rising more than 40% along with 10% more upscale flags sold during 2012 than 2011. Demand growth is projected to increase 1.9% where as supply growth is expected to increase at .8%, in 2013. Multifamily Multifamily continues to be the best performing property type with it’s low vacancies and improving rental rates. According to the National Association of Realtors, the U.S. multifamily saw a vacancy rate of 4% during Q4 of 2012. The rental growth rate closed Q4 2012 at 1.2%, making a 4.1% growth for the year. As noted in the Emerging Trends in Real Estate 2013 survey, cap rates for U.S. high-income apartments and moderate-income apartments are expected to decline to 6.3% and 5.9% respectively, by December 2013. The end of Q4 in 2012 held cap rates at 6.1%. The Midwest had the lowest average price per unit at $71,085 and the Northeast had the highest average price per unit at $179,416. Housing Market As 2012 came to an end, we have seen a decline in foreclosures and foreclosure sales, which are driving up prices for single family residences. According to the most recent Foreclosure Sales Report by RealtyTrac the total number of foreclosure-related sales in the fourth quarter of 2012 decreased 9.8% from the 3rd quarter and 6% from the prior-year. While foreclosure-related sales accounted for 21% of all sales in 2012 (down from 23% in 2011), Non- foreclosure short sales accounted for an estimated 22% of residential sales. The average selling price of properties in foreclosure was $171,704 up 1% from the prior quarter and 4% from the same quarter of 2011. According to Daren Blomquist, a vice president at RealtyTrac, “while distressed properties — whether bank-owned, pre-foreclosure or short INSIDE TRAX 4th QUARTER 2012
  4. 4. INSIDE TRAX 4th QUARTER 2012 sales not in foreclosure — are still selling at a significant discount compared to non-distressed properties, average distressed property prices are increasing in many markets thanks to strong demand and limited inventory.” With fewer distressed homes on the market, distress house prices are increasing, and causing a higher demand for non-distressed homes. Blomquist continued by pointing out that distressed homes are still a disproportionately high portion of the overall housing market. Relative to the overall market, the average price of a foreclosure sale was a 36% discount to the average price of non-foreclosure homes, RealtyTrac said. A discount for bank-owned homes was 40% for the year. Furthermore, the overall share of distressed sales was 43% including non- foreclosure short sales. Despite a large percentage of distressed homes, the average discount found by buying a distressed house is weakening, which will create a higher demand for normal single family residences Third parties purchased a total of 449,873 pre- foreclosure residential properties in 2012, up 6 percent from 2011 and up 1 percent from 2010. REOs sold for an average price of $151,998 in the second quarter, up 1% from the third quarter and up 3% from the fourth quarter of 2011. In review of the statistics, we can conclude there is an improving housing market with fewer foreclosures and strengthening prices. Additionally, we see an increase in demand for non-distressed properties.