Perceptible Progress

The CRE financing market continues to wiggle its way out of the cocoon in which it has been bound.  Maybe a more apt metaphor is that CRE financing market is slowly pulling its legs out of the mud into which it sunk and has been trapped.  If that conjures unpleasant images of dirty feet, how about CRE lenders continue to dip their collective toe in the water, sorta of a process of cleansing and renewal.

LIFE COMPANIES

For all of 2010 big life companies have been willing to make big loans (>$10M) on primo property (no hair / no problems).  As Treasury Yields have dropped, rates on those deals have also dropped to historically low levels, i.e., 5% – 6% range, depending on variables such as leverage, borrower credibility, etc.  Leverage has nudged up from the 50% LTV range to the current mid to high 60% LTV range.  Occasionally deals have seen leverage in the low 70% LTV range.

CMBS

The handful of CMBS deals brought to the capital market since Q4 2010 have been strongly embraced by investors.  Like the life company loans, the CMBS pools have been composed of primo properties with moderate leverage.  Loan size target is > $10M.   Leverage caps have nudged up to 65% – 70% LTV, a 10-15  basis increase over the past two quarters.

The good news is that each month one or two additional CMBS lenders creep gingerly into the market.  Some being the progeny of new ventures by capital market firms.  This is a sign of early stages of a resurgent capital market.  However, these lenders are not entering the loan market to solve someone else’s problems.  Standards are high; they are not trying to lend cash for trash, or even cash for moderately distressed property which needs a little time and nurturing to return to health.  They are currently lending cash for stabilized, well functioning properties.

FANNIE MAE / FREDDIE MAC

The Agencies continue to provide multifamily financing at historically low rates.  And small loan size is not a barrier to getting in on the action.  Today, if a borrower was given a Fannie loan, it would be 80% LTV at 4.5% – 4.75% rate.  These once-in-a-lifetime rates have no relationship to reality or sound economics.  In fact, it can be argued that these uneconomically low interest rates are blowing hot air into a burgeoning multifamily bubble.  But that is not a problem for the borrower, that is a problem for the Agencies’ shareholders…oops, those shareholders are the US taxpayers.

BANKS

Banks provided 40% of mortgage capital which flowed to CRE before the crash.  Approximately half of that was for development/acquisitoin/construction loans and loans to users.  Thus, about 20% was for income producing CRE.   That is equal to the amount of mortgage capital provided by CMBS lenders and in excess of the amount provided by life companies and pension funds.  When the banks exited the CRE capital market they left a gapping whole.  Unlike the life companies and CMBS lenders, the banks cannot be counted on to resume their major share of supplying CRE capital for as far as the eye can see.

Small community and regional banks are still struggling.  More than 850 of the nation’s more than 8,000 banks are on the Fed Watch List.  If the Feds decided to look more deeply, they could double or triple or quadruple the number on the Watch List.  The Feds don’t have sufficient personnel to close many of those Watch List banks quickly enough.   An overwhelming number of banks have not returned to sufficient health, or in many cases liquidity, to provide meaningful relief to debt starved CRE.

For the intermediate term it appears that banks are out of the game, save for unusual one-off deals for treasured customers with bulletproof deals.

CONCLUSION

People can see Perceptible Progress I am Proud to Pronounce.

As we approach Q4 2010 it is fair to say that the real estate capital market is making incremental progress towards becoming a viable vehicle for providing capital to real estate, or more precisely, to high quality problem-free real estate.

For problematical real estate, it will still be necessary to try to fashion an ad hoc solution with a friendly bank, not a life company or CMBS lender.  Obviously, with many banks on life support, looking to banks for help is like grabbing a deflated life preserver.

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