Good News

If you are involved in commercial real estate (CRE) and looking for a reason to get out of bed in the morning, there is good news.  To those who view commercial real estate loans as the mother’s milk of investing, I say put on your bib because mother is about to feed you.  

The CMBS market is returning to viability.  The process of improvement in the secondary financing market is gaining ground by accretion, so it is slow, but it seems to be steady.

Two handfuls of CMBS lenders are either now active or constructing CMBS lending platforms to become active in 2011.  Currently they are looking for deals of minimum $10M size ($12M in the case of Goldman Sachs).  Underwriting and leverage are cautious.  However, underwriting is no more cautious than that which most prudent investors would use…these folks are as uncertain about the speed and extent of CRE revival as everyone else.

CMBS lender bias, like that of life companies, is to invest in primary markets, but two realities are forcing them to broaden their geographic scope to secondary and tertiary markets; those realities are (1) a dearth of qualifying properties in primary markets and (2) aggressive prices reflective of a feeding frenzy being paid by some investors due to product shortage.  Thus CMBS lenders are being forced to consider smaller markets (not necessarily weaker markets) in their search for deals.  Life companies are subject to the same pressures, even more so.  Thus the same dynamic causing CMBS to loosen the purse strings is at work with the life companies.

There is no shortage of CMBS lenders eager to invest in larger deals at favorable fixed rates for 10 years.  Some CMBS lenders are wisely ramping up to handle smaller deals, even below $5M in size.  That market is not yet functional, but it will be soon and it is a grossly under-served market niche.

If the accretion to CRE lending market continues, 2011 will become the year when quality properties without hair on them were able to obtain financing.  It’s a different story for properties with hair.

Multifamily properties continue to sit atop the food chain, enjoying incredibly favorable rates from the Agencies.  More recently life companies have also started to play in the multifamily arena.

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