CHICAGO, IL, Nov. 1, 2011 - Uncertain economic conditions impinge on commercial property sales, particularly older office, retail and industrial properties in secondary locations.
Funding sources and investors alike are retreating from these asset classes as the lack of job growth office building sales, particularly for older properties in secondary locations.
Lenders and investors alike, are retreating as fewer businesses consider new leasing. With a GDP growth of about 2%, not enough jobs are generated to allow landlords to raise rents based on commercial space demand.
Even though lingering problems face commercial property lending, funding sources are swollen with cash, as investors scramble to find some type of
more attractive yields as compared with treasuries and corporate bonds.
A brief overview based upon active funding sources is as follows:
Agencies - The dominant multifamily funding sources for over a decade, the
agencies compete on both price and leverage. While securitized lending stays depressed, the agencies continue to migrate towards such funding as
mortgage note buyers maintain faith in the future of apartment performance backed by implied governmental guarantees. Also, the agencies are expanding prepackaged leverage offering of up to 90% in combination with mezzanine
funding partners.
Banks - With many legacy issues settled, banks are again active in the short-term fixed and floating-rate funding space. Since most new deals are of higher quality, banks hone in on sponsorship equity and guarantees for such properties; preferring to compete on pricing instead of leverage.
For the right situation, banks will the most competitive sources for loans with terms of 5 years or less, often dropping rate floors and providing more proceeds to strategic clients. On a case-by-case basis, recourse can be reduced or even eliminated.
Life Companies - The most active funding sector for longer term permanent
debt, the life companies aggressively compete for the highest-quality
conventional property types. This sector leads with competitive pricing
instead of higher leverage or more risk.
CMBS - After a brutal retreat in August, CMBS lenders cautiously return to the market, but softening cash flow fundamentals restrict the scope of qualified borrowers and financeable properties. At the same time, the securitization industry is plagued with higher spreads of at least 75 basis
points or more in contrast to balance-sheet lenders and loan syndication issues for larger funding in excess of $50 million.
Lastly, CMBS lenders only offer rate estimates rather than lock into specific pricing as available hedging mechanisms are too costly (due to volatility) for any type of rate protection prior to funding. As such, securitized lenders will only compete for higher-risk loans bypassed by other traditional lenders.
The Real Estate Capital Institute's Jeanne Peck (top right photo) warns, "Record-low interest rates aid realty cash flow performance, but economic uncertainty plagues any significant growth." She concludes, "Other than the multifamily and part of the healthcare properties sectors, the property markets will remain stagnant for most of 2012."
Contact:
The Real Estate Capital Institute(r)
3517 West Arthington Street
Chicago, Illinois USA 60624
Contact: Jeanne Peck, Research Director
