Commercial Real Estate Finance

San Diego- After the  2008 4^th quarter of shock and awe in the world’s capital markets, lenders appear to have found their footing and liquidity has returned to the commercial real estate financing market. Credit for multifamily, office, industrial and retail properties is available. Most life insurance companies in attendance in San Diego for the Commercial Real Estate Finance convention on February 8,-11, 2009, have budgeted billions to deploy into the commercial real estate markets in 2009. While several previously large market participants remain on the sidelines, liquidity remains available. Lenders surveyed indicated loan pricing will be generally be higher and loan proceeds lower in 2009.

Lenders in attendance included banks and life insurance companies from around the world. Gone are the Wall Street firms (Merrill, Lehman, Wamu, Bear Stearns, Wachovia, etc.) who comprised over $308 billion of the commercial real estate financing market in 2007. These firms have exited the market completely or are no longer in business. Wall Street securitization firms provided much of the liquidity in the 13 years before the securitization markets collapse in late 2007. In 2008 commercial securitized loans production totaled only $29 Billion (less than 10% of 2007 production; source Commercial Mortgage Alert).

Commercial Real Estate Finance

Regional and Community banks have stepped up to fill the void, with greater loan volumes in 2009. Banks are generally lending up to 75% on commercial property in the 6.0% to 7.0% range for 5, 7 and 10 year loans sized between $1 and $30 million.  These lenders may be requiring personal recourse on the loan from the sponsor.

FNMA, the Federal National Mortgage Association known as Fannie Mae and Freddie Mac which stands for The Federal Home Loan and Mortgage Corporation are government sponsored entities which were essentially taken over by the US Treasury in September 2008. These entities provide funding to the multifamily (and single family) residential markets. These financing sources remain healthy and viable options for apartment owners.

Loan requirements above $30 million in size are currently the domain of life insurance companies. With Wall Street securitization firms gone and most large banks severely wounded (Citi, Wachovia, Bank of America, etc), life companies once again are providing the primary source of capital for larger loan needs. The syndication of larger loans is currently very limited. Pricing on larger loans is higher from life insurance companies than the pricing offered by regional banks on smaller loans. This higher pricing (relative to banks) is a result of competing investments such as highly rated corporate bonds, which  also are generating solid returns for investment managers. Attractive alternatives to real estate, coupled with higher capital requirements’ for real estate loans, have pushed rates from life companies to the 7.0% to 8.5% range. Life company lenders indicate they have reduced loan proceeds offered to 65% of value. As a result, borrowers will have to increase cash equity invested in acquisitions and even possibly even on refinances. Financing in excess of 65% LTV on larger loans will be quite expensive (above 10% coupon; mezzanine financing) and in short supply in 2009.

Lower loan to value loans and higher financing costs will continue to place stress on commercial real estate financing markets. Continued deterioration in all asset classes, in particular retail, will put stress on lenders portfolios. Pricing and proceeds dislocation in the commercial real estate markets will necessitate borrowers to increase their canvassing of lenders to evaluate loan alternatives. Lenders diverse risk appetites coupled with variable allocation commitments will make 2009 a challenging, although not insurmountable year for commercial real estate borrowers.