COVER STORY, APRIL 2012
NOW IS THE TIME TO SEIZE THE DAY
As lenders return to the market, borrowers need to learn the
best ways to access capital and take advantage of opportunities.
“Seize the day, trusting in the next as little as possible.” – Horace, Ode 1.11
This well-worn phrase has relevance in today’s commercial real estate marketplace: Do not look back to establish normalcy, looking to the future for current solutions is folly. While the familiar quote elicits lofty ruminations on the meaning of life, it’s not exactly what the ancient scribe was trying to convey. No, when Horace used the word “Carpe,” it more likely translated to “make use of,” or to “capitalize upon.” What he really meant was seize the opportunity.
According to Bloomberg and Real Capital Analytics, there were about $220-billion-worth of U.S. commercial real estate transactions in 2011, which translates to a 57 percent increase from the previous year. Commercial originations were up by about 64 percent, tracing the same growth trajectory as 2002 to 2003.
So what happened since the peak of the commercial market? First, there have been no substantial changes in the supply of commercial real estate deals. Demand has not forced that hand. Additionally, there have not been enough favorable lending options to spur new development. We saw a rise in average capitalization rates from 2007 through 2011, with a slight decrease in the national average in 2010. However, the rise in cap rates alone was not quite enticing enough to elicit the buying frenzy experienced over the past seven years.
Unsurprisingly, lending options are becoming more abundant. The interest rate spread is also more compressed as a result of lenders’ increased appetite for creating commercial loans. Furthermore, many life insurance company lenders are motivated by the higher returns yielded by commercial loans over traditional fixed-income investments, which has significantly increased loan activity in 2012. United States Treasury yields continue their steady decline on news of domestic economic woes (low GDP, lack luster job growth), the European sovereign debt crisis and the Japanese tsunami disaster. The 10-year US Treasury yield has declined by about 60 percent since 2001, bottoming out in September 2011 — a historical low and a benchmark that was last set in the early ‘40s. With the combination of higher cap rates, compressed spreads and low Treasury yields we now have the perfect catalyst for a favorable borrowing scenario.
The majority of life insurance companies that are active in the commercial lending arena have met or exceeded their 2011 goals of placing about $40- to $45-billion-worth of commercial loans, which is nearly a historical high. After a few years of conservative origination, many of these balance sheet portfolio lenders have additional capital and will remain active, aggressive and anxious to deploy their money. It has been a spectacular year for life insurance lenders as they offer competitive low interest rates on long-term loans with non-recourse, early rate locks and reassurance of closing.
A symbiotic relationship has emerged in which portfolio lenders are able to capture trophy assets in primary markets while borrowers enjoy rates in the low 4 percent range (180 to 300 basis points over UST) for 10-, 15- and 20-year fixed-rate money. Last year marked a change for life companies, which are now starting to close on a number of multifamily properties traditionally won by agency lenders like Fannie and Freddie. With low exposure to troubled assets, continued conservative underwriting and a willingness to lend, life companies will be on track to drive more money out the door in 2012.
Securitization lenders are also thrilled by the market’s improvement, and have subsequently increased their projections after experiencing a tumultuous year in 2011. During that period, conduit lenders were only able to produce about half of their projected placement, which was roughly $30 billion to $35 billion in new loan originations. By mid-2011 more than 30 shops had emerged, originating and pooling more than $22 billion in mortgages due for securitization. A number of Wall Street lenders could not manage the volatility as the market began to stumble in late July, and were forced to either restructure their platform or exit without a clear strategy. Securitized loans managed to find a stable foothold by the end of the year, and Wall Street lenders have responded by ramping up their origination efforts in 2012. This market has become active again, and it looks to be a positive year for the industry.
Last year was very active for banks, and we expect the sector to remain active this year. They continue to be a steady source of capital in the multifamily arena, with owner-occupied properties and, more recently, on conventional commercial properties. Many banks restructured their lending platforms—with some sitting on an abundance of cash—and have been hesitant to lend while navigating regulatory uncertainty, capital market risks and clearing the legacy loans left on their balance sheet. With the exception of the large central banks, many bank lenders are making short-term fixed loans or floating rate terms. Historically, banks avoid making long-term loans matched up against short-term assets (daily deposits).
With more than $350-billion-worth of maturing loans available this year, and roughly the same on tap for the next 3 years, the key to accessing capital will be working with qualified experts and intermediaries that have the required knowledge to navigate this ever-changing marketplace. Borrowers need to realize that the commercial lending market will continue to be unpredictable, and understand the importance of access to a wider breadth of available capital sources. In other words, they will need to carpe occasio — seize the opportunity.
Simon Wong is executive director of Barry Slatt Mortgage’s San Francisco office
©2012 France Publications, Inc. Duplication
or reproduction of this article not permitted without authorization
from France Publications, Inc. For information on reprints
of this article contact Barbara
Sherer at (630) 553-9037.