COVER STORY, AUGUST 2011
THE ONLY CONSTANT IS CHANGE
The 2011 lending environment is turning out to be much more fluid than in recent years. The ambitious projection by the American Council of Life Insurance (ACLI) that the insurance industry would lend $40 billion this year — a marked increase from 2010’s numbers — are right on track. Most insurance companies active in the lending space have met or exceeded their year-to-date goals, and securitized lenders are also ramping up activity.
In 2010, there were approximately 10 active CMBS banks that lent a total of nearly $20 billion. Currently there are roughly 25 active CMBS lenders in the market, with industry experts predicting the CMBS market to double in 2011, originating in excess of $40 billion. Midway through the year, this segment of the market is more than half way there. Clearly, the outlook for this year is on pace for a watershed of change.
Increased liquidity has caused a compression in spreads for life insurance companies — a spread is the margin that a lender charges over the interest benchmark, usually the comparable treasury rate. This compression, coupled with low treasury rates, has made it very attractive to borrow in this market segment.
While the borrowing landscape has become more appealing, securitized lenders have experienced a lot of volatility in CMBS pricing throughout the first half of the year. AAA spreads hit a low of 100 basis points over the comparable swap rate (the most common CMBS benchmark) in February, but have since widened to 175 points over the benchmark.
The investment community views CMBS pricing as a key indicator for the overall economy. When economic statistics such as employment rates and retail sales are as mercurial as they have been recently, CMBS spreads change accordingly. This volatility makes borrowing complicated for real estate owners who want to borrow through a CMBS vehicle. An article that ran in the July 15 issue of Commercial Mortgage Alert even noted that “CMBS spreads are widely expected to keep fluctuating as debt crises and economic concerns roil global financial markets.”
Borrowers simply have more choices for capital than they did in the previous few years, but the market is certainly more complicated and fast paced. This has elicited an added focus on working with qualified experts with the knowledge to successfully access capital and navigate this ever-changing marketplace.
Borrowers are increasingly discovering the importance of access to a wider breadth of capital sources that experienced mortgage bankers can provide. The combination of additional resources and expertise offered by mortgage banking has never been more important in a landscape characterized by continued belt-tightening and complex market machinations.
Many of the premium lenders appoint seasoned mortgage banking companies to originate and service loans as their sole representation in specific markets. Bankers with exclusive arrangements such as these are able to offer loan products unavailable to the rest of the market. With the right partner and a bit of due diligence, borrowers will be able to secure previously unattainable deals in the second half of 2011.
Dan Friedeberg is the president of Barry Slatt Mortgage, a premier commercial mortgage banker with more than 40 years of excellence in loan origination, and more than $2.3 billion in servicing.
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