COVER STORY, FEBRUARY 2011
GENTLEMEN, START YOUR ENGINES
Increased liquidity spurs increased allocations for commercial lending.
On the heels of the improving commercial real estate outlook, lenders have a renewed approach to the market and are taking steps to bolster staff and increase production for the upcoming year. If 2009 was about regrouping, 2010 proved to be one of the most conservative periods for originating loans in the past 20 years. While there has been a small and successful return to confidence in recent months, the big question is — what will lenders do for an encore in 2011?
Lenders are starting to feel better about the overall environment, and with moderate stabilization in property values nationwide, increased purchase activity, historically low rates, and the reemergence of the CMBS lending market commercial real estate lenders may be in for a very productive year. Although velocity has returned to the commercial arena, we are still far away from the peak environment of 2007 that resulted in more than $350 billion in commercial lending from CMBS and life-insurance companies.
Against the backdrop of an improving commercial market, life insurance companies continue to increase their allocations and provide extremely competitive financing terms for qualified investors. According to the American Council of Life Insurers (ACLI), it is expected that life insurance lenders will increase their allocations from approximately $30 billion in 2010 to almost $40 billion in 2011. However, even with increases of almost 30 percent, life insurance companies will continue to focus on providing financing for many of the core properties in major markets where the downturn did the least amount of damage. That focus is not likely to change dramatically during the next year , but with the reemergence of the CMBS markets, life companies may broaden their platforms to ensure their fair share of the estimated $100 billion upcoming refinance market in 2011.
Securitization lenders are also encouraged by the market’s improvements and are subsequently increasing their projections for the upcoming year. In an article posted on the ICSC web site, Citigroup managing director Ed Adler said about the CMBS market, “There is an ability to originate and pool new mortgages backed by commercial real estate. In 2009, no one really knew if that market still existed.”
Well the market does exist again, and it is gaining momentum. Currently, there are more than a dozen banks restructuring their platforms and actively participating in the origination of CMBS. It is expected that securitization platforms — the origination of which was approximately $20 billion in 2010— will increase to $40 billion in 2011. That is a 100 percent projected increase for the upcoming year, building on a volume that had already doubled from 2009.
This added level of liquidity in the market is a positive for everyone in the commercial real estate industry. Not only does it bolster refinancing activity, but it also provides the necessary capital to facilitate acquisitions. The additional liquidity has already helped to stabilize commercial property values, and in some primary lending markets values have actually been increased.
Even though commercial real estate investors will continue to see more lenders come back into the marketplace in 2011, they must recognize that while there is increased liquidity and demand to provide commercial mortgages, there is also going to be an increased focus on the underwriting and fundamentals of these loans. Whether a CMBS or life company, lenders will continue to underwrite conservatively. There are billions of loans coming due in the next couple of years, and it is unlikely that every borrower will be able to refinance.
Looking at the overall financing market, borrowers will simply have more choices for capital in 2011 than they did the previous year. 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 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 deals in 2011 previously unavailable to them. With increased capital, competitive interest rates and more lenders willing to provide structure, as well as increased leverage with better terms and conditions, all signs point to historically low interest rates. Gentlemen, start your engines. This could be a banner year.
Michael Kaplan is chief operating office and principal at Barry S. Slatt Mortgage Company.
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