The glory days of million-square-foot office leases may not be back yet, but you would never know it by the latest news from Houston’s Energy Center office campus. Trammell Crow Co. and Principal Real Estate Investors have landed ConocoPhillips to take a total of 850,000 square feet at two trophy towers. 

The energy company will be the sole tenant of Energy Center Three, a 550,000-square-foot tower now under construction. ConocoPhillips will also take half the space at Energy Center Four, a 600,000-square-foot building scheduled to get under construction during the fourth quarter.

Located in the heart of the city’s bustling Energy Corridor, Energy Center Three and Four will bring ConocoPhillips’ Lower 48 Business Unit together at a single address. The new buildings will be within easy reach of the company’s corporate headquarters campus.

Balfour Beatty Construction, the general contractor for Energy Center Three, kicked off construction in January and is on track to complete the project by the second quarter of 2015. Trammell Crow and Principal have a helping hand from Wells Fargo Bank and U.S. Bank, which are providing construction financing.

Signing on in advance for a new development has become one of the best bets for securing large Class A office accommodations in Houston’s central business district. Big blocks of premier space are at a premium, as Jones Lang LaSalle Inc. notes in a recent report. Only three blocks larger than 200,000 square feet were available in the submarket during the first quarter. “Until new developments slated for delivery in 2014 and 2015 come to market, availability within sought-after submarkets such as The Woodlands, Energy Corridor, and CBD will continue to tighten,” the report predicts.

Freddie Mac reported on Wednesday that it earned net income of $4.6 billion in the first quarter, compared to $4.5 billion for the fourth quarter of 2012. That’s a far cry from the losses of the worst days of the recession for the government-sponsored enterprise and its sister company, Fannie Mae, which caused the two to be put under federal conservatorship in 2008.

The company is benefiting from recent improvements in the housing market, particularly the slowdown in foreclosures. During the first quarter of 2013, Freddie Mac’s real estate-owned dispositions continued to exceed its REO acquisitions. The length of the foreclosure process and a high volume of foreclosure alternatives are also causing fewer Freddie Mac loans to proceed to foreclosure, and thus fewer properties transitioning to REO.

Freddie Mac received no money from the federal government in the first quarter. All told, the company has requested $71.3 billion from the Treasury, but has also paid the Treasury cash dividends of $29.6 billion.

Las Vegas Housing Recovery Continues

The Greater Las Vegas Association of Realtors reported on Wednesday that the total number of existing local homes, condos and townhomes sold in April was 3,789. That’s up from 3,642 in March, but down from 3,924 in April 2012. Still, the numbers are a lot better than they used to be in the Las Vegas market, which was arguably the hardest hit by the housing crash.

Foreclosures and short sales also declined last month. In April, 32.5 percent of all existing local home sales were short sales, down from 33.3 percent in March. Another 10 percent were REO, down from 11.2 percent in March. The remaining 57.5 percent were the traditional type, up from 55.5 percent in March. In April, GLVAR also reported that 59.3 percent of all existing local homes sold were purchased with cash (the favored payment method of investors and speculators). That’s up from 57.5 percent in March and approaching the peak of 59.5 percent in February.

The total number of single-family homes listed for sales on GLVAR’s Multiple Listing Service increased to 13,881 in April. That’s up 1.4 percent from the end of March, but down 22.4 percent from one year ago.

Wall Street had an up day on Wednesday, with the Dow Jones Industrial Average rising 8.92 points, or 0.32 percent. The S&P 500 gained 0.41 percent and Nasdaq advanced 0.49 percent.

Multi-family is still reeling in the lenders. A 12-property apartment portfolio in Manhattan has just been refinanced to the tune of $94.4 million, courtesy of Beech Street Capital L.L.C. The mortgage banking firm financed a group of Freddie Mac loans for owners Henry Moses and Robert Moses as part of its correspondent relationship with originator Meridian Capital Group L.L.C.

The portfolio was irresistible.  “[They're] low-leveraged, well-located Manhattan properties,” Meridian’s Josh Rhine told Commercial Property Executive.   The collection of apartment communities encompasses 488 residences located on the Upper East Side, Lower East Side and in the East/West Village. And the tenant rosters are full at all 12 properties.

The Moses brothers have owned some of the assets for over a decade, having amassed the portfolio over a nine-year period beginning in 1999. A Wall Street lender had held the majority of the loans on the assets. The entire group of loans has now been replaced with a full-term seven-year interest-only loan package.

“The borrower was extremely pleased with the entire process,” Rhine said in a prepared statement. “Beech Street understood what they wanted and delivered accordingly.”

At the 2013 Mortgage Bankers Association CREF/Multifamily Housing Conference, David Durning, president and CEO of Prudential Mortgage Capital Co., explains Prudential’s targets for balance sheet, Fannie Mae, Freddie Mac and FHA, CMBS and bridge financing for 2013.

Could the conduit financing recovery reverse course overnight? Not likely, according to some experts, who believe a sudden evaporation of conduit financing is less likely this time around because the economic recovery appears to have legs.

Make no mistake, spreads for conduit loans can spike, as has been demonstrated in recent history. “We have seen disruptions before. There were a few instances in the last years. Spreads can increase suddenly, and CMBS financing can become non-competitive very quickly,” said Gary Tenzer of George Smith Partners.

A recent false start in the CMBS market occurred in 2011, when the recovering market was derailed by the European debt crisis and concerns about the U.S. economic recovery. “Because of the volatility, it was difficult to price deals on the front end,” explained Rusty Fleming, partner at Morris, Manning and Martin L.L.P. When the loans were taken to market, the conduits were not able to obtain the yields they anticipated. “That shut down the market.”

However, though a reversal of the current CMBS financing recovery is “always possible,” it is currently unlikely, according to Fleming. “We feel the U.S. and world economy are at different places now compared to two years ago.”

Tom Muller, co-chair of the real estate and land use practice group at Manatt, Phelps & Phillips L.L.P., agreed that the conduit market “would not be as easily derailed again.” He elaborated: “We expect the conduit market will be sustained for the next several years because the U.S. general economic recovery will be sustained for the next several years.”

Tenzer said borrowers can protect themselves against possible CMBS market disruption by locking in rates. “CMBS is a volatile market. Until you get to the point of locking the rate, you do not know you have a deal.”

CMBS financing allows for early rate locks of about 30 days in advance. But Tenzer also stressed that the borrower should not lock the rate until the due diligence, such as environmental reports, has been performed. Borrowers could lose their deposit if they lock the rate and decide not to complete the transaction.

 For more on the conduit market’s performance, see “Comeback Redux” in the May 2013 issue of CPE.

Drawing on the assistance of commercial real estate services firm Jones Lang LaSalle Inc.’s Capital Markets group, LaSalle Investment Management Inc. has landed $125 million in financing for the acquisition of the mixed-use Onterie Center in Chicago. New York Life Insurance Co. provided the funds for LaSalle’s $188 million purchase of the premier office and residential property from Metropolitan Properties of America Inc., which had shelled out $131 million for the complex in 2006.

Keith Largay

How did the lending community view the opportunity to provide financing for Onterie Center? “Very favorably,” Keith Largay, a senior vice president with JLL Capital Markets, told Commercial Property Executive. “We received a fair amount of interest from both banks and life companies.”

And it’s no wonder. Onterie, which has graced the Chicago skyline since 1986, ticks all the boxes. It sits in a coveted area adjacent to Lake Shore Drive; its 615 residential units, located in a 60-story tower and an 11-story building designed by Skidmore, Ownings & Merrill, command top dollar; and the property’s 102,600-square-foot office component is fully leased. Additionally, the 16,000 square feet of ground-level retail space provides the “play” element in the live-work-play destination.

LaSalle, which is part of the JLL group of companies, will set aside part of the financing it obtained from New York Life for upgrades and renovations down the road.

The capital markets are, indeed, open for business. JLL believes lender response to opportunities like Onterie will only increase this year. “We see 2013 being very strong, as there is a great deal of capital in the market, with very few great offerings to match with it,” Largay said. “Competition for prime assets such as this will continue to be fierce.”

Life companies and pension funds increased their market share of commercial property financing last year despite ongoing industry deleveraging, and the mortgage loans yielded a total return of 4.7 percent for the institutions in 2012.

According to the Giliberto-Levy Commercial Performance Index, 25.6 billion in new permanent mortgages were originated in 2012 by institutional balance-sheet lenders. The Index principal balance ended 2012 at a total level of 180.6 billion, compared to 178.7 billion in 2011. The Giliberto-Levy Index is a private debt market index that tracks senior loans made by balance-sheet lenders, primarily life companies and pension funds.

“The good news here is that the life company/pension fund activity is actually increasing and gaining market share in the overall commercial space,” said Michael Giliberto, co-founder of the Giliberto-Levy Commercial Performance Index. He noted the increase in principal balance was occurring at a time when the commercial property sector was still deleveraging.

Speaking at a webinar reporting on the Giliberto-Levy 4Q Index, Giliberto noted that office and industrial lending by the institutions lost market share last year, while apartment lending by the institutions gained share. Office mortgages comprised 26.3 percent of total mortgage lending by the institutions, industrial made up 12.6 percent, and apartments were 20.1 percent of the total. Sixty percent of the institutional senior loans consist of five- to seven-year loans.

The Giliberto-Levy Index showed total returns from the balance sheet loans was 4.7 percent for the institutions in the whole of 2012. Giliberto noted that this return was higher than 10-year Treasury returns.

The Index showed that while 10-Year Treasury yields increased from 1.65 to 1.78 percent in the fourth quarter, 10-year mortgage spreads narrowed from 2.60 to 2.35, resulting in a net decrease in mortgage yield of 0.12 percent for the institutional lenders.

Bud Malone, CEO of Mortgages USA, describes how he was able to take on a loan that other lenders had rejected. The transaction illustrates the benefits of consulting seasoned FHA lenders.

The 444-unit community is adjacent to Huffines Communities’ previously built and fully occupied first phase of the development, which contains 250 units.