CMBS Update: Single-Tenant Lending Notches Up in 2010

By Raj Aidasani, Jay Koster and Guy Ponticello, Jones Lang LaSalle

Property fundamentals stabilized and lenders across the spectrum re-emerged. The CMBS market in particular returned strongly in 2010. CMBS issuance in 2010 was more than four times the total issuance in 2009, and 2011 looks even more promising. The single-tenant sector also benefited, especially in the second half of 2010, fueled by increased credit availability and demand from private and public REITs.

Over the course of 2010, the availability of financing in the commercial real estate space improved dramatically. Property fundamentals stabilized and lenders across the spectrum reemerged. The CMBS market in particular returned strongly in 2010. CMBS issuance in 2010 was more than four times the total issuance in 2009, and 2011 looks even more promising. The single tenant sector also benefited, especially in the second half of 2010, fueled by increased credit availability and demand from private and public REITs.

Jones Lang LaSalle’s Corporate Finance and Net Lease group examined nearly $900 billion of loans to the single tenant space made by CMBS lenders in 2010. Capitalization rates, on a weighted average basis, came in at sub-7 percent; however, this was heavily influenced by the Bank of America Tower in New York City. Excluding this property, cap rates were in the mid–7 percent range.

Not surprisingly, the largest number of loans was to the retail sector (47 percent), followed by office (35 percent) and industrial (18 percent). The retail loans tended to be smaller and were mainly to stores such as Walgreens that have strong credit ratings combined with long leases. Loan terms and structure in 2010 had very little resemblance to the loans underwritten during the peak years of the market. Recent deals were backed by mostly lower-leverage, amortizing loans with simpler structures sized off in-place income.

Terms, especially leverage, varied widely based on property fundamentals, the underlying strength of the tenant and the lease term.