Figuring Out What’s Up With Lenders
- Nov 02, 2011
There's much to be said about how investor appetite has dropped in recent months, but what about the lending side?
By Bob Bach,
Senior Vice President & Chief Economist, Grubb & Ellis Co.
To gauge what’s coming down the pike for lenders, I consulted Jeff Majewski, executive managing director of Grubb & Ellis’ debt and finance platform, and some of his colleagues around the country, several of whom just returned from the Fall Urban Land Institute Conference in Los Angeles. Here is our view:
CMBS is still trying to find itself. About $1 trillion of commercial real estate loans will mature over the next six years, and the industry needs CMBS financing to make up the shortfall from banks, life insurers and other sources. After the Europe-related swoon in CMBS issuance this summer, look for a slow re-start of lending during the course of 2012. Life insurance companies can only fund about $60 billion annually, and with overall demand projected to be at least $150 billion per year, other sources of debt capital are needed. Life companies will get the better sponsored, better located and newer product. Below that threshold, there is still a big gap to fill.
But investor appetite for risk shrank over the summer and early fall as Europe’s sovereign debt crisis deepened and the debt-ceiling debate in Washington rattled global confidence. There are rumors of a few more conduits curtailing or suspending transactions. The industry appears ready for CMBS 3.0, featuring stronger sponsorship, more conservative underwriting, better properties and lower risk overall. The new deals are expected to be conservative enough to appeal to traditional bond investors. Yet the winners – the issuers still in the game – will be those that can sponsor and fund the lowest class or unrated tranches, because those places will be where other sources of debt capital will be reluctant to tread. Rates and spreads should retreat when Europe and the capital markets stabilize – which is an open question at the moment.
Life companies will do more business, but will not stretch for most deals. Their sweet spot is going to be 65-70 percent LTV through primary market deals. It will continue to be a “Tale of Two Cities” in terms of who the life companies will fund. Demand for new loans is up – the question is whether the life companies will modify their underwriting as overall quality of the deals presented declines at the margin. Look for an expansion of loans to quality, yet non-traditional, product types first before life companies increase their lending in tertiary markets, products or locations.
For regional and community banks, many of the cans continue to be kicked down the road. Despite the recent decline in delinquencies, banks continue to rewrite many existing loans.
Multi-family will continue to be the darling property type. FNMA is down to a 3.5 percent coupon on a 5 year deal for 55-60 percent LTV.
Look for a surge in foreign investors and potentially lenders in the U.S. real estate market when global financial markets stabilize. European banks, however, may not be among this group as they have to solve their sovereign debt problems before they expand their lending horizons.