Forward Motion

CPE editor-in-chief Suzann Silverman evaluates the capital markets situation in the February issue.

More than two years after the capital markets crisis in the fall of 2008, the recovery is still young and fragile, and memories of losses remain deep and raw. Compared to the mid-decade market peak, structuring deals will remain difficult for at least the next several months. That said, however, long-awaited signs of improvement are impossible to dismiss. In light of renewed prospects for investor activity, lenders are again feeling the pressure to get money out the door. Outstanding debt continued to shrink in the third quarter as borrowers paid off and paid down loans, according to Mortgage Bankers Association multi-family and commercial real estate research executive Jamie Woodwell. And while CMBS delinquencies in November did rise significantly year over year and were up slightly compared to October, it may be even more significant that they have not fluctuated notably in recent months, according to research from Standard & Poor’s. (See Data & Analysis on page 7 of the February 2011 issue for details.)

Furthermore, while the capital stack today is so complex that putting a deal together calls for multiple willing financiers, the array of interested lenders is growing: from banks to life insurers, government-sponsored enterprises to CMBS conduits. In fact, Ron Davis, vice president of Johnson Capital, notes in this month’s Financing Roundtable (page 38) that there are now 15 active CMBS players, and Thomas Fish, co-head of capital markets and real estate investment banking for Jones Lang LaSalle Inc., actually uses the phrase “wildly optimistic” when referring to prospects for 2011.

Strong words? Perhaps. But longtime financier Shekar Narasimhan, who now runs a real estate advisory firm, is also positive, though cautiously so, as he reveals in this month’s “Visionary,” starting on page 25. He sees benefit in the hotly debated government initiatives of recent years, standing firmly by his contention that, while those initiatives may seem to lack a cohesive direction, ultimately the system will prove to have worked. Narasimhan is also encouraged by the efforts financiers are making to adapt their own structures to the recovering market. Among the improvements he describes is increased participation alongside borrowers. Though the level of participation varies widely, responses to this year’s CPE-MHN Mortgage Bankers survey likewise indicate this is taking hold.

And while the amount of borrower equity required to close on a loan also varies considerably among lenders, nearly a third still require 60 percent or more, according to survey respondents. Of course, real estate finance—like the real estate industry itself—tends to be an optimistic business. It is only natural, since it is a business built on getting money out and therefore likely to ease its lending parameters over time. Borrowers may view that fact of life favorably in good times, but are also at risk of feeling the bite when the inevitable downturn strips away the protective layers to reveal unstable borrowers, poorly performing properties and other weaknesses.

That cycle never seems to stop repeating itself; human nature and economics being what they are, it probably never will. But if the lessons re-learned at such high cost do serve to limit damage and speed recovery next time around, real estate finance really will have moved in a positive direction.