Wat Til Next Year

The consensus among finance professionals is that for 12 to 18 months, the real estate capital markets will look much like they did a dozen years ago, before the CMBS boom. That will translate into financing structures consisting of 65 to 70 percent leverage, rather than the more than 85 percent that became common in recent years. A more conservative debt-service-coverage ratio of 1.2 to 1, as well as 25- to 30-year amortization, will also be the norm, according to Eric Tupler, vice chairman for CB Richard Ellis Inc.’s capital markets group.These trends are playing out in a slowing deal pace. Savills Granite, for example, has run into roadblocks while trying to arrange acquisition financing for a Class B Manhattan office building. The well-leased property is located in Manhattan’s tight Midtown South submarket, exactly the type of solid asset at which lenders would have jumped less than a year ago. But now, Savills Granite’s client must wait in line behind borrowers that are seeking financing for even more attractive assets. “It’s not that (lenders) don’t like the deal,” explained managing director Arthur Milston. “They’re getting inundated with product.”Many deals originated during the past two years have workouts in their future. The best known of those troubled transactions is Macklowe Properties’ $7 billion acquisition of seven Manhattan trophy towers from The Blackstone Group L.P., which closed in February 2007. Because the market downturn made it impossible to refinance more than $6 billion in short-term loans, Macklowe is expected to sell at least some of the portfolio. Also on the market is the investor’s prize possession: the GM Building, one of Manhattan’s premier office properties.Other owners may not face a situation the size of Macklowe’s, but their prospects could be equally dire. “There are a million people that have done deals like this over the last year,” Milston noted.Like their clients, intermediaries are feeling the pinch. David Rosenberg, managing partner for Meridian Capital Group, estimates that the firm’s transaction volume has dropped 20 percent during the past year. “Every loan we work on takes a huge amount more work than it used to,” he reported. “We’re speaking to more lenders to figure out who’s hot and who’s not these days.” Nevertheless, Rosenberg believes that leaner days give savvy pros a chance to shine.As the CMBS market continues to hibernate, balance-sheet lenders still have the field largely to themselves. Life insurance companies, commercial banks and other lenders are picking and choosing their clients. In this climate, relationships with lenders have taken on new importance. Many balance-sheet lenders are turning down new clients and serving only customers with which they already have a strong track record. For example, Meridian was able to find acquisition financing for an office building in the Northeast only because it has a strong history with the lender, Rosenberg reported.