Freeze. Crunch. Collapse.
Whatever you call it, commercial real estate credit markets are stuck on slow.
A lack of debt and equity has all but halted new deals and put many existing projects in danger of default.
After little property lending in 2009, real estate and investment industry execs are pondering where the credit markets go from here.
The consensus is that the turnaround will be slow and painful.
Craig Hall, founder and CEO, Hall Financial Group:
“Anecdotally, what I am hearing and seeing is that debt continues to be very, very hard to come by. That said, I would expect it would get somewhat better as time goes on.
“The problem is even if — which I think will happen — commercial debt and equity thaw a bit, for many it will be too little too late.
“The problems are so extreme that values are down 20 percent to 40 percent. And if and when lenders start making loans, they will want loans at more conservative ratios than in the past; i.e., 65 percent instead of 80 percent.”
Stuart Wernick, senior vice president, Grandbridge Real Estate Capital:
“For thawing to occur, we need to see some sort of stability in governmental intervention, an increase in lending confidence and asset re-evaluation in the marketplace.
“The re-emergence of new debt and equity to commercial real estate will begin as asset re-evaluation speeds up. The timing depends on whether or not there is a need by the owners to sell their assets.
“A significant amount of the loans have serious refinancing risks. Most of our intellectual talent in 2010 will be used on modifying and restructuring those loans.”
Susan R. Gwin, executive director, Capital Markets Group, Cushman & Wakefield of Texas Inc.:
“The verdict is out as to whether or not we will see a slow-moving upward trend or whether we will see the kind of vacillations we have seen in the stock market over the last few years. I agree that conditions will continue to weaken into 2010 as lenders face capital shortfalls. Will more banks likely stop the ‘pretend and extend’ on loans and finally be forced to shed troubled assets?
“I also believe we will see creativity step in, largely due to the fact that if conventional lending sources withdraw, other capital will step in at some point. On a weekly basis, we are seeing new private equity firms or commercial mortgage companies or mortgage REITS come on the scene.”
Scott R. Lynn, director and principal, Metropolitan Capital Advisors Ltd.:
“In the past 60 to 90 days, there has been some evidence that life insurance companies have started to come off the sidelines providing very conservative loans on high-grade, top-quality properties.
“Players seeking loans and equity are surprised at the higher cost of capital. The traditional model of pricing capital over a predetermined spread is out the window. Most capital providers are naming their price based on the dynamics of the transaction, property type and leverage along with sponsor track record plus the sponsors’ willingness to commit their own capital.
“Bottom line: There’s always money available; it’s just a question of price.”
Mark Dotzour, chief economist, Real Estate Center at Texas A&M University:
“The Office of the Comptroller of the Currency is turning up the heat on banks of all sizes all over the U.S. to reduce their lending exposure to every aspect of commercial real estate. Credit for homebuilders and subdivision developers will be even more hard to come by in 2010 than it was in 2009.
“A sizable default in commercial real estate mortgages on properties all over America is inevitable. Prices nationally have fallen somewhere between 30 and 40 percent. Most properties purchased in 2006 and 2007 had way too much leverage, and now the values are well below the mortgage amount.”
Jack Eimer, president, Central Region, Transwestern:
“It’s interesting to me that many people in our industry forecast recovery of our commercial real estate sector beginning as early as mid-2010. These same professionals will quickly agree that the dynamics of this recession are significantly worse than the late ’80s and early ’90s. Do we forget that we suffered through six to seven years of malaise before we experienced a recovery?
“With property values already decreasing 30 percent to 35 percent from 2007 highs and net income continuing to be hammered by rising unemployment, a significant portion of this debt will have to be recapitalized with new debt. Where is it coming from?”
Jack Crews, managing director, Capital Markets Group Jones Lang LaSalle:
“We expect new equity raises to continue for the next few years as investors work to get back in the game on assets that have had their values adjusted to the new underwriting and economic conditions. Private investors, directly or through broker dealer networks, lead the efforts to date.
“Additionally, real estate investment trusts have raised some $16 billion through secondary offerings in 2009 and are positioned well to take advantage of a market where cash will be king.
“Debt is still limited to better-quality assets and borrowers. We do not expect traditional life insurance company lenders to come back quickly and with a lot of debt, but we do expect them to come back. Commercial mortgage-backed securities providers will come back slowly and at a much smaller size as the overall financial markets rebound on Wall Street.”
Mark D. Gibson, executive managing director, Holliday Fenoglio Fowler LP:
“In terms of capital in general, there is abundant capital in both the equity and debt markets for assets which meet the buyer and lender underwriting. However, the real lack in commercial real estate is not capital but product; i.e., assets to sell or to lend against.
“We are forecasting continued monetary defaults and therefore more product coming to market over the next eight quarters, and we believe there is adequate capital to absorb same.
“The capital markets have healed, there is ample liquidity for well underwritten assets but a shortage of product. And finally net operating incomes will be declining over the next two years or until job growth emerges.”