Patience will see commercial realty through this
For nearly three years, obtaining capital for commercial property has been challenging, both for new construction and existing assets. The Fed projected GDP growth between 2.5–3.5 percent for 2010 and the national jobless rate improved in January, yet credit remains tight for many borrowers, and the labor market weak. Commercial real estate fundamentals lag the economy and other factors impede the asset class such as corporate downsizing, bank mandates to reduce real estate exposure, rental rate compression, and higher vacancy and capitalization rates. Although the commercial real estate market is experiencing a protracted correction, financing remains available for select properties and borrowers.
The challenge for borrowers since 2008, apart from the credit crunch, is lenders are writing considerably lower-leverage loans
compared to 2000–2007. The net effect requires borrowers to increase their cash equity position for construction, refinance
and acquisition loans. With the exception of quality apartment properties, leverage will likely remain constrained until the sale
market returns, capitalization rates and values are re-established, and the Commercial Mortgage Backed Securities (“CMBS”)/Securitization market recovers—the latter of which may not soon be realized.
The challenges intensify for developers seeking construction financing. Essentially, banks will only consider construction loans if they possess, among other things, 1) significant guarantors (a high ratio of net worth and liquidity to loan request), 2) lower loan-to-cost ratios, and 3) higher than normal pre-leasing levels (in excess of 60% of the project’s net rentable square footage). However, HUD/FHA construction lending programs are available for qualified apartment projects, and certain lending programs are actively pursuing “owner-user” or “build-to-suit” projects, with scrutiny placed squarely on credit quality. The slowdown’s silver lining? Supply has been curbed and property fundamentals should subsequently benefit over time.
One major positive for borrowers in recent months is that borrowing costs have improved. Lower-leveraged, existing and stabilized commercial properties can secure long-term fixed rates in the 6–7 percent range, aided by historically low Treasury rates and diminished corporate bond yields. Apartment loan rates can be obtained closer to 5.5 percent. Commercial property
loans are still being originated via life insurance company lenders as well as private debt and specialty finance firms.
Lenders today are afforded a high degree of selectivity in the transactions they wish to pursue.
Apartment lending remains advantageous to borrowers. The government sponsored agencies (Freddie Mac, Fannie Mae and HUD/FHA) continue to provide liquidity to stabilized apartment complexes. These agencies enjoyed an 84 percent market-share for apartment lending in 2009. Conversely, when considering the single-family home lending market, unless the borrower is a large publicly-traded builder accessing public markets, single-family construction loans to small to midsize home builders are nearly non-existent. Builders can access loans through private equity firms at a steep price, reportedly at rates of 15–20 percent. It’s guesswork as to when homebuilder debt capital will be revived.
The most significant news in the commercial real estate financing market came recently with the first CMBS/Securitization transaction in the U.S. since 2008. The deal, which closed in November, consisted of a $400 million Goldman Sachs loan to Developers Diversified Realty secured by 28 shopping centers. It was expected that most bond buyers would access the Fed’s Term Asset-Backed Securities Loan Facility (TALF) to provide leverage to purchase the securities. Surprisingly, TALF was utilized to acquire only 22 percent of the eligible bonds, with the remaining purchased with cash by private buyers. Although the transaction was unique as a single borrower and terms were more conservative than CMBS loans executed pre-2008, the success fueled hopes that CMBS will become a viable capital source for commercial real estate again, and investors will have an appetite for well underwritten securities. Our industry, though, will continue to practice patience, and assume that if CMBS/Securitization returns, lenders will not only be regulated to underwrite conservatively but also retain a principal position in the bonds, whereas in the past these institutions were only taking warehousing risk. 
Joe Platt manages a commercial and multifamily servicing portfolio for Grandbridge Real Estate Capital in Mission Hills, Kan.
P | 913.748.4456
E | jplatt@gbrecap.com
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