On Barren Ground (2/12)
Feb 12, 2009 12:11 PM, By Elaine Misonzhnik
It’s been a slow few months in the world of real estate lending. For example, Steven J. Lurie, partner in the real estate practice group of Greenberg Glusker, a Los Angeles-based law firm, has handled only one retail financing since Sept. 15, when the investment banking giant Lehman Brothers filed for bankruptcy, taking with it whatever was left of the scant confidence in the global credit markets. The deal, which funded a $65 million purchase of the 173,000-square-foot Larkspur Landing Shopping Center in Marin County, Calif., was arranged through City National Bank and featured a five-year term, an interest rate in the 6 percent range, a loan-to-value ratio of 50 percent and a recourse requirement. Plus, the bank felt comfortable with the borrower, James Rosenfield, principal of J.S.
Rosenfield & Co., with whom it has been doing business for the past 20 years. Considering current market conditions, if the terms were any less stringent or if the lender did not have absolute faith in the borrower, it would be unlikely for even that deal to go through, Lurie notes.
“Certain banks are being very difficult with their customers: trying to get loans paid off, not making new loans, not renewing loans,” Lurie says. “Senior debt is not available on terms anything like what was available before the meltdown, except when you have very low loan-to-value and very good credit behind the guarantee.”
In fact, in the fourth quarter of 2008, real estate lending activity on commercial/multifamily transactions by commercial banks fell 86 percent compared to the same period in 2007. On an index where 100 equals the 2001 quarterly average, origination volume by commercial banks on all commercial/multifamily loans in the fourth quarter of 2008 fell to 74—down from 521 during the fourth quarter of 2007, reports the Mortgage Bankers Association (MBA), an industry trade group. On retail properties, the index fell to 47, down from 264 a year ago. For all lenders, the index fell to 54 down from 275 a year ago.
Since the beginning of the year, the average loan size contracted by more than 46 percent, to just $6.0 million from $11.2 million. Lending activity by life insurance companies fell 27 percent year-over-year, to 163 deals from 222, though the average loan size increased by approximately 6.9 percent, to $13.9 million from $13.0 million. Originations for all of 2008 were down approximately 60 percent from 2007 levels, according to the MBA.
“In a normal market you have a run-off, where people can refinance [with new lenders] so there is always money turning,” says Andrew Oliver, executive vice president and principal with Cushman & Wakefield Sonnenblick Goldman, a global real estate financial services firm. “Now, there is just stagnation.”
Here and there, it’s still possible to get loans, notes Oliver. But those loans tend to be small in size, are granted only to good credit existing customers and feature very tight underwriting standards. What’s more, retail properties tend to be out of favor because of the high potential for tenant bankruptcy, he adds.
“Lenders are very cautious on retail,” Oliver says. “If it’s a grocery-anchored center in a prime location, there is money for it. But if it’s a power center, the tenancy is very important because some of those tenants are having financial problems, so the underwriting is very conservative.”
Size matters
Part of the difficulty is that the profile of the senior lenders active in the market has changed. As recently as June 2008, the bank with the highest profile of mortgage servicing transactions was Wachovia Securities, which had more than $434 million in mortgage collateral, according to MBA data. But in October of last year, Wachovia had to agree to a takeover by Wells Fargo when it became clear that the bank’s $312 million mortgage portfolio could destroy the company.
Many of the larger commercial banks are in a similar position, still trying to work though the losses they incurred in their exposure to sub-prime mortgages. As a result, they will likely not take any new risky bets on commercial real estate lending for a while, notes David Akeman, director of capital markets with Stan Johnson Co., a Tulsa, Okla.-based commercial real estate investment firm.
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