On Barren Ground (2/12)
Feb 12, 2009 12:11 PM, By Elaine Misonzhnik
Lurie, for example, recalls a recent conversation with a retail broker who told him his client managed to line up eight different bids for a refinancing loan in the summer of 2008. But by the time the owner made a decision, all eight offers disappeared in the wake of the Lehman Brothers bankruptcy and the subsequent market meltdown.
Meanwhile, many life insurance companies, which serve as another major source of senior debt, have not yet finalized their allocations to real estate for the 2009 fiscal year, according to Oliver. When they do, the amount they lend might turn out to be significantly below the 2008 commercial mortgage allocations, according to Ryan Krauch, principal with Mesa West Capital, a Los Angeles-based institutional commercial real estate lender. “Their balance sheets had so badly deteriorated that they just don’t have money right now,” he says.
Life insurers’ mortgage commitments fell 26 percent from the first to the third quarter of 2008, according to the MBA, to approximately $7.0 billion, from $9.7 billion. By contrast, during the third quarter of 2006, at the height of the commercial real estate boom, their commercial mortgage commitments totaled almost $34.0 billion. As a result, most of the senior lenders active in the market right now happen to be smaller regional banks, according to Akeman.
But since the smaller banks’ lending capacity is limited, that means that the loans getting closed today tend to be relatively small—typically, under $5 million. Recently, for example, Akeman closed loans in that range on two Walgreens-anchored properties. The biggest deal he is working on right now is an $11 million loan for a BJ’s Wholesale Club.
“It’s the larger loans that are hard,” says Oliver. “Lenders don’t want a larger loan on their books. They want to diversify.”
Good credit a must
Current deals are also getting done under much tighter underwriting terms. Loans on properties in secondary and tertiary markets, where most of the distress is expected to occur, have become virtually nonexistent, says Oliver. The lenders want a top quality asset in an urban location and, in many cases, they will lend only to existing clients, he notes.
But even then, with scant new transactions happening in the investment sales sector, it’s extremely difficult to assess the true value of a given property, so lenders tend to be conservative, says Craig Carbrey, president and chief credit officer with EnviroFinance Group, LLC, a Sacramento, Calif.-based brownfield lending specialist. In November, the most recent month for which data is available, investment sales in the retail sector totaled $600 million and involved fewer than 50 properties, according to Real Capital Analytics, a New York City-based real estate information provider. The volume was 83 percent below that of November 2007, when roughly $2.6 billion in significant retail transactions closed.
To get a mortgage closed now loan-to-value ratios on retail transactions have to range between 50 percent and 70 percent, according to Oliver and Krauch, with interest rates of 7.5 percent to 9.5 percent. Securing financing from senior lenders will continue to be difficult for a while, says Akeman, as it will take at least until the second quarter of this year for the U.S. financial system to recover from the shocks it had received in 2008.
“To date, we have seen absolutely no movement [in the credit markets],” says Krauch. “It was bad six months ago, even worse two or three months ago, and it continues to be bad. The banks are having their own issues right now in terms of mergers and their balance sheets, so they are not going to be playing any time soon. There are very, very few lenders that are looking at deals today.”
Related articles from National Real Estate Investor:
Commercial/Multifamily Mortgage Originations Plunge 80% from Fourth Quarter 2007 (2/10)
Dismal U.S. Employment Outlook Dampens Mood of Mortgage Bankers (2/10)
More Questions Than Answers As Mortgage Bankers Kick Off Convention (2/9)
Wachovia Tops List of Commercial/Multifamily Loan Servicers (2/9)
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