Capital Markets and Imbalanced Growth

Experts say capital markets have a long way to go before they see a true recovery despite increases in lending and growth in varying sectors like apartments and …

Experts say capital markets have a long way to go before they see a true recovery despite increases in lending and growth in varying sectors like apartments and multifamily units. The reason is because the focus has shifted to transactions involving premium assets that are being purchased by vetted investors. In other words, the market is experiencing growth but it is only in one direction and excludes a large swath of prospective investors and properties. Analysts blame uncertainty in the global economy and a lack of traction in domestic jobs improvement. For more on this continue reading the following article from National Real Estate Investor.

Lenders like commercial real estate. They really do. But they have concerns about the global economy, and that makes them unwilling to finance anything other than quality assets in major markets owned by strong sponsors.

“There’s been no meaningful job growth and uncertainties with U.S. debt and Europe just won’t let people believe the situation will be better six months or a year from now,” says Steve Holle, a regional director with Northwestern Mutual, which originated $4.5 billion in commercial real estate loans in 2011.

Even though mortgage originations have increased annually since the credit crisis, and even the once dormant conduit market is coming back to life, Holle says the capital markets are still far from normal. “The focus is strictly on high-quality, core real estate in primary markets,” he says.

HFF Managing Director John Pelusi agrees: “Other than the GSEs, which lend on multifamily exclusively, it’s difficult to entice life companies and major banks to go into secondary and tertiary markets. Prior to 2008, they would lend in those markets, so we have a way to go before we are in a normal capital markets environment.”

Meanwhile, assets and borrowers that meet lender requirements are getting sweet deals. “Quality is getting the most aggressive rates that I’ve ever seen in my 32 years in the business,” Pelusi acknowledges.

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Risk-averse lenders

The Mortgage Bankers Association (MBA) projects originations of commercial and multifamily mortgages will hit $230 billion this year, an increase of 17 percent from 2011 volumes. Commercial and multifamily mortgage debt outstanding is expected to also grow in 2012, ending the year above $2.4 trillion, 2 percent higher than at year-end 2011.

The MBA origination numbers don’t offer a complete picture of today’s capital markets, experts note. Perhaps more telling are the results from the most recent survey conducted by the National Multi Housing Council (NMHC).

Industry experts widely agree that financing for multifamily properties is more available than it is for other property types. Not only is the apartment sector outperforming other commercial property sectors, but it has benefited from the ongoing support offered by the GSEs.

Even so, NMHC’s Chief Economist Mark Obrinsky says the organization’s survey findings indicate that capital is largely targeted at top-tier apartment properties in core markets and not available throughout the U.S.—fully 79 percent of respondents said capital was constrained either by property type, by market or both. The situation is far more challenging for other property types, experts contend.

“Because there is uncertainty with the economy, everyone is cautious, and underwriting is conservative,” Holle says, adding that Northwestern Mutual is focused on non-recourse, fixed-rate loans with moderate leverage.

In this upper quality echelon, loan-to-value ratios are moving toward the traditional 75 percent, while newer and better quality portfolios and single assets can attain amortizations of 30 years. Rates are in the 4 percent to 4.5 percent range for 10-year fixed rate loans.

This aversion to risk is persisting despite the tremendous liquidity in the system and the low 10-year U.S. Treasury rates. “It’s still not encouraging lenders to take risks into secondary and tertiary markets—it’s just driving down rates on the deals that they were already willing to do,” Holle says.

Construction lending available

It’s a positive sign, however, that more capital is available for construction projects, albeit in select markets, says Tom Melody, executive managing director of Jones Lang LaSalle’s capital markets group. Moreover, banks are willing to commit to larger loans—up to $100 million, which wasn’t the case a year ago, he points out.

“There are opportunistic deals in various markets, although lenders require significant pre-leasing and borrowers must be willing to accept recourse and be willing to put in 40 percent to 50 percent equity,” Melody notes.

This article was republished with permission from National Real Estate Investor.


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