S till reeling from the impact of the
credit crunch, the pace of commercial debt originations has slowed to
a crawl and what financing is available
h as become more expensive to obtain.
Uncertainty in the capital markets has
c aused lenders to tighten underwriting
s tandards and re-price risk. Spreads have
b een widening, while interest rates have
b een rising, albeit slightly. Borrowers,
m eanwhile, are stepping back, taking
t ime to adjust to the new standards and
d etermine what types of financing are
a vailable and how it will impact the via-b ility of pending and potential deals.
“It’s time for a lot of the commercial
r eal estate activity to slow down a bit as
l enders and borrowers try to figure out
w here equilibrium is in a market that’s
b een shaken by a significant liquidity
s queeze,” observes Mike Szwajkowski,
p resident of structured finance at
C apitalSource in Chevy Chase, MD.
“There’s just not that much activity in
t he marketplace,” echoes Christopher
C arroll, managing director of capital mark ets at Cohen Financial in Chicago.
“ Owners that have to refinance a property,
t hat have a note coming due, are doing
d eals. And there are some spotty purchases, but it’s not plentiful at all. Nobody’s
doing anything now unless they must.”
This market shift over the past several
months has caused many deals to fall
through, say the experts. According to
Real Capital Analytics’ December
Capital Trends Monthly report, buyers
backed out of some $10 billion worth of
property purchases during the second
half, while sellers have withdrawn more
than $13 billion of offerings. The New
York City-based research firm noted that
in many of the transactions that closed,
sellers accepted prices that were 5% to
8% lower than originally contracted. And
while the tally of deals falling out of contract has started to decline, the report
found that the number of properties
being pulled off the market is rising.
Even those mega-mergers and large
portfolio sales that dominated the real
estate industry in recent years have been
impacted by the shifting marketplace.
Australia’s Centro Properties Group,
which bought New Plan Excel Realty
Trust Inc. for $6.2 billion in April 2007,
told investors in December that it was
The string of broken deals is but one
facet of a changing market. Another is
more stringent underwriting. “At the
beginning of last year, a typical fixed-rate
conduit loan would have been underwritten to, say, a 1. 15 interest-only debt service,” says Scott Bottles, a Los Angeles-based principal at George Smith
Partners. “Now they’re being underwritten to Treasury plus 1. 20 or 1. 25 debt service with a 30-year amortization period,”
he notes.
Many lenders are sitting on the sidelines
waiting to see how the mortgage market
plays out. Yet experts say there is still money
available to get deals done—at a steep price.
having trouble refinancing acquisition
debt tied to the deal. The firm must refinance $3.4 billion in short-term loans that
will come due Feb. 15. On Jan. 2, Centro
announced it was “seeking expressions of
interest” from investors in the firm or
some of its assets.
Highwoods Properties has also felt the
pinch. The REIT recently pulled its
Winston-Salem, NC portfolio off the
market. “Given the volatility of the capital markets and its resulting impact on
the marketability of portfolios of this size,
we have decided to delay the sale at this
time,” Ed Fritsch, Highwoods’ president
and CEO, said in a statement. The package, which encompasses 1. 3 million sf of
office space, 300,000 feet of industrial
and 14 acres of land, went on the block
last May.
Bottles adds that as a consequence,
loan proceeds are cut significantly. And
since buyers are not able to get the same
degree of leverage as in early 2007, a
number of transactions have either
dropped out of escrow or prices are being
renegotiated to allow the buyer to get
financing. “While money is still available
today, it’s being underwritten to more
conservative standards, so leverage is
definitely down and spreads have
increased. Pricing in general is more
expensive,” he explains.
Compounding the situation is the fact
that some lenders are out of the picture
right now, relates Thomas Sherlock,
senior managing director at Buchanan
Street Partners. “There are some who are
having a very hard time pricing risk
today, which is creating pricing volatility
