2007 was flush with mega deals
and large REIT privatizations,
such transactions are now hard
to finance. Last year, there
were more than $476 billion in
commercial real estate sales,
but RCA predicts that the
record volume will not be
repeated in 2008.
“The pricing of capital has
changed and it makes it more
difficult for those transactions
to get done,” Sherlock
“I don’t think borrowers
should expect to get the
kind of leverage or the
super-cheap pricing they
were getting last year.”
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• Real estate focus: A strong commitment to real estate
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• Structure solutions: MFB can provide structures, generally
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lowered DSC requirements for new properties that have not
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in place of large escrows for properties facing signi cant
• Permanent financing terms: Permanent 5 to 10 year loans
at competitive pricing by a portfolio lender.
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at management allows for timely answers.
National Income Property Group Offices
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explains. “There are those that
believe we’ve hit a peak in the
marketplace in terms of pricing,
at least for the near term, and
that’s going to make those
transactions difficult to come
Carroll agrees, adding that it is
likely more “good-sized, middle-market deals” will get done.
The experts agree that the
capital markets should settle in
2008, but what will the landscape look like once things stabilize? Bottles predicts that when the
uncertainty in the markets is reconciled,
conduit lenders will be back in action.
Floating-rate bridge lenders will have
money to lend, but at higher spreads and
under more conservative terms. Cap
rates could rise as much as 50 to 125 basis
points, spreads will tighten and there will
be more certainty of execution.
Underwriting standards will continue to
be more stringent than what was seen in
the past. “I don’t think borrowers should
expect to get the kind of leverage or the
super-cheap pricing they were getting last
year,” he adds. “It’s going to be more like
2003 or 2004.”
Szwajkowski says when the markets do
stabilize, deals should be done at more
favorable prices. “I think it will be a better lending environment because the fundamentals are better and a lot of the hot
money has been run out of the market,”
he notes. “You’ll see stronger levels of
debt service coverage, slightly lower
leverage and more traditional covenants.
You could look at this as either a virtuous
or a vicious cycle. But really, buyers are
now being more prudent and more judicious about where they’re willing to
invest in a transaction.”
So, the big question that remains is:
when will things calm down? Bottles
believes that the debt markets will start to
tighten and stabilize once demand for
new CMBS bonds increases and loan
originations begin to rise to meet that
need. Meanwhile, Sherlock says that if
the economy slides into a recession, the
correction might take a year to play out.
But, if a recession is avoided, it may only
take six months before we see things start
to turn around. “We’ve got the first half
of the year to work through the issues,”
he says. “Hopefully, by the end of the
second half, things will have settled into a
good operating mode again.” ◆
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