The real
estate debt
funds have
emerged in
the market. A
number of our
institutional
clients have added a debt
fund to complement their
traditional platform of real
estate equity funds.”
BILL COTTER, Wells Fargo Commercial Real Estate
We’re not sure they’re all momentum markets any longer. So some of our markets are
changing in terms of where we’re going to
focus.
COTTER: We have 40-plus commercial real
estate offices across the US, so we actively
lend in all of these markets to provide support to the local economy. Many of our
institutional clients are looking at the secondary markets more favorably. By example,
we’re financing a couple of apartment developments in Center City, Philadelphia. We
just financed an acquisition of an office
building in Pittsburgh. We’re also pursuing
construction financing in Seattle with very
strong sponsorship. There’s real dynamic
growth taking place in these markets. When
we look at individual markets, it’s back to
fundamental underwriting: What rent levels
and occupancy are sustainable over a long
period of time? Are current cap rates sustainable? These are the challenges in underwriting in certain markets today.
PUMPER: Todd, where do you think the
opportunities may be for lenders in the
coming year?
LIKER: I think there are a lot of lenders
who feel that the worst is largely behind us
from an economic standpoint, so they’re
starting to get their sea legs and more
aggressively pursuing deals. The general
sentiment amongst lenders is that we’ve hit
the bottom, and in many cases, asset values
are bouncing upward again. Don’t get me
wrong, I don’t think lenders are out there
aggressively underwriting growth prospects
and forward-reserving interest and all the
things that were happening back in ’06-’07,
but I do think that lenders are generally
feeling more comfortable underwriting a
60% to 65% LTV-type loan and feel that
when debt yields are 10%, 11%, 12% on
that type of paper, they’re reasonably well
covered from a collateral perspective.
I’m seeing appetite coming back from
lenders for just about every asset type,
though not so much in development. But
for a well-leased asset with good sponsors
and reasonable capital as well as cash flow
coverage, the lenders are there, and it’s balance sheet lenders as well as CMBS. The
CMBS lenders are getting aggressive. There
is a lot of demand in the capital markets for
yield today, so there are a lot of fixed-income investors that have flooded back into
the CMBS space. Because these yield investors have come back en masse, the banks
have greater confidence that if they originate the loans, they’re going to be able to
profitably sell those loans into securitizations. We’ve seen it many times before:
large amounts of capital chasing yield drives
increased competition amongst the banks
for that capital, which drives the need for
As CMBS
comes back,
it’s going to
provide key
liquidity to the
secondary
markets that
we’re all talking about.”
WISTAR WOOD, AEW
increased lending volume to satisfy that
demand, which drives more aggressive
lending standards. We all saw how it ended
last time and it’ll be interesting to see if
we’ve learned our lessons or we’re destined
to repeat the mistakes of our past.
COTTER: Another interesting observation
this past year is that the real estate debt
funds have clearly emerged in the marketplace. That’s one thing we’ve seen across
the competitive landscape that we didn’t see
last year. We have a number of institutional
clients that have added a real estate debt
fund to complement their traditional platform of real estate equity funds. At times we
compete with the debt funds pursuing certain lending opportunities. However, as this
market evolves, we have been working with
the debt funds in structuring senior/subor-dinate financings. We’ve done that on a
number of opportunities. It’s an interesting
change in the lending landscape.
WOOD: As CMBS is coming back, it’s going
to provide that key liquidity to the secondary markets we’re talking about.
DESIATO: Are the CMBS loans coming
up for maturity getting refinanced?
LIKER: The whole zombie building phenomenon that people have talked about for
the past couple of years is still in force.
There are a lot of assets that have been
capital starved and there’s a lot of debt that,
although it can be refinanced, may not be
refinancable in full. In the aftermath of
Lehman, many lenders and special servicers opted to extend loans as opposed to
pursuing foreclosures. This gave owners a
reprieve and allowed the banks and CMBS
trusts to postpone loss realizations.
Frankly, in the immediate aftermath of
Lehman, this was probably the right idea.
However, the problem with the kick-the-can
strategy is that lenders and special servicers
now have a lot of buildings that are under-invested, which offset some of the benefits
associated with extending the loans and
waiting for cap rate recovery. As a result,
these under-invested assets continue to
cause headaches for lenders and special
servicers, fueling a pipeline of restructurings over the near to medium term.
HILL: Adding to that point, we’re again trying to find yield, and we’re trying to track
some of these types of situations. We do
mostly multi-tenanted office product. It
makes sense that office would be the worst
category since it’s just a big beast that you
have to feed all the time.
We’re often shocked at the pricing being
paid for distressed notes on office assets.
Only a de minimus amount of asset information is available, but it appears many
buyers are not deterred and not interested
in performing some level of due diligence.
We’re often
shocked at
the pricing
being paid for
distressed
notes on
office assets. Only a de mini-
mus amount of information is
available, but it appears many
buyers are not deterred.”
