2nd Qtr Capital Markets Update by Jamie Dick


The commercial real estate capital markets continue to operate in a constricted manner as the 2nd quarter of 2009 draws to a close. With CMBS associated lending completely shutdown income property borrowers must continue to focus on the life insurance, bank, credit union and private capital lender sectors for any financing needs for the foreseeable future. I see this limited availability of debt capital continuing through 2009 and into 2010 though there are some interesting new lending initiatives underway that may help to “turn back on” the CMBS lending faucet…albeit initially at a very, very slow rate.

Macro capital market pressures (i.e. massive U.S. government deficit spending) is beginning to put upward pressure on key interest rate indexes (please note the attached 10-year Treasury history chart) which has negated recent lower pricing spreads from some lenders currently in the market.

Due to the current (and potential ongoing) dramatic imbalance between capital demand (existing and projected loan maturities) and capital supply (lenders/capital in the market) underwriting standards are and will continue to be very conservative. Maximum LTV’s (for the very best properties) top out at 65% of current value with minimum debt-service-coverage hovering in the 1.30 range.

In the multifamily property sector Fannie Mae and Freddie Mac continue to be the lender bright spot though underwriting parameters have tightened recently.

Banks continue to be under increasing regulatory pressure. In 2007 a total of 7 banks were taken over by the FDIC. This number increased to 23 in 2008. As of today the FDIC has taken over 40 banks already this year. Expect many more before 2009 is done.

The inclusion of newly issued CMBS as eligible collateral for the federal government’s TALF loan program will create an opportunity for some select borrowers to access the capital markets but ultimate loans terms will be very conservative and pricing will be at a premium. Also the long term viability of this program is in question as currently the program is scheduled to expire at the end of 2009. To date no new loans have been originated through this program.


The CMBS (conduit) lending window continues to be completely closed. To make the point of how important this is please note the following historical data. In 2007 $237 Billion in loans were funded to income property borrowers and then securitized through the Commercial Mortgage Backed Securities (CMBS) window. In 2008 this dropped to only $12.2 Billion. This year, 2009, the number is 0 (Zero) as of today. The last securitization of income property loans was completed in June 2008.

The closing of this “window” has resulted in a huge “hole” in the commercial real estate capital markets and the results have been predictable. Though college for me is a distant memory I do remember the basics of Econ 101 my 1st year at the University of Washington. If the supply of something goes down while the demand for it continues at the same pace the price and the difficulty of finding it will increase. This is what our industry is dealing with regarding debt.

The government, through providing the availability of TALF loan funds to buyers of newly issued CMBS, is hoping to jump-start this important source of funding for commercial real estate. Unfortunately I believe that the return of the CMBS lending will be a slow process.

I believe when CMBS lending returns it will resemble the very first CMBS lending almost 20 years ago. Ultimately it is the bond buyers who control the future of CMBS and today they have a similar attitude toward buying CMBS securities as they did in the early 90’s when the CMBS industry was first established. Any buyers of newly originated loans (or bonds associated with loans) will have the same level of concern, skepticism and distrust as the original buyers of CMBS did immediately after the RTC dominated late 1980’s and early 1990’s.

Borrowers should expect CMBS lending parameters to be conservative, thoroughly reviewed and underwritten, highly documented and pricey. Those of you who were in our industry “back in the day” will remember how CMBS lenders only loaned on “B & C” properties while the life insurance industry dominated lending on “A” properties. It wasn’t that CMBS lenders didn’t want to loan money to “A” borrowers, it was just they could not compete with the life insurance companies. This of course changed over the years until ultimately, from approximately 2001-2008 CMBS lenders dominated due to lower pricing and more aggressive underwriting. I expect CMBS lending will return soon, perhaps as soon as this year, but will look very much like it did in the early days of the industry and not the go-go years of 2004-2007.

Life Insurance Companies

Of our 16 life insurance company correspondent relationships 11 are currently “in the market” and quoting new loans. No huge changes in this category of lenders since my April newsletter/email as underwriting standards continue to be tight. Spreads have actually fallen during the past 7 weeks with all-in rates being in the 6.50% – 7.50% range. LTV’s continue to top out at 65% of current value (for the very best properties & borrowers) but lenders are really looking for loans in the 50% – 60% range. 5,7 and 10 year terms are available with 30 years amortizations acceptable for lower LTV requests. I continue to expect that the life insurance companies that are currently in the market for new loans will continue to be through the end of the year though underwriting parameters will begin to tighten at the beginning of the 4th quarter.

Banks / Credit Unions

The banking industry continues to be under significant regulatory pressure as the FDIC pays more and more attention to medium and small bank balance sheets. With the stabilization of the top 20 banks (who hold 65% of all deposits!) near completion the FDIC now can focus on the remaining 8400 banks in the US. If the Top 20 fall in the category of “Too Big To Fail” the balance of the banks clearly do not! In the 7 weeks since my last Update 11 more banks have failed for a year-to-date total of 40. If this pace continues another 46 banks will be taken over by the FDIC this year! My personal guess is it will be an even larger number. Needless to say this results in a VERY conservative atmosphere in the lending departments of banks across the country.

Fannie Mae / Freddie Mac

The brightest spot in the income property lending industry continues to be Fannie Mae and Freddie Mac for multifamily properties. Since my last email spreads have actually come down a bit though underwriting parameters have tightened. All-in pricing for new loans is in the 5.75% – 6.25% range depending on loan term and requested LTV. Besides lending on multifamily properties both agencies have programs for affordable housing projects, mobile home parks and senior housing. Not surprisingly, due to this debt capital availability, values of multifamily properties have held up the best of all income property types during the last year.

Private Capital

Private debt providers continue to grow in importance as an alternative to the closed CMBS “window” and constrictive bank underwriting requirements. Pricing is steep and collateral requirements expansive but these lenders can provide borrowers, faced with a significant & immediate financing need, a welcome alternative to a more traditional lender.

Bottom Line

No change from my last email…but perhaps just a stronger tone to make sure borrowers are listening…

1. If you are going to have a financing or refinancing need during the last 6 months of this year start now. Given the environment everything is taking longer than has been the case the past 5 years. It takes longer to find the right lender…it will take longer for them to do their underwriting…it will take longer to get loan approval…it will take longer to document and close the loan. I can’t emphasize this too strongly. Start your loan search early.

2. There are lenders lending money. The underwriting is tighter…the price is higher…the terms are tougher…but there are lenders lending. But as the year goes on I expect that there will be fewer and fewer as they begin to run out of their 2009 allocations. This definitely impacted our business last year during the 4th quarter and I expect it to happen again this year.

3. If you are a buyer or owner of multifamily it is a great time to be a borrower. If your property qualifies Fannie Mae and Freddie Mac are funding loans at prices that continue to allow a buyer to achieve true positive leverage…something we haven’t seen for some time!

4. If you have a problem with an existing property you own due to the properties debt do not hesitate calling in outside, expert help. We as a company and me personally are working with owners, on a consulting basis, to help them restructure their debt. Lenders, though no push-over, are open to discussions about restructuring debt. The sooner you get in front of your lenders the better if you think this is necessary. But go prepared and think about bringing an outside advisor. Not only will an advisor help you with identifying creative solutions but many lenders like having a 3rd party advisor involved in the process. It brings a dose of objectivity to the situation.

Please give me a call if I can be of any assistance with your financing needs. With the resources of Newmark Realty Capital, the #1 West Coast based commercial real estate mortgage banking firm, I know my colleagues and I can help you solve your issues. I hope this email finds you and your family healthy and look forward to working with you as we move through these interesting economic times.

Best Wishes!


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