Financing Availability, Low Interest Rates Drive CRE Markets

Debt financing has returned to the commercial real estate markets, deleveraging will likely continue, and the stream of distressed loans will continue to flow into the market, according to speakers at the 2012 ULI Spring Meeting held last week.

By Keat Foong, Executive Editor

Charlotte, N.C.—Debt financing has returned to the commercial real estate markets, deleveraging will likely continue over the next years, and the stream of distressed loans will continue to flow into the market, according to speakers on financing panels at the 2012 ULI Spring Meeting held last week.

At a session titled “Full Court Press on Commercial/Apartment Debt: A Competitive Financing Debate,” Kevin Pivnick, managing director at Deutsche Bank, said that the CMBS industry is experiencing a shortage of demand, not supply. The CMBS market is very healthy today, said Pivnick. Pivnick reported that there is currently robust investor demand for all CMBS bond issuances.

He said, however, that CMBS lenders are still wishing for greater levels of demand from borrowers. He added that 80 percent of the loans his company has seen last year are refinancings rather than acquisitions, and that lenders would like there to be a greater amount of acquisition activities in the CRE space.

David Clark, senior vice president, real estate, of Nothwestern Mutual Life Insurnace Co., said that life insurance companies’ commercial real estate financing activity reached record levels in 2011. He said his company has lent to regional malls, apartments and office buildings in roughly equal proportions, and that life companies’ pricing are currently extremely competitive. Typical rates are at about 4.6 percent, although LTV is more often about 64 percent and DSC 1.5 percent.

Glenn Grimaldi, executive vice president, HSBC, cited low interest rates as a major trend that is driving the real estate industry by allowing for low acquisition cap rates. The low interest rates will also have implications on the amount of deleveraging as loans mature in the next few years, he said. Grimaldi forecasted that banks may sell more loans at discount in the next years.

Northwestern Mutual’s Clark suggested that the commercial real estate industry is still overleveraged. However, it is likely that the next two to four years will see continued flat to declining levels of mortgages outstanding, such that there may be enough debt to meet refinancing needs and that a significant CMBS resurgence will not be required, Clark said.

On the same panel, Simon Ziff, president of Ackman-Ziff Real Estate Group, suggested that CMBS financing will ultimately drive commercial real estate values, and CMBS financing needs to be watched to obtain an indication of where the industry is headed.

On another financing panel, “Game Over…or…Overtime?,” Ann Hambly, co-CEO and founder of 1st Service Solutions, predicted that the CMBS loans resolution market will be active at least through 2017, when 10-year loans originated in 2007 matures.

As an indication of the quality of loans originated in 2007, Hambly pointed out that in 2005, when CMBS issuance totaled $14 billion, CMBS loans had 75 percent LTV, had no interest-only feature, and required some reserves. By 2007, when issuance had reached $230 billion, LTV had increased to 80 percent, there was interest-only features, and little reserves were required. Hambly cited statistics which indicate that of the loans maturing in 2011, 65 percent were underwater.