James DuMars: The New Positive

I attended the annual lending conference attended primarily by major commercial real estate lenders, mortgage bankers & servicers.  NorthMarq hosts a couple suites and we meet on the half hour with each lender over a four-day period.  We also host a reception and had 250 lender representatives join us.


Generally the convention can be summed up as follows:

“Less Negative is the New Positive”

Things are getting better in the capital markets and interest rates are coming down:  Specific capital providers are outlined below:


Life Companies  – almost all are back in the market.  Many reported to have allocations exceeding $1 billion for 2010.   Basically, cash is piling up and they have to invest it.  In order to do so they have cut rates from say 7.25% a year ago to generally 6.25% – 6.75% today.  These lower rates also correspond to alternative investments such as yields on corporate bonds.    Look for a few life companies to go down to 5.75% – 6.0% for lower leverage Class A opportunities.  

REO – Life companies each report to have only a handful of nonperforming loans.  However, they do acknowledge that that number is anticipated to increase throughout 2010.  Despite this fact, they see the current market as a good one to be lending in given the recent expansion in cap rates and decline in values below replacement cost.   Some life companies will take action before a trustee sale takes place and sell their nonperforming loan through a debt sales platform or authorize a short sale.  Others will take the property back and hold it, lease it up and eventually plan to sell it.  NorthMarq has recently financed properties that our  life companies foreclosed on and decided to keep.  In one recent example, we placed the financing through our Fannie Mae DUS program.  


Freddie Mac and Fannie Mae – Continue to dominate the landscape for fixed rate and floating rate multifamily loans.  For now we don’t see any other competitors stepping up to challenge them. Fixed rates for 10-year terms remain in the 5.50-5.75% range. Depending on the agency’s perspective on any given market leverage remains 65% – 80% loan to purchase price.  The only potential downside facing borrowers that utilize this financing vehicle is the government’s recent announcement to follow through and end their purchase program of mortgage backed securities.  Depending on who you interview, spreads will either increase or stay flat.  Click on the link to read a recent article.

http://online.wsj.com/article/SB20001424052748703410004575029610236173870.html <http://online.wsj.com/article/SB20001424052748703410004575029610236173870.html>
FHA/HUD – This platform has been vital to many developers unable to pay off their high leverage construction loans, however, the view on the street is that this financing vehicle is going to tighten up.  A recent memo from the MBA included the following quote “During a meeting today with representatives of more than ten industry trade groups, Deputy Assistant Secretary for Multifamily Housing Carol Galante stated that HUD will be making changes to the multifamily programs based on the need to “target and tighten” the Department’s multifamily activities.”    Look for a possible 1.20X DCR verses 1.17X and carve-outs as well.  Email me if you want the complete announcement and I’ll send it over.


Nonrecourse bridge money is getting cheaper.  Rates are now in the 5.5% range for say a low leverage (60% to purchase price) multifamily deal (not qualifying for agency debt) to as high as 8-9% for a broken condo acquisition.  Again, the theme is lower rates and more capital entering the market.  Where a bridge lender funded five loans in 2009, they may already have six in process thus far in 2010.�

EQUITY/HIGH LEVERAGE DEBT (Life Companies/Opportunity Funds/Hedge Funds)

Some life companies are talking about equity again.  I would describe their perspective as tire kicking at this point.  Looking for IRRs in the 11% range and long term holding periods of say 5+ years.  They want a strong sponsor and in many cases will pick one in each market for each property type they’re looking to invest in.

Hedge Funds – looking for opportunities.  They are seeking IRRs in the 15%+ range for their high leverage debt (80-85% range).  They will structure their equity as a participating mortgage and go up to 85% of the equity in the deal.  For their equity they’re looking to be in the low 20s on rate.  To be considered competitive the hedge funds will chase empty buildings, discounted note purchases and development deals with tenant in tow.�

CMBS – Although not like the good ole days of 10 years interest only – CMBS Lenders announce new platforms and begin issuing terms sheets. 

Goldman Sachs, JP Morgan and a few others are now actively seeking to pool loans for securitization.   They have taken the temperature of the investors and believe a market exists to begin securitizing one off mortgages again.  Look for Goldman to assemble a $500 million pool in the near future.  These are not backed by TALF.  These are market deals, 5-10 year terms and rates in the 6.25-6.75% range (depending on term).  Money is piling up at all the funds that were raised to buy distressed debt and make high interest bridge loans.  These groups will likely deploy the capital in the unrated portions of the CMBS pools as these tranches offer very favorable returns and lower risk on properties that are 70% leveraged at today’s cap rates and underwritten with today’s market rents.  Cash management vehicles will likely be a part of each of the loans as will carve-outs.  30-year amortization and either 5 or 10 year terms will be offered.   This is very good news for the real estate community regardless if you are a borrower of CMBS.  It will offer additional liquidity in the marketplace.   Look for the initial loans to be larger, say in the $10+ million range.


In summary, the conference was relatively upbeat.  As I walked the halls of the Mandalay Bay Convention Center I saw lots of old people (like me).  Many young faces are gone or didn’t make the trip.  It’s been a tough three years since the initial memo came out from Moody’s in the spring of 2007 announcing scrutiny of CMBS.  However, I am relatively upbeat after this conference.  This downturn began with a capital crisis and will likely begin to heal up as capital begins chasing returns above the very low returns offered by US Treasuries and banks.

James DuMars is managing director in Northmarq Capital’s Phoenix market.