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By Dees Stribling
Even in hard times, high-quality commercial real estate deals should still be possible. The question during this particular down cycle—a leftover question from 2009 and very likely one that will continue to be asked well into 2011—is whether investors and owners can get the debt financing they need to do deals, even those as straightforward as refinancing performing mortgages. The entry of equity into the depressed real estate investment market is likewise problematic, considering the resistance of potential sellers to pulling the trigger on sales.
On the debt side, there are signs that commercial mortgage origination is increasing as the economy slowly recovers in early 2010. According to the Mortgage Bankers Association, U.S. commercial real estate mortgages were up 12 percent in the last quarter of 2009, compared with the same quarter a year earlier.
Considering that the world was in the grip of a financial panic at the time, beating 4Q08 might not be much of an achievement. But it’s also true that mortgage originations the last quarter of 2009 were also up 15 percent from the third quarter of 2009, notes the MBA.
More specifically, mortgage originations by banks were up 17 percent in 4Q09 compared with 4Q08. Fannie Mae and Freddie Mac registered a 26 percent decline in origination volume, while too little CMBS lending was done during the quarter to make a meaningful comparison with previous totals.
Looking ahead, extrapolating a trend in commercial real estate lending for 2010 is a little tricky from such numbers. “I don’t expect real estate finance to budge too much, certainly not in the next six months,” says Craig Fitzpatrick, senior vice president at Grubb & Ellis’s Fairfield office. “That’s true everywhere, but of course some markets are more frozen than others. New Jersey isn’t the worst.”
According to a survey of senior loan officers by the Federal Reserve early in February, banks have mostly stopped tightening overall business lending standards. But most of them haven’t quit tightening standards for commercial real estate borrowers.
“A substantial share of domestic banks, on net, reported having tightened standards on CRE loans and having experienced weaker demand for such loans again in the fourth quarter of 2009,” notes the Federal Reserve survey. “Moderate net fractions of foreign banks also reported having tightened standards on CRE loans and having seen weaker demand for such loans over the past three months.”
The survey also shows that banks have clamped down hard on certain aspects of commercial real estate lending, including a tightening of the spreads of loan rates over banks’ cost of funds, debt-service coverage ratios, and loan-to-value ratios. “Lenders want to lend, but they can’t justify a high volume of loans under current market conditions,” says Fitzpatrick. “A number of deals are going to get done in markets such as metro Washington, D.C., but that isn’t going to happen in most places.”
At the federal level, there’s one proposal to help uncork some commercial real estate lending. Tucked away in President Obama’s proposed federal budget for fiscal 2011 is a change in the Small Business Administration’s 504 loan guarantee program. Under current rules, businesses can use SBA-guaranteed loans for capital expenditures such as real estate purchases.
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