Lending Is Returning Carefully And With Limits

March 29, 2012

Are you watching economic signs to determine if commercial property management in San Diego will be on the rise? 

Lending of all types is returning, although, it is still limited and to some extent, still bifurcated. 

CMBS 2.0 is starting to ramp up again, although it is likely not to exceed $40-45 billion this year. The first pool of 2012 should happen very shortly with four others to follow soon after. The size is likely to stay around $1.0-$1.2 billion per pool. Average loan size will most likely stay moderate and be around $25-$35 million, with an average of about 50 to 60 loans per pool. There is not likely to be a lot of very small conduit loans this year. There will probably be fewer of the single asset or single borrower, mega loans than there were. However, the total volume will remain far below what is required to refinance the maturing loans of both CMBS and bank loans. There are not a lot of CMBS lenders active at the moment, but several are currently sitting on the side waiting to see how the market and the economy develop over the next few months. 

Banks are getting back into lending again. It is not aggressive, and is still often limited to existing borrowers or local projects where the bank knows the area and possibly knows the borrower. Banks will remain very cautious in their underwriting and will continue to restrain lending to 60% to maybe 65% of cost or conservative value. The banks’ capital is now back to what is sound in many institutions, but they are not going to allow that to be jeopardized by excessive lending again. The regulators are all over the lenders to be conservative and to not allow high risk loans, and this can definitely affect the demand for property management in San Diego. In addition, the banks need to still be cautious as the economic recovery is still tenuous and could possibly go off track later in the year if there is war with Iran or if gas prices continue to climb to $5 to $6 or more. No bank is going to go out on a limb this year to extend high leverage or to lend where they are not very comfortable with the sponsor. The foreign banks have mostly withdrawn from the market due to their own capital shortage issues, and their own cost of capital makes it hard for them to compete against the strong US lenders on spread since US banks have very low costs of capital with US-based deposits.

There are a lot of bridge lenders around now who will look for DPO, distressed REO buys or recap deals with rescue equity being infused. They are not willing to lend on deals that are just plain solid deals. They need value add deals that look like distressed to justify the higher rates they need to charge to meet their stated returns to their investors. There is an odd view of some of these lenders. They will only lend on distressed deals, and not on those where there is a class A asset with an institutional single tenant, the theory being the tenant might not renew. Yet they will loan on a partially leased multi-tenant building hoping it will lease up. While I understand the risk issue, what became clear is that many of these lenders are really a fund, and they tell their investors that they are bringing smarts and value to the situation. If the building is class A and is fully let to a credit tenant, then there is nothing of value add to be brought by the bridge lender or equity, so they can’t justify to the investors that they should get their 2% fee and 20% promote, even though on a risk adjusted basis the class A building is a much better deal than some others. 

In every case today who is the sponsor are the most important criteria for lending. If a sponsor acted well during the crash and did not screw any lenders, even if they had workouts, then if that sponsor is sound financially today, then a lender will consider a loan. These are the people most likely to be in the market for San Diego property management.  If the sponsor is weak, put assets into bankruptcy to pressure lenders, and generally violated covenants, then he is unlikely to get a new loan. Strong sponsors, with an asset in a top market that is cash flowing is likely to get multiple bids at very good spreads. LTV is still around 60% to 65% but may move up a little if things continue to improve as the year goes on. Deals in secondary cities will not enjoy anywhere near the same treatment. To get better spreads, it is likely that lenders will make more secondary market loans but only to very good sponsors and good assets. This will cause up to 60% of all maturities to fail to get a full refinancing this year and maybe next year. That leaves a gap equity situation which is the opportunity for funds, family offices and investors to step in with gap equity in an A/B structure. While the gap is less than last year due to rising values, that rise is likely flattening out as the year unfolds and the economic recovery stays fragile and subject to black swan events such as Iran. 

Loans are likely to remain floating and for 5 year terms. Mezzanine loans are available, but some senior lenders will not allow it, and mezzanine lenders are being very careful not to get caught again like has occurred in the past couple of years. 

In summary, it is better, but not for many borrowers in secondary markets who do not have equity to fill gaps. With the rising number of maturities now hitting, cash is still king. Equity is what is required among those who will purchase commercial real estate and ultimately require commercial property management San Diego. This is not going to be a year where lenders are going to do you any favors unless you are a major sponsor in a major market. If a black swan event does occur, then we are going back to real severe restraints on lending again and another reset. Best advice is keep cash handy and keeps costs under tight control. 

Source:  Joel Ross

 

DISCLAIMER: This blog has been curated from an alternate source and is designed for informational purposes to highlight the commercial real estate market. It solely represents the opinion of the specific blogger and does not necessarily represent the opinion of Pacific Coast Commercial.