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Capital Markets Update
From the MBA CREF: Capital Is Available!

Each February, the Mortgage Bankers Association hosts the Commercial Real Estate Finance (CREF) convention where over 1,700 professionals from the lending and mortgage banking industry gather. Lenders from every type of capital provider attend.

I just came back from the MBA CREF convention. The theme at this convention was the same as what I heard at the Commercial Mortgage Securities Association (CMSA) conference two weeks ago.

The industry is flush again with capital and capital providers looking to lend.

Here are some of the findings that we've learned at the MBA-CREF.

Random findings:

1) Money is available. Life insurance companies believe they will lend $32 billion to commercial real estate – double what they invested in 2009.

2) There are 6 new conduit lenders (CMBS) taking applications and actively making loan quotes.

3) The market has tri-furcated:

Tier 1 - Life insurance companies seek the highest quality deals with the best borrowers, the best products and the best locations. They will price loans accordingly (as low as 5.75%).

Tier 2 - Banks will go up and down. Bigger and/or healthier banks will “reach up” for tier 1 and compete with life insurance companies where they can. Smaller regional banks will reach down to tier 3 (and accordingly they will price higher).

Tier 3 - Finance companies and conduits who can't compete with these lenders (or who choose not to for purpose of yield reasons) will seek out deals in the third tier.

BUT CAPITAL AND PROVIDERS ARE OUT THERE AND ARE ACTIVELY FINANCING AGAIN.

4) Interest rates (see 3 tiers above) are in the 6-8% range

5) Loan-to-value (LTV) is no longer a driving force in underwriting. Lenders are uncomfortable with market fundamentals and therefore the question of the true value of commercial real estate. Lenders are underwriting against debt service coverage ratio (DSCR) and debt yield. Debt yield is the ratio of verifiable net operating income divided by the principal balance. They want a debt yield number between 10% and 12% (which is down from 12% to 17%!)

6) Apartments, office, industrial and retail are the primary property types of interest to lenders. There is some appetite for some hotels and some more appetite for medical office. There is light appetite for vacancy – in place income is key.

7) There is capital available for the borrower who needs to improve a property but doesn’t have the funds – but it will be expensive.

8) Lenders believe interest rates will be flat to lower in 2010 and as the year progresses, spreads are likely to come in. Over the next three years interest rates will rise.

9) Proceeds (see #5 above) seem to be in the 60-65% range but competitive pressure throughout the year should move life insurance companies to 70% and conduits (CMBS) to 75%. There is an outside chance that by year end a momentum play creates conduits in the 80% range. My view is this is bad for our industry but great for users of capital.

10) There seems to be no way to differentiate one capital provider from another. They think alike and seek alike. That’s where we all come in; we can help them select the right deals and right structures for the right reasons. RELATIONSHIPS WILL MATTER (OURS WITH LENDERS AND YOURS WITH REAL ESTATE PRODUCT) REALLY.

11) For lenders, adding new loans in this environment should be deemed a risk mitigants for their existing portfolios.