2013 Midyear Financing Report
Lenders strive to minimize risk and maximize yield.
abundance of available capital, the first half of 2013 showed plenty of healthy
competition to finance commercial real estate. Will this trend continue?
rising interest rates create significant market turmoil, projections from the
Mortgage Bankers Association are optimistic, forecasting commercial mortgage
originations growing by 11 percent in 2013, to $254 billion by year’s end. A
look at current lenders’ plans for the rest of the year fills in the details.
market reveals a new landscape, replete with opportunistic borrowers, new
government regulations, and a strong lender emphasis on limiting risk and
Last year saw a 48
percentincrease in commercial mortgage-backed securities issuances from
2011, with 2013 expected to rise another 40 to 50 percent to $55 billion. While
market watchers predict as much as $90 billion this year, recent market
volatility has led some to drop their estimates by as much as $15 billion. CMBS
origination already hit $19 billion in first quarter 2013, about four times the
volume of last year’s first quarter. Ten-year terms offered at 70 to 75 percent
loan to value are priced out today from 4.3 to 5.0 percent.
CMBS lenders are concentrating on a project’s debt yield when making funding
decisions. Debt yield is the net operating income divided by the proposed loan
amount.To lenders, this figure represents their cash-on-cash return on
money lent if the commercial property is foreclosed immediately after funding.
A target 9 to 10 percent debt yield is currently standard, but these numbers
are dropping in the face of fierce competition. Top CMBS players
includeDeutsche Bank, J.P. Morgan, Wells Fargo, Goldman Sachs, UBS, and
Bank of America.
Companies. Life insurance companies closed 18.1
percent of 2012’s commercial real estate loans, according to Marcus &
Millichap and Real Capital Analytics reports, and they are expected to increase
commercial real estate allocations by 15 percent this year. Life companies
offer an average LTV of 65 percent and 10-year fixed pricing in the high 3
percent to low 4 percent range. While maintaining their conservative
reputation, many life companies such as StanCorp Financial Group, Symetra
Financial, and Ohio National Financial Services are looking to pick up market
share by offering smaller loan amounts and becoming more aggressive on overall
Post-credit crisis, the banking
community has remained a small group, with local and regional survivors
consolidating in part to comply with new regulations. These new rules require
larger capital reserves, which may affect the amount of commercial real estate
assets banks will choose to hold. National, international, and regional banks
accounted for roughly 25.5 percent of all commercial real estate loans last
year, according to Marcus & Millichap and RCA.
an increased appetite for commercial real estate loans, banks remain conservative
with underwriting criteria: Often, they are more eager for banking
relationships and the sale of ancillary services than for stand-alone
commercial real estate loan transactions. Some banks now offer nonrecourse
financing to strong borrowers, while most stick with three- to five-year fixed
terms in anticipation of rising interest rates.
Enterprises. Despite huge increases in multifamily
acquisitions and record low interest rates, the Federal Housing Finance
Agency’s 2013 strategic plan decreases Fannie Mae and Freddie Mac lending.
Under the new directive, Fannie and Freddie’s combined multifamily lending will
shrink from $63.3 billion in 2012to $56.9 billion in 2013.
this news may have little impact on existing GSE borrowers, other lenders may
see an opportunity to expand market share in the healthy multifamily sector,
particularly among new borrowers in secondary and tertiary markets. Fannie Mae
lenders such as Arbor Commercial Mortgage, Centerline Capital Group, and Greystone
Servicing Corp. offer 10-year loans to 80 percent LTV in the low 4 percent
range starting at $1 million.
SBA is expected to remain on pace with 2012 originations this year, with only a
slight dip from 2011’s numbers — considered a banner year due to a number of
stimulus efforts that reduced fees,expanded loan guarantees, and raised
loan amounts. The SBA’s 504 program offers lenders, particularly portfolio
lenders, the opportunity to make 50 percent leverage loans, which helps to
maintain a low weighted average LTV on their overall portfolio. These first
trust deeds, combined with a 40 percent SBA second trust deed, currently a
20-year term fixed at 4.16 percent, offer borrowers a combined LTV of 90
percent with a low blended rate. The SBA’s 7(a) program enables lenders to
provide small businesses a 90 percent leveraged first trust deed on real estate
up to $5 million with an SBA guarantee to 75 percent of the loan balance. This
guarantee is particularly important, as many lenders are selling the guaranteed
portions on the secondary market at tremendous premiums, which replenishes the
lender’s liquidity, reduces their exposure, and encourages even more
Loans. Many lenders are entering the bridge
financing market with aggressive terms for empty buildings, unseasoned
properties, discounted note payoffs, and buildings needing funds for tenant
improvements, leasing commissions, and minor or major rehabs. Terms range from
two to three years at 65 to 75 percent LTV, with rates at 5 to 6 percent with
local banks and 7 to 10 percent with bridge and private lenders. While Fannie
Mae lenders like Walker & Dunlop, Wells Fargo, and Berkadia Commercial
Mortgage offer aggressive bridge loans for larger balance loans to win the
take-out financing, non-bank entrants such as ReadyCap Commercial, A10 Capital,
and Emerald Creek Capital are aggressively originating loans of $10 million and
less, Crittenden reports.
financing outlook for the remainder of the year is somewhat mixed. While there
is significant capital in the market for the right projects in the right
locations, rising interest rates are a wild card, and credit is still tight for
those projects that are too small, too weak, or too far away to get the
attention of the big players. New entrants should address some of the projects
that are currently struggling to find financing over the coming months. If 2012
(and history) is an indicator, financing activity is likely to surge by the end
Elizabeth Braman, CCIM, is
chief production officer at ReadyCap Commercial in Irvine, Calif. Contact her