Tuesday, March 17, 2009

Market Report for Monday, March 16, 2009

Welcome to the inaugural issue (Volume 1, Issue 1) of the Sperry Van Ness | Better Capital Partners-Capital Market and Interest Rate Newsletter. Each week we will provide our readers with an overview of the following: National commercial real estate interest rates and underwriting for the major property types, marketplace conditions and how they affect various property types nationwide, insightful capital market analysis with a personal viewpoint and focused subject matter in every newsletter. You will notice that national interest rates located on page (1) of this newsletter are down into two categories (multi-family and commercial) and provide a sample of our national, regional and local commercial real estate financing programs. These rates are derived from portfolio lenders, life companies, credit unions, agency and exclusive national correspondent relationships. Many of our lenders and exclusive correspondent relationships have the ability to lower these interest rates by 15-30 basis points if a borrower is interested in establishing a business or personal banking relationship.

Let's begin by taking a closer look at the major commercial real estate property types: multi-family, office, industrial, and retail.

Major Property Types...

Multi-Family: Non-recourse adjustable financing programs are still aggressively priced starting at 4.34%. Loan-tovalues (LTV's) can underwrite as high as 80% and underwriting debt service coverage ratios (DSCR) can go as low as a 1.00 breakeven.

Non-recourse fixed 5, 7 and 10 year terms are starting at 5.22%. Loan-tovalues (LTV's) are as high as 80% and debt service coverage ratios (DSCR) are starting at 1.20 for our correspondent small loan permanent- programs and 1.25 for our regular permanent programs.

Please note that Sperry Van Ness | Better Capital Partners offers a Small Loan correspondent program with a fast track option. This program does not require tax returns and can close within 45 days. We also offer nonrecourse multi-family financing programs that do not have any origination fees other than third party expenses (appraisal, environmental etc.) and closing costs.

We are also seeing very aggressive permanent and development underwriting in the senior housing, independent and assisted living sectors. Nonrecourse construction lending for multifamily and healthcare construction with permanent take-out loans is available nationwide for qualified developers.

Be aware that lender underwriting exceptions used to be very common and are quickly disappearing unless a borrower is extremely strong, has a lot of experience owning and possibly managing this property type along with a verifiable historical track record.

Office: Office vacancies are increasing nationwide as large and small businesses shut down or scale back their operating expenses. However, we are starting to see increased acquisition and refinance activity for this property type. Multitenant office properties are the most appealing to lenders, as long as tenant profit and loss statements are available for review and the lease terms extend at least 2 years beyond the loan term for a permanent loan program.

Interest rates are ranging from a low of 5.75% to a high of 7% for a 10 year term. On average a 5 year fixed is around 6.25-6.50% and may be lower. National lenders are offering the lowest fixed, rates for shorter term loans. Two (2) and three (3) year fixed rates have become extremely popular onceagain. Please note that many of these short-term, fixed, low interest rate programs are swap programs that require full recourse with warm body guarantees. Additionally, many lenders are beginning to require borrowers to obtain some sort of rate protection such as a cap or collar, due to the market volatility.

Industrial: The industrial sector has seen tremendous growth over the last decade and lenders still feel it is a favored and stable product type, directly behind multi-family.

You should note that conventional loan-to-values (LTV's) can underwrite as high as 80% and Small Business Administration (SBA) programs can underwrite as high as 90%.

Nationwide, fixed 5, 7 and 10 year terms are starting at 5.75%-6% for permanent owner-user programs and 6.25% to 6.75% for investment properties with 25 and 30 year amortization.

Although the industrial property sector is appealing, it is currently being scrutinized due to low port activity and current economic conditions. Additionally, the Q4 2008 Baird Industrial Distribution survey confirmed that the industrial sector is in a recession. Feedback from over 300 independent distributors confirmed this statement based on their own Q4 2008 financial statements. On a positive note, we are seeing capitalization rates (cap rates) adjust to marketplace conditions.

In summary, industrial properties still appear to be a solid investment vehicle, especially for owner-users. You should note that the new Obama economic bill may provide some Small Business Administration (SBA) lending relief. This would be accomplished by reducing the high fees charged by many of the current SBA programs.

Retail: Retail properties can still be aggressively financed. However, many lenders are beginning to scrutinize tenants and leases. Tenant sales are lagging, national chain stores are cutting expansion plans, shopping center owners are performing fewer transactions and retail developments are taking longer to obtain financing.

In general, it is becoming increasing difficult to fund due to the ever increasing retailer bankruptcy's (BK's) and the reduction in consumer spending. Some lenders are adding an additional 15- 25bps to retail interest rates, some are requiring lender origination fees, and some will not even consider financing retail at all. One of the most difficult properties to finance these days is the single tenant NNN restaurant. Some of the biggest lenders in the nation like GE are out of the market or are offering unfavorable interest rates, amortizations and terms.

Vacancies are increasing every week in the major metros and the burbs. It's not only the mom and pops that are getting hurt out there; it's the national credit tenants as well. Look for lenders to discount second floor retail space or use market rents to underwrite space containing tenants that are paying above market rents ex. Starbucks.

Interest rates for retail are still ranging in the 6% to 7% range with 25 and 30 year amortizations and debt service coverage ratios (DSCR's) in the 1.20- 1.35+ range.

Capital Markets National Lenders

In February 2009, Jones Lang LaSalle surveyed 50 national lenders during the Mortgage Bankers Association's Commercial Real Estate Finance/Multifamily Housing Convention and Expo in San Diego, California. The goal was to obtain a realistic overview on lender loan production figures for 2009. These national lenders included a mix of life insurance companies, commercial mortgage- backed securities dealers (CMBS), private lenders, commercial banks and government agencies. The published findings were very interesting. 53% expect loan production to increase in 2009 versus 2008. However, those who expected increased lending were private equity lenders and government agencies. These groups estimated that loan production would increase by as much as 20% (+/-). In a classic Catch 22, the surveyed banks and life companies all expected a volume decrease in 2009 ranging from 30 to 80 percent. Due to the state of the capital markets, the lack of Commercial Mortgage-Backed Securities (CMBS), and the lack of confidence, many lenders are unable to originate new loans.

Based on the survey results, 80% of the lenders predict that 40% of their loan allocations will be used to refinance maturing loans within their existing portfolios. Another 13 percent expect refinancing of maturities to make up to 80 or even 100 percent of their portfolios.

Although last year's survey predicted that the financial crisis would end or ease in 2009, most feel that 2011 is now the magic number. The lending community feels that financial institutions do currently have limited lending capabilities. However, to turn the financial crisis around some sort of securitized debt needs to re-emerge. Many question whether the government will step in to enable the second coming of the CMBS marketplace. According to the report, 67 percent of nationwide lenders to the commercial real estate sector expect some sort of securitized lending to return to the capital markets by 2011 or beyond. A further breakdown of those surveyed indicates 22 percent predict securitized lending to return to the markets in 2010, while an additional 11 percent said securitized lending will never return to the capital markets.

Lenders responding to this survey predict that when securitized lending appears on the horizon it will take a much different form with more traditional, conservative underwriting, fewer tranches, more disclosure and a structure where originators must hold the first loss piece. Respondents also commented that issuers retaining the b-piece may appear in the near future.

The Jones Lang LaSalle survey also indicated that, as borrowers seek to avoid default, 59 percent of all different lending types will provide forbearance from six to 12 months. A further 18 percent would extend between one and six months, and nearly a quarter (24 percent) would extend beyond a year. Those extensions will not come easily, as 79 percent of lenders will require different terms, such as principal pay-downs, to restructure maturing loans.

"The lending community doesn't want to inherit assets through foreclosure, as most lenders surveyed are willing to provide some form of forbearance, though the level varies case by case."

Sperry Van Ness | Better Capital Partners offer Sperry Van Ness advisors and their nationwide clients a full capital stack which includes debt, equity and joint ventures for all forms of commercial real estate properties nationwide. The firm's services include: Permanent, Bridge, Mezzanine, Construction, and customized financing for acquisition and refinance. For a soft or hard quote, or to refer a client, please visit our corporate website at or contact Eric Better for further information.

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