James Dumars: Renewed Optimism in the Air at 2011 CREF Conference

James DuMars

With all the talk of increased allocations by lenders at the conference, it seems like the credit crisis is fading into the abyss as lenders speak of anticipating extreme competition this year to get their money out.  This year the conference was held in San Diego and representatives from 25 CMBS platforms, 50 life insurance companies, agencies, FHA and various bridge, mezzanine lenders and hedge funds attended.  NorthMarq ran two suites and had meetings on the half hour with each lender.  We also hosted a cocktail party for 150 lender representatives.  The overwhelming message was “we have money, lots of it and we want to get it out.”  Nearly every life insurance company reported an increased allocation for mortgages.  

Sentiment
The cocktail parties were all full, lots of smiling faces and several life company lenders seeking trophy deals and offering a 150-spread to capture them.  However, because of renewed competition on the immediate horizon, other life co. lenders spoke of creativity, smaller loans, flex prepay etc.  One lender spoke about how they dropped their spreads 25-basis points that afternoon.  The gist: Everyone accumulated cash for two years and now they need to put it to work.  After three years of the doldrums, it was a refreshing conference, and I believe there’s renewed momentum for a much more competitive lending environment.  Don’t expect a recovery to look like the peak years, but instead a pragmatic environment where lenders will do their best to get their hands around a deal and see if they can make it work.   

Lender Feedback 

• CMBS – 25 platforms looking for loans.   If I were a borrower, I would consider the platform that is backed by a large low-cost balance sheet and go with a mortgage banker that delivers volume to the platform.  These groups are looking to reestablish credibility and have assigned underwriting teams to NorthMarq since we can deliver the volume.  Be realistic, this is CMBS 2.0.  Expect springing or soft lockboxes, reserves, carve-outs, etc.    Interest Rates – 6.15% – 6.35% (10-Year Term).
• Life Companies – Some are talking low rate for trophy assets while others are speaking of higher leverage, smaller loan size and listening to the story and in some cases offering structure.    All seem to acknowledge their peers, as well as CMBS platforms, are going to be major competition for them in the very near future.  Interest Rates – 5.25% – 6.35% (10-Year Term).
• Agencies (Freddie & Fannie) – These two organizations originated over $30 Billion in multifamily loans last year.  Barring meaningful reform, they will continue to dominate the multifamily lending landscape.  They have the government behind their paper which gives them a huge advantage in terms of cost of funds and liquidity.  Interest Rates – 5.20% – 6.10% (10-Year Term).
• Mezzanine Lenders- Look for these groups to offer gap money to fill the shortfall between the first mortgage and what the borrower needs to either pay off his existing debt or acquire a property.  These groups will lend up to 80-85% loan to value with rates in the 10-15 percent range.  Even a couple life companies mentioned mezzanine or B-notes behind their first as a way to capture business. 
• Hedge/Opportunity Funds – Seeking experienced sponsors to partner up with.  90/10 Equity ratio and seeking to double their investment in 5 years. Most want cash flowing assets with upside. The minimum investment of these groups is $5MM to $10MM.  
• Bridge Lenders – These are nonrecourse loans. Rates are in the mid 6% range to 7.25 percent range with terms of 2-3 years, interest only. Offering additional advancements for good news (leasing).
  – Actively seeking opportunities for placing purchase money loans on distressed assets
  – Loan size $10 million and up
  – Will finance vacant buildings
  – Leverage is in the 55%-65 percent range depending on occupancy
  – Focusing on core locations and Class A assets
• Interest Rates – U.S. Treasury Rates were rising during the entire conference.  At the same time, lenders made it clear they have room in their spreads to compensate for this.  After all, historical mortgage spreads are closer to 150 so even if the U.S. Treasury Yield went to 4.50 percent and spreads compressed to 150 for the run of the mill opportunity we’re still at 6 percent.  Not much anxiety about rising treasury yields.  Today, spreads are in the 225 to 275 range for the average opportunity and drop as low as 150 for the low-leverage trophy opportunity.

Summary
In summary, lots of cash is ready to be loaned and CMBS is back but now known as 2.0, as the programs have been changed to restore confidence in the product. Expect competition to eventually lead to higher loan to values, creativity, and an enlarging of the “box” lenders use to pursue opportunities.  Don’t expect lenders to go back to the market peak behaviors anytime soon.  Furthermore, Dodd-Frank reportedly requires CMBS originators to hold on to a portion of the deal.  All lenders will do more due diligence and will continue to mark rents or blend them to market.  

James DuMars, managing director/senior vice president for NorthMarq Capital’s office in Phoenix, has more than 20 years of experience resolving complex commercial financing issues. Contact James at (602) 508-2206 or [email protected]