Shaking Off the Summertime Blues

By Elliot Throne,
Director, Holliday Fenoglio Fowler L.P.

Summertime is supposed to be about enjoying some relaxation and recharging from the first half of the year. The rejuvenation of the commercial real estate market has brought a much needed run of new acquisitions, record-setting financings and a general sense that the market is making up for lost time from the previous few years. If, by chance, you have been buried in that great summer novel, you might have missed the last few weeks and the crazy roller-coaster ride we have all been on. It’s not easy to digest the recent events but we must use them as a guide for how the rest of 2011 will unfold in our industry. You can either get bogged down in the past or stay focused on the fact that US Treasury Rates are still near their all-time lows and unbelievably attractive financing is still available for many types of deals.

If we go back only a few months to January 1 of this year, we can remember with fondness the mountain of equity ready to be invested in new deals. Debt capital was even more plentiful as the CMBS market was shaking off the rust and gaining momentum, life companies announced huge allocations and the agencies were as eager to lend as ever. Deals were getting done and anyone who had been sitting on the sidelines became desperate to get back in the game.

Then came August.  The month started with the Budget Control Act of 2011 being signed into law on August 2, ending, for the short term, the debt-ceiling-crisis. Unfortunately, three days later Standard & Poor’s credit rating agency downgraded the long-term credit rating of the United States government for the first time in its history, from AAA to AA+. This would not be the only spotlight S&P would find itself in as their decision to withdraw their rating of Goldman Sachs & Citigroup’s $1.5 billion securitization caused major waves in the CMBS market.

With the revival of the CMBS market, Borrowers were finding great loan terms that were helping deliver cash-on-cash returns that could offset concerns for potential moderate future price appreciation. Multifamily borrowers had been cashing in on cheap debt from both Freddie Mac and Fannie Mae driving the multifamily market into a deal making machine, so the broader commercial sector was happy to join the party. But just when the party was getting a good vibe, the music stopped.

In February, Wells Fargo and RBS priced a $1.3 billion securitization with AAA 10-year notes priced at a recent low of +100 points over swaps. This helped inspire others to get deals to the market quickly. But by the time Morgan Stanley and Bank of America priced their June securitization, spreads were up to +148, and then Wells Fargo and RBS priced their second offering of the year in July at +170. Even with a higher subordination level (30 percent vs. Wells/RBS’s deal at 16.9 percent), Deutsche Bank and UBS priced their August deal at a spread of +200 over swaps. While the CMBS market’s year-to-date issuances of $23 billion was putting it on track to reach its anticipated $40 billion goal, it seems now that everything is on hold until the six deals totaling an estimated $6.4 billion come to market in September and early October. All eyes are watching how these touchstone deals get priced.

The numerous volatile events of August, including the concerns over the U.S. and Europe’s debt, rating-agency questions and the worst month for stocks in more than a year, all seemed to cause more damage than the unexpected 5.8 magnitude earthquake that further shook the east coast on August 25.

The summer is ending, kids are back in school, and we have to wade past the flood of the economic events in which we have recently been submersed.  As the summer (and Hurricane Irene’s floodwaters) subsides, we need to stay focused on the fact that Treasury rates are still near their all-time lows as the 10-year came down in August from February’s recent high of 3.74 percent to match December 2008’s low of 2.07 percent. Life companies may be a bit more selective today as they are rapidly approaching their full anticipated annual allocation, but they are still offering all in rates in the low 3 percent range for low-leverage 5-year fixed rate deals. It may not be as enticing as what the agencies are doing on full leverage multifamily deals (80 percent LTV, 1.25x DCRs pricing near 4 percent for 7 years fixed) as most deals need higher leverage, but it’s comforting knowing the financing machine has not stopped.

Hopefully the Labor Day holiday provided us all with an extra day of rest before what will surely be a busy race to the close of the year. Even with an overwhelming mountain of news and data to digest and brace for, there are most definitely bright spots and opportunities to take advantage of in this market. Lenders will certainly be a bit more selective going forward, but good sponsors and the right deals will enjoy access to plenty of capital.  As the sun sets on the summer of 2011, today’s exceptionally low interest rates will ultimately feel like a day at the beach for borrowers able to capture their glow for a 7- or 10-year term. May the sand stay on the beach where it belongs, far away from the financing gears of the commercial real estate industry.