Tag Archives: james dumars

phx-skyline

Seeing green: Bank roles shift in real estate market

Phoenix is a city of extremes, but lenders will see some balance in the market this year. There’s more capital flowing through the system than there was a year ago and, despite a slow recovery, Phoenix investors should find it easier to get loans in the market.

James DuMars, NorthMarq Capital

James DuMars, NorthMarq Capital

“This is an exceptional time to acquire financing for real estate,” says James DuMars, managing director of NorthMarq Capital. “The majority of lenders are planning to place more than they did in 2013 and offering competitive interest rates and terms. The properties look good as income trends are up over the past couple of years as are occupancy rates. The lenders still perceive upside to many of these projects because rental rates are still below where they were at the top of the cycle. It will be a busy year.”

NorthMarq is one of the largest privately held commercial mortgage banking companies in America and represents many life insurance companies. Recent policy changes have changed how life insurance companies reserve commercial loans, which DuMars says lowers reserves set aside for each loan.

“This means real estate loans will be more attractive going forward and more profitable,” he says.

Jim Pierson, principal at Legacy Capital Advisors, recently financed a deal in less than a month’s time — an acquisition deal that would typically take 45 to 60 days to complete. What made the deal even more interesting, he says, is it was for a value-add property that was less than 50 percent leased. Finding a non-recourse loan like that would have been unavailable a year ago, he adds.

Jim Pierson, Legacy Capital Advisors

Jim Pierson, Legacy Capital Advisors

“Phoenix has higher highs and lower lows than most places … The capital markets are virtually back in full swing,” says Pierson. “Lenders are originating loans in the 75 percent loan-to-value (LTV) range for commercial projects and 80 percent LTV for multi-family. During the boom, you could get a 10-year interest-only (IO) loan. Interest-only loan periods went away in 2009, but have come back into the picture. Borrowers can get a five-year IO loan at full leverage and full term IO for lower leverage deals.”

Pierson says his clients are actively purchasing real estate with longer term interest rates due to the sense “that rates cannot stay this low for too much longer.”

“From the lender’s perspective, the Phoenix MSA is a great place to lend money again,” says DuMars. “Lots of transactions are getting done. The perception of the lending community is that we are on the upswing in the cycle. We have positive job creation, a healthy housing market (with new construction), positive net in-migration and a lower unemployment rate than the national average.”

David Lodwick, Alliance Residential

David Lodwick, Alliance Residential

Alliance Residential CFO David Lodwick says several debt and equity companies that have previously focused on larger coastal markets are coming to Phoenix.

“Financing has become more institutional in nature as Phoenix has established a stronger national brand,” Lodwick says. “There is a significant demand for high-quality apartments, and it has been ideal to be involved in financing such a strong investment sector.”

Multi-family has dominated the commercial real estate market at $2B in sales in Phoenix, making it attractive to lenders. This continues to be the case. Multi-family has seen the most active financing in new construction financing and acquisition/refinances, Pierson says, adding that the next most active sectors are retail, office and industrial.

“We compete with all asset classes for capital and are seeing that competition increase as the market recovers,” Lodwick says. “The past few years of recovery was largely focused on multi-family, which has been great, but it is also great to see other commercial asset classes rebounding, as the related job growth is a strong driver for multifamily demand.”

Office vacancy dropped from 19.5 to 18.9 percent in the 1Q and home ownership is down to 65 percent, which has pushed people into multi-family living situations. Jones Lang LaSalle Vice President of multi-family sales and leasing Charles Steele adds that Fannie Mae and Freddie Mac have started to diminish loans put into the multi-family space by 10 percent every year.

“Significant policy changes have created additional guidelines and regulations that impact construction lenders, and have increased reporting requirements,” says Lodwick.

“With great partners, we are always able to work through these changes, but it has clearly changed the perspective of lenders. The policy changes will make it tougher for sponsors who do not have a strong track record and history to obtain construction debt. In addition, the permanent financing market — which provides much of the liquidity for the multifamily asset class through government-sponsored entities such as Fannie Mae and Freddie Mac — has been subject to much discussion on housing reform. We believe the success realized by the GSE’s multifamily finance capital will provide for future expansion.”

Joe Bleyle, Enterprise Bank & Trust

Joe Bleyle, Enterprise Bank & Trust

The industry is seeing the strongest improvement in industrial and hospitality markets. Well-located, anchored retail is slowly improving, says Joe Bleyle, senior vice president of Enterprise Bank & Trust.

“After enduring a number of false starts, most of our clients are cautiously optimistic that the commercial market is recovering,” Bleyle says. “While the rebound in residential prices has certainly been a positive dynamic for the Phoenix economy, commercial developers and investors want to see that translate into stronger permit numbers and job creation.”

Job creation, Bleyle adds, will improve office vacancy in particular.

“Lender appetite is strong for multi-family and industrial projects right now and nearly any commercial building that is owner-occupied by a stable company,” Bleyle says. “Financing is fairly difficult to obtain for investor office and almost non-existent for land.”

DuMars says lending is even across the board.

“With  the full return of the CMBS market we are very busy financing retail shopping centers that were held on the sidelines by the borrowers up until now,” he says. “Many owners have decided to refinance instead of sell now that they have the ability to pay off their maturing loans.”

“We’re starting to see investor interest in more traditional suburban projects in the southeast Valley,” adds Lodwick.

This interest is garnered by the high-wage jobs announced this year — from the Apple manufacturing facility to the Intel expansion.

“You’ve seen some of the capital partners recognize that and desire to be there to take part in that cycle,” he adds.

Recent policy changes within the CMBS and life insurance industry will make it easier for both lenders to be more active in 2014, DuMars said. Life companies, for example, may see the amount of reserves they held for real estate loans cut in half.

“Real estate debt is a preferred asset class by life insurance companies and institutional investors,” says DuMars. “Fear about pending maturities between 2015 and 2017 causing defaults has greatly abated.”

Brandon Harrington, Walker and Dunlop

Brandon Harrington, Walker & Dunlop

Rates are going to stay low in 2014 as CMBS becomes more aggressive and more banks are willing to lend, predicts Walker & Dunlop’s Brandon Harrington.

“I think 2014 is going to be a great year for borrowers — at least for the first quarter, potentially lower refinances and more deals,” he says.

Though life companies and CMBS can expect a better year in 2014, their struggles have changed the climate for bank financing.

The low cost of funds and weak demand for construction and bridge loans has made the industry more competitive among banks for term loans, says Bleyle.

“During the Great Recession, in 2009 and 2010, there was so little money out there that real estate in our space could be bought very attractively,” says STORE Capital CEO Chris Volk, who owns $2B in real estate and rents to 160 companies in 43 states. “In the wake of the Great Recession, there’s a gravitation to tenant quality. There’s a lot of activity that goes on in that space. In our spaces, the individual dollars, we gravitate toward smaller properties.”

“There’s a lot of capital, it’s just a matter of finding good deals to invest in,” says Harrington.

waterstone

NorthMarq finances $13.74M acquisition in Mesa

Luke Donahue, senior director of NorthMarq Capital’s Phoenix office funded the $13,744,000 acquisition loan of Waterstone Apartments, a 269 unit multifamily property located in Mesa, AZ. The transaction was funded by NorthMarq’s through their FHLMC seller/servicer platform.

“NorthMarq was pleased to have the opportunity to fund another loan for this good repeat client of our Phoenix office,” said Donahue.

Future of Finance - AZRE Magazine September/October 2010

Lenders Experience An Increase In Loan Requests

Depending on whom you talk to, it appears the financing freeze in commercial real estate is starting to thaw a bit. Part of that thawing process, according to Bruce Francis, vice chairman of CB Richard Ellis Capital Markets, may be that there has been an increase in the number of loan requests, and that activity alone is making the industry feel the situation is generally getting better.

With that said, lenders still are looking hard at every financing request. They have gone back to the basic underwriting principals that were used in the years prior to the “go-go” times leading up to the real estate bust.

Francis says these are the questions lenders want answers to:

- Who is the sponsor?
- How long have they been in business?
- Have they been through a downturn in the past and what kind of staying power do they have?
- What is the borrower’s exposure to real estate?
- Where is the property located and how healthy is this market and submarket?
- Are the property’s rents in line with the market?
- What is the relationship of this property relative to competing properties (age, improvements, quality, utility, etc.)?
- What is the health of its tenants and what industries are they in?

“It is not so much that one property type (office, industrial, retail) is favored over another,” says Francis, adding that each of the property types has its challenges.

“Rather, it really comes down to the basic underwriting criteria that we all have learned and used for many years that determines if a lender will have interest in offering financing on a property today.”

James DuMars, senior vice president and managing director for NorthMarq Capital in Phoenix, says permanent financing is happening across all major sectors. Life companies and agency lenders (Freddie Mac and Fannie Mae), he says, are by far the most active lenders in the market. CMBS are attempting to gear up again, with several pools scheduled to hit the market before the end of the year.

“We anticipate that the CMBS market will continue to improve and eventually this will be another good source for investors seeking permanent debt,” DuMars says. “But for now, I am not aware of any recent CMBS loan closings in Phoenix.”

Multi-family forecast

Multi-family owners have a significant advantage over owners of all other types of commercial real estate, DuMars explains, as they can access government-guaranteed debt from Freddie Mac and Fannie Mae.

“As I understand it,” he says, “the investors who buy this debt on the secondary market are rewarded with higher yields than standard U.S. Treasuries, but receive the government’s guaranty on the bonds. Consequently, recent Freddie Mac securitizations have reportedly been very successful as fund managers snap up the paper. Today, rates for multi-family are in the low 5% range, fixed for 10 years and include a 30-year amortization.”

Richard Rosenberg, managing principal for DPFG, agrees.

“The only segment of the commercial real estate market where lending may have loosened up recently is that involving multi-family,” he says. “This is principally due to the availability of agency funds (Fannie Mae, Freddie Mac) to backstop the financing provided.”

Industrial forecast

Institutional lenders (life insurance companies) are very interested in the Phoenix industrial market, DuMars says.

“I am currently processing several loans on big box and light industrial warehouses,” he adds. “The lenders focus on loan per square foot, and want to be in infill locations and lend on properties that have multiple tenants so as to limit the downside if a tenant vacates.”

Retail forecast

“We’re processing loans on retail with life companies,” DuMars says. “Expect lower loan-to-values in the 55% range, and expect the lenders to require a grocery anchor in the income stream with a long-term lease.

“The problem with many retail centers today is you may have most of your rent roll in, say, the $25 per SF range, but recently the landlord did a couple deals in the mid-teens. The lender sees this and gets nervous that all rents will eventually revert to the new lower figure.

“It’s easier for a lender to make a retail loan in Chicago vs. Phoenix, so they have to be compelled to come here. They will want strong sponsors, a significant equity contribution and will ask lots of questions about the rent roll and tenants. If they like what they hear, then they will lend.”

Office forecast

This is a tough product type today, DuMars says. The job loss in Phoenix and the 27% Valley wide office vacancy rate have deterred many permanent lenders from wanting to pursue offices in Phoenix.

“However, we are quoting office loans,” DuMars says. “Underwriting an office building today will include marking rents to market or blending them to market and using a market vacancy rate. Again, expect a loan to purchase price of say 55% and a rate of approximately 6.5%. Expect lenders to be in the sub $75 per SF range for this product type when it comes to loan dollars.”

For more information:
northmarq.com
cbre.com
dpfg.com

 AZRE September/October 2010