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Lending the way: A good buy is hard to find

In 2013, NorthMarq Capital arranged $10.1B in loans. In 2014, that number rose 20 percent to $12.6B, reports Managing Director James Dumars.

James Dumars Managing director NorthMarq Capital

That doesn’t mean the market isn’t competitive, notes DuMars, who locked in a low-leverage $25M loan at 3.64 percent for 10 years. He is also financing a $56M class-A shopping center purchase at a rate around 4 percent with full-term interest only and 75 percent loan-to-purchase price.

“Lenders are seeking good, quality real estate with quality sponsors,” says DuMars. “They will get aggressive on rate and terms to win the business. I doubt any lender would say 2015 will be any less competitive than 2014 has been.”

Andrew Van Tuyle Chief of aquisitions BH Properties

Andrew Van Tuyle
Chief of aquisitions
BH Properties

A good buy exists, but is hard to find, says BH Properties Chief of Acquisitions.

“I’m very curious to see the business plan that buyers have when buying some of these apartment deals at record numbers and incorporating gimmicks into their debt like high leverage and long-term interest only,” he says. BH Properties pays cash for its assets, which he calls an advantage as it is not reliant on debt markets and timing, and wants to leverage more than $100M in acquisitions in 2015.

CMBS lenders are on track to originate $100B, notes DuMars.

“My banker friends tell me that they are losing many loans in their portfolios to CMBS,” he says. “I expect this to continue in 2015. There is high demand for the paper and delinquency rates are low.”

Don Garner                Executive vice president Alliance Bank of Arizona

More banks are re-entering the real estate sector, says Alliance Bank of Arizona Executive Vice President Don Garner.

“The liquid lending market benefits borrowers and brings about short-term memories as to the last real estate cycle,” adds Garner. “Banks tend to be like lemmings and follow one another, to the extent that often times structure and margins are the No. 1 things that suffer.”

The 10-year treasury yield dropped, despite an overwhelming sentiment of rates reaching 4 percent in 2014. Instead, they’re hovering around 2 percent as of press time. NorthMarq’s DuMars is reluctant to offer a forecast on treasury rate, but suggests the risk-adverse investor refinance.

“Spread movements typically adversely correspond to the change in the UST,” says DuMars. “Historically, I’ve seen spreads compress due to competition between lenders. There is room for spreads to compress and there is a lot of competition to get money out. My guess is that spreads may narrow.”

Van Tuyle says lenders are not pricing the appropriate risk into today’s deals.

“I believe there is a real refinance risk for many of the loans that are being made because we could see a real rise in interest rates without a correlative inflationary pressure on rents,” he says. “Without amortization or a long-term fixed rate, many of those deals could be difficult to refinance.”

In October, DuMars observes, when the 10-year note’s yield plummeted by 1.8 percent (180 basis points), “many lenders retreated to the sidelines.”

“Lenders like stable and calm,” says DuMars. “Volatility shakes them up. During these few days, some life companies instituted rate floors and many CMBS lenders refused to quote spreads. As soon as the 10-year stabilized, everything went back to normal.”

Alliance’s Garner predicts the Federal Reserve’s tapering of its quantitative easing process (which was announced in late 2013) will lead to an increase in rates. BH Properties’ Van Tuyle agrees.

“My instincts say [rates] have to rise, to the point where I think we will see a 3+ percent 10-year Treasury in 2015. This has to be quantified to say that if there is a major market correction in the Dow Jones, there likely will be a flight to bonds, which actually could bring the yield lower in the short term and delay the inevitable, which I believe is an increase in 10-year treasuries to 3.25 percent.”

The Phoenix Metro market’s hot spots are predictable with class-A and -B multifamily properties topping Van Tuyle’s list. Industrial is stable, he adds, noting that Phoenix’s retail situation has a unique challenge to overcome.

“Retail is still tricky because Phoenix was so overbuilt,” says Van Tuyle. “Often, there are two shopping centers at the same intersection and it is a case of the haves and have nots. Once center will be stabilized at 95 percent occupancy, and the other will have under 30 percent occupancy. Location, access and parking are keys to making a retail deal work, and making sure you’re properly represented in the brokerage community is also critical.”

“Everyone is gearing up,” says DuMars. “All sectors look good for Phoenix. We have lenders seeking all of the major property types.”


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.


NorthMarq Capital Arranges $4.275M In Combined Mortgages For 2 Chandler Properties

James DuMars, senior vice president and managing director of NorthMarq Capital’s Phoenix Regional office, arranged combined first mortgage refinancing of $4.275M for Paseo Del Oro and Dobson Plaza (above photo) in Chandler.

Combined these two properties contain a total of 123,480 SF of retail space.

Paseo Del Oro was financed at $2.975M and contains 96,892 SF of anchored retail space. The major tenant at the site is LA Fitness (Dark). Dobson Plaza was financed at $1.3M and contains 26,588 SF retail space.

Financing was based on a 10-year term and a 25-year amortization schedule and was arranged for the borrower by NorthMarq through its correspondent relationship with a life insurance company lender.


NorthMarq Capital - Atrium

NorthMarq Capital Arranges $6M Mortgage For Scottsdale Atrium

Shari Stults, vice president of the NorthMarq Capital Phoenix Regional office, arranged first mortgage refinancing of $6M for Scottsdale Atrium Professional Building, 14300 N. Northsight Blvd., in Scottsdale.

The two-story, 71,516 SF multi-tenant office building was designed to be and is occupied by small to medium tenants. The average tenant size is 1,300 SF. Financing was based on a 2-year interest-only term and was arranged for the borrower by NorthMarq Capital through its relationship with a correspondent life insurance lender.

“The borrowers were very pleased that our correspondent life insurance company structured a flexible, non-recourse, interest-only loan,” Stults said. “Everyone worked together to meet critical deadlines as well, resulting in a successful loan closing on a tremendous asset.”

NorthMarq Capital, the largest privately held commercial real estate financial intermediary in the U.S, provides mortgage banking and commercial loan servicing in 33 offices across the U.S.

For more information on NorthMarq Capital, please visit northmarq.com.

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:

 AZRE September/October 2010