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 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.”
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.”
“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.”
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.”