Deals Starting to Happen as Capital Returns to Market
NREI – With approximately $700 billion worth of loans coming due on distressed properties over the next four years, transaction activity in commercial real estate is picking up this year, albeit slowly, and is expected to intensify in 2011 and 2012.
Investment capital that had been waiting on the sidelines from mid-2008 and the first quarter of this year is getting back into the game as confidence returns in the form of the market’s stabilizing fundamentals.
“For example, life insurance companies, a traditional source of capital, are back in the market,” says Craig Butchenhart, the president and director of capital services for NorthMarq Capital, a national firm that offers commercial real estate investment banking. “And as more traditional sources come back to the market, there will be available capital to access.”
Many of the loans originated in 2006 and 2007 — the height of the commercial real estate boom — come due in 2011 and 2012. Morningstar, an investment resource specializing in fund investing, believes that will create an environment that fosters asset sales more aggressively than in 2010. To date, 2010 has produced better opportunities for refinancing than outright asset sales.
“Most institutions that we deal with believe that values are fairly stable now,” Butchenhart says. “Confidence that fundamentals are stabilizing and not deteriorating further is bringing these institutions back to the market.”
Of course, available capital is just one aspect of the picture. Financial institutions are lending again, but underwriting requirements remain conservative as stronger cash flows continue to be required as well as longer leases, and the ability of the borrower to pay back its loan.
One surprise that may generate more transaction activity in the near future is the return of the commercial mortgage-backed securities (CMBS) market. Many analysts hadn’t expected the CMBS market to turn around this early after it was considered dead for nearly two years during the recession. Since then, few CMBS-backed deals have occurred as investors and issuers, aware of the creditworthiness risks involved, painstakingly do their homework on these securities.
In June, JP Morgan Chase Commercial Mortgage Securities Corp. issued a $716.3 million CMBS-backed bond, primarily consisting of retail properties, in the second such deal this year.
“There’s a little life in the CMBS market,” Butchenhart says.
There’s significant maturity in the CMBS loan pipeline, and most of those maturing CMBS loans are being refinanced due to low interest rates as they are maturing at rates higher than the current interest rates. If they can’t be refinanced, the CMBS loans are being modified or extended for a period of time as the borrowers await capital.
“As long as those properties have maintained a reasonable amount of leasing, loans can be refinanced,” Butchenhart says.
