Mid Atlantic Real Estate Journal — Commercial Office Spotlight — March 30 - April 12, 2012 — 3B



By Mark Fitzgerald, High Associates Ltd. “Water, water everywhere, nor not a drop to drink.” Current status of the commercial real estate debt rowers with core assets in first-tier gateway cities.

Th o s e f a - mous words b y S amu - e l Ta y l o r Coleridge, in The Rime of the Ancient M a r i n e r , ring true to- day for many “W

ater, water every- where, nor not a drop to drink.”

ization rates have improved in the last year across most asset classes; yet most banks continue to use stricter under- writing standards in evaluat- ing new loans. According to CBRE Capital Market Lender Forum, the average loan-to- values have decreased from 75 percent in 2007 to 62 per- cent in 2011, with underwrit- ing based on current in-place lease terms rather then overly aggressive lease-up and rent growth assumptions. It is anticipated that lending by banks will pick up slightly in 2012 for creditworthy bor-

the financial crisis relatively unhurt. Multi-family/apart- ment assets are the most sought after property type, as market fundamentals have improved in most markets to pre-recessionary levels. In most markets occupancy has returned to 95 percent and landlords have once again seen the ability to raise rents. While the future of GSEs — Government Sponsored Entities — remain uncertain, Freddie Mac and Fannie Mae continue to play a dominate role in multi-family lending. While there is some opti-

mism that 2012 will be better then 2011, liquidity will not return to the market until the economy begins to show signs of a full recovery and the CMBS — Commercial Mortgage Backed Securi- ties — market re-emerges under a stronger CMBS 2.0 model. During 2005-2007, the CMBS market averaged approximately $200 billion in loan originations annually, peaking at nearly $300 billion in 2007. New loan origina- tions were non existent in 2008-2009. During 2010 there continued on page 20B

So who is lending now and for what type of proper- ties? For those fortunate high- quality sponsors with first- class core assets, stable cash flows, located in major mar- kets, capital is available at historically low long-term rates. Life companies con- tinue to dominate the mar- ket, representing nearly 85 percent of all refinancing transactions completed in 2011, as they are flush with cash and have emerged from

Mark Fitzgerald

real estate borrowers as the capital markets are awash with cash, but precious little capital is flowing to debt- starved borrowers. Fr om De c embe r 2007 through June 2009, the Unit- ed States economy suffered through the worst recession since the Great Depression, a recession brought on by a financial crisis with origins from the explosion of sub- prime mortgages. While the economy has “officially” been out of the recession for 30 months, the financial institu- tions supplying debt capital to the markets have been reti- cent to turn on the spigot and start capital flowing again in any meaningful way. Why the low-flow of debt? During the past two years, many large money center and regional banks took advan- tage of “free” money from the Federal Reserve to increase their profits and shore up their balance sheets — play- ing the game of “extend and pretend,” hoping and waiting for the economic recovery to bail them out of underwater loans. Unfortunately time is running out. Between 2011 and 2015 nearly $1.8 trillion of loans are expected to ma- ture with nearly 60 percent of those loans underwater, despite improving market conditions. To date, banks have slowly been addressing troubled loans by modifying loan terms for larger borrow- ers with good assets in strong locations, while liquidating smaller loans in distressed regions. While there has not been the “anticipated” flood of foreclosed assets brought to the market, lenders are losing patience and will start to increase the rate of fore- closures in a desire to perma- nently resolve their troubled portfolios. Reality-based lending In all but the most troubled markets, supply and demand fundamentals and capital-


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