By Susan L. Blumberg
Managing Director-Northmarq Capital
Today’s buzz-words are “Cash Flow”, “Income in Place”, and “Lease rollover”. Virtually all lenders have returned to the market. Life Insurance Companies, Banks, CMBS (no longer called Conduits) and many public and private Funds are providing capital to real estate, post recession. This is a clear sign that we bottomed out in 2009-10 and the future is bright. We are no longer focused on fire sales, double dips or falling prices.
2011 and 2012 will start the momentum of capital flowing into the markets as loan maturities start to ramp up. The amount of maturing debt doesn’t dramatically increase until 2013-2015, and there is a strong likelihood that the by then, property performance and cash flows will have recovered a great deal from where they were the last few years.
Transactions have picked up over the last six months, as many sellers believe interest rates are going up and this is the time to sell. Cap rates remain low, with a shortage of properties on the market and a lot of money on the sidelines. There seem to be new “Funds” forming daily, and where these funds were previously formed as equity providers looking for investment partners, now they are lenders and direct investors, all seeking higher returns on their investments. With nowhere else to place their money for greater returns, they are lending now too.
What we have learned in this last go-around of lending is that true underwriting standards must be adhered to and there should be consideration given to the exit strategy at loan maturity. Life Insurance Companies have traditionally lent on lower leveraged, high quality properties, in primary markets with high quality borrowers. Although they did not escape the downturn totally, their losses were minor and their rates remain very competitive. Their appetites are still healthy for Class A properties in Class A markets with Class A borrowers. They continue to prefer loan leverage of no more than 70 percent loan-to-value and 75 percent on apartments (everyone’s preferred property type).
Banks were in disarray. Thanks to government help, they are re-defining their roles and looking for the best borrowers, long relationships and requiring recourse. They are still the preferred lenders when looking for flexible terms, low rates and conservative underwriting, if you can stomach the recourse. They are the only name in town when looking for construction financing.
CMBS will be a player in this recovery. It didn’t take long for these intelligent Wall Street investment bankers to find their new niche. They are backed by the largest financial institutions that repeatedly come up with creative ways to compete, therefore garnering their share of the market. This time, at least for awhile, they are underwriting the deals more realistically. They are trying to compete for the larger trophy properties in the largest markets, primarily the coasts and Chicago. These players seem to be willing to win the business and be very aggressive on the low leverage deals. They are also willing to provide a larger portion of the capital stack in the form of mezzanine, preferred debt or B-pieces, in order to win a deal. It seems that they are using these high profile deals to seed their securitization pools, so that they can be up and running as quickly as possible. As they increase the size of their lending box, liquidity will return to the market.
Last, but not least, we have to stress the importance of the multifamily GSE lenders in returning the liquidity to the markets. Freddie Mac and Fannie Mae were there the whole time, for the duration of the recession. It should be noted that the delinquency rates for the multifamily business for the GSE’s are extremely low, at levels far below 1 percent. The GSE’s never stopped underwriting realistically, and are jeopardized by the single family parts of their companies. There is no way of knowing what will happen over the next few years, but there is a good likelihood that the agencies will survive in some form, whether privatized or with a form of government guarantee. They should be the poster child for what SHOULD be the model going forward. There are hundreds of millions of dollars of long term loans on the books of these agencies that are good, solid, well underwritten business.
All lender types prefer multifamily loans due to demographics, economics, and stability. There is tremendous competition by all lenders for the lower leveraged deals, as previously mentioned. Fannie Mae and Freddie Mac are the best execution, by far, for the full leverage loans – up to 80 percent, with 1.25 debt coverage. Each of the agencies has its niche in product types and has upgraded their student housing programs and senior housing programs in order to expand their market share of rental housing. FHA is an alternative, although their resources are stretched to capacity, for max leverage of 83.3 percent and 1.20 debt coverage, but based on their own underwriting, which can end up at the same place as Freddie and Fannie.
It sure feels better in 2011 than it has for the last several years. We will soon be looking back at the recent recession caused by financial and housing upheavals as another cycle that could have been avoided. Perhaps the same people that contributed to the last downturn might be more cautious and patient going forward, to insure longevity in this next rally. The future is brightening, like a low energy light bulb that turns on dimly at first and then gradually gets brighter, and hopefully lasts a much longer time.
Susan Blumberg is Senior Vice President/Managing Director for Northmarq Capital in Chicago. She may be reached at [email protected]