Magazine article Journal of Property Management

Joining the Capital Mainstream

Magazine article Journal of Property Management

Joining the Capital Mainstream

Article excerpt

Capital - not bricks and mortar - is keeping today's real estate growth afloat.

Now that real estate and Wall Street have found each other, they are not likely to soon be parted. Wall Street has given real estate investors what they have always wanted - liquidity, the ability to buy and sell interests in real estate as easily as stocks and bonds. In so doing, commercial real estate has opened itself to the resources of the capital market and its seemingly limitless funds.

"Capital is the great equalizer," said Joel B. Rubin, managing director of E&Y Kenneth Leventhal Real Estate Group in New York. "We have the most liquid real estate market we have ever had, and liquidity breeds capital."

Wall Street's involvement in real estate is certainly not news anymore. What is newsworthy, however, is the continuing high level of acceptance by investors of real estate-based securities. Investors are snapping up the real estate issues as fast as Wall Street can produce them. In 1996, investment bankers issued $30.4 billion in collateralized mortgage-backed securities, up from $18 billion the previous year, according to E&Y Kenneth Leventhal.

"However, that huge spike of issuance is not beginning to satisfy investment demand for this product," said Rubin. "There is probably two or three times the appetite for senior investment-grade paper than the Street can manufacture," said Bruce Cohen, managing director of Cohen Financial, a Chicago-based lending, conduit origination, and investment firm.

Underpinning the securitization craze is an economy that seems almost ideal to make real estate attractive to the capital markets. "The real estate boom today is fueled by a confluence of macro-economic factors that are probably without precedent, at least since the 1970s," said Greg Spevok, director of origination at Bear Stearns Commercial Mortgage Inc. Those factors include "a very favorable exchange rate, record corporate profits, very low inflation, low energy prices, very high employment throughout the economy, and all the things that generate growth in segments like hospitality and tourism, such as record levels of travel."

Securitizing Debt

Institutional investors are big buyers of mortgage-backed securities. Significantly, insurance companies, which are the biggest mortgage lenders, are also "by far the largest buyers of commercial mortgage-backed securities (CMBS)," according to Spevok. Not only does liquidity make these securities attractive to life companies? but insurance regulators require lower reserves on such securities than on direct loans on real estate. Those reserve requirements represent an incentive for insurance companies to buy mortgage-backed bonds, rather than mortgages themselves. "The insurance companies are still huge providers (of debt) to real estate, but they are going to do it in a different way. Instead of doing it on the lending side, they will do it on the investor side," said Rubin. "That is a fundamental change that will continue into the next few years."

Through the Conduit

Meanwhile, Wall Street, ever hungry for more deals, is pushing forward into unexpected areas. Most recently, the "hot" product has been conduits - essentially, prepackaged pools of many, small commercial mortgages that are underwritten as a single package, securitized, and subsequently sold to investors. As a direct lender to small real estate projects, the conduits are helping fill the niche left vacant by the decline of the S&Ls. Although the individual loans that make up the conduit would be too small to interest Wall Street - in the $2 million to $20 million range - the ease of selling off conduits to investors has made the investment very popular. Now banks have entered the conduit contest, too, offering loan packages to investors.

As the number of conduits increases, lenders are scouring the landscape in search of mortgages and are chasing product in looking further afield for more property types on which to lend. …

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