Another Banner Year: Lenders from around the Country Are Seeing Strong Commercial Morfgage Lending Volume This Year. Market Conditions in the Northeast, Southeast and Southern California Echo This Upbeat Trend
Bell, John, Mortgage Banking
The nation's commercial lenders in 2006 are on track to beat what was a banner year for loan volume in 2005. Signs also point to a continuation of healthy lending activity into 2007, buoyed by a massive infusion of new capital, strong real estate fundamentals, the positive impact of job growth and the emergence of the collateralized debt obligation (CDO) financing vehicle. [??] Joseph Franzetti, managing director of NY Credit Advisors, New York, a real estate finance company, points out that economic growth has prompted most lenders to lend more aggressively than they would if the economy were just plodding along. [??] "There's a lot of capital allocated to lending. Borrowers have confidence that things will get better and property cash flows will continue to stay strong," he says. [??] Thomas Jaekel, chief investment officer of Chicago-based Wrightwood Capital LLC (formerly Cohen Capital LLC), commercial real estate finance company, comments, "Real estate fundamentals in most markets are improving, and job creation is increasing the demand for most real estate assets." He concedes, though, that rising interest rates may negatively impact the investment market. [??] Brian Stoffers, president of CBRE/Melody, Houston, a mortgage banking subsidiary of Los Angeles-based CB Richard Ellis Group Inc., agrees that real estate fundamentals are improving, together with decreasing vacancies and rising occupancy levels. He says 2005 was a peak year for commercial real estate loan volume, and the outlook for increased lending volume is positive for 2006.
"Ours [lending volume] was up 35 percent in 2005 over 2004. There's a lot of demand for commercial real estate, and delinquency rates are at historically low levels, enhancing the appeal of the asset," he notes.
E.J. Burke, executive vice president and head of Cleveland-based KeyBank Real Estate Capital (KBREC), commercial real estate division of Cleveland-based KeyCorp, says the economy has helped commercial real estate. "Multifamily has rebounded, office appears to be better, retail is steady and leasing activity has improved," he says.
"The development-oriented lending market, in particular, took off in 2005, with a 30 percent increase in loan volume over 2004. Our firm was up 33 percent for that market category in that time period," he adds.
Speaking for the CMBS market, Charles Krawitz, managing director of the multifamily finance group, LaSalle Bank, Chicago, says the market has received a boost from economic growth.
"Lenders think the tide is rising, and cash flows are improving on their assets. Commercial real-estate has done well for the past 10 years running as job creation puts more money into consumer pockets and increases retail spending," he says.
Chicago-based Real Estate Research Corporation (RERC), in its spring 2006 Real Estate Report entitled "Managing Expectations in a Riskier World," concurs on the favorable impact the economy has had on commercial real estate, but sounds a note of caution: "Unfortunately, the risk affecting our economic growth continues to grow as well," RERC's report states. "Interest rates are growing; inflation appears to be growing. Gasoline prices are growing. Geopolitical risk seems to be growing. And real estate values are still growing--enough [so] that a real estate bubble is said to exist in a few markets." More recently, at least one of these risks--gas prices--has started easing, while all the rest remain as risks on the horizon.
Looking ahead, most sources foresee similar to slightly higher commercial loan volume for 2006 into 2007 compared with 2005.
Franzetti says, "The relationship between Treasuries and LIBOR [London interbank offered rate] has fueled continued demand for fixed-rate loans and has reduced the amount of interest in the floating-rate product."
Burke says, "We foresee a slow to moderate growth year in 2006 in the area of 3 [percent] to 5 percent, with no big increases in new construction and development, because there's a lot of housing supply coming on the market. …