Increase in Availability of Real Estate Capital Expected in 2011

A Perspective from Greg Richardson, a Managing Director of Johnson Capital
(re-printed with permission from Mr. Richardson)

As we approach the conclusion of another trying year in commercial real estate, there are some clear, positive trends we can build upon to start off the next decade. We likely saw real estate values bottom in several market-specific sectors, transaction volumes increased significantly this year – albeit over dismal numbers in 2009, and most importantly, the debt markets seemed to find their footing and are poised for a continued resurgence next year.

Despite little change in real estate fundamentals, an unstable political climate and lackluster job growth coupled with a 9.6% national unemployment rate, the availability of capital for commercial real estate made great strides in 2010. Specifically, the CMBS market demonstrated growth that surprised even the most optimistic market insiders. Absent for the better part of three years, recent trends clearly signal the return of this once dominant source of capital. According to the Wall Street Journal, CMBS volume is expected to approach $15 billion this year. While this is a mere fraction of the $230 billion in issuance during the height in 2007, it represents a fivefold increase over 2009.

The primary reason for the increase in volume is the number of lenders that have reentered the market, especially in the past six months. In Q1 2010, there were a half dozen or so lenders actively looking to originate multi-borrower CMBS loans. At last count, there were 18 conduit platforms in the United States, with several others in the planning stages. As expected, this growth has fostered competition and driven more aggressive loan terms for borrowers. Debt yields have dropped recently into the high single digits with leverage levels approaching 70-75%. These underwriting parameters, coupled with historically low Treasury yields, provide for attractive loan terms. Ten year loans in the 5% range and five year loans in the mid 4’s are commonplace. The return of the conduit market was further validated last week when the Federal Government announced that the FDIC would be looking to launch its first CMBS deal – backed by $500 million of performing commercial mortgages.

In addition to CMBS, the life insurance companies’ appetite remains strong for stabilized core assets with proven sponsors. Typically 10% less on the leverage scale than their CMBS brethren, life companies also compete very favorably on low-leverage assets or for terms exceeding ten years. Additionally, Fannie Mae, Freddie Mac and HUD/FHA continue their directive in providing aggressive capital to the multifamily sector. We have not yet seen banks reemerge as a noteworthy source of real estate capital, but that should change in the future as they continue to manage their earnings and dispose of their REO.The availability of real estate capital turned the corner in 2010 and we can expect further growth in 2011. Now, we just need more opportunities to put that capital to work.

Founded in 1987, Johnson Capital is one of the country’s top real estate capital advisory firms with eighteen locations nationwide. Greg Richardson originates and structures debt, mezzanine, and equity transactions for Johnson Capital and is the Managing Director of their Irvine, California office. To learn more, email: gregrichardson@johnsoncapital.com