Even as values and in-place incomes fall steadily, firms that have slowed or frozen commercial real estate lending are warily beginning to turn the lending spigot back on.
The money isn’t plentiful yet, nor does it come cheap. Nor should borrowers expect it to come cheap. Lenders’ cautious re-entry into the pool isn’t being driven by bullishness about commercial real estate. Instead, commercial lending is getting another look because it’s one of the few avenues remaining for driving decent yields.
John Gorga, president of Fantini & Gorga, said that, earlier this year, life insurance companies had “stepped to the sidelines” because they “were getting hammered” to show liquidity on their balance sheets. Now, however, stock analysts are leaning on the life companies to improve their earnings.
“You can’t have both,” Gorga says of high liquidity and high earnings. “Once they’ve repaired their own balance sheets, they need to make money again.”
‘A Much Better Relative Value’
Early in the year, when life companies turned the commercial spigot off, they were still able to drive yields because spreads on even AAA-rated corporate bonds had blown out so widely. Now, however, “the spreads in the public markets and private placements have all come in dramatically,” Gorga said. Narrowing bond spreads have turned commercial real estate into “a much better relative value,” he added.
Speaking at a real estate finance luncheon earlier this year, Sam Davis, senior managing director of Allstate Investments, said in the fourth quarter of 2008 and the first quarter of 2009, “the life industry was in survival mode. There was so much fear. People really pulled back on the risk front dramatically.”
However, he added, lenders were realizing that “you can’t stay in defensive mode for very long.”
“As institutional lenders people become more comfortable with the economy, [they] need more yield than they’re getting now,” said Peter Goedecke, managing member of Goedecke & Co. “Corporate bond spreads have come way in. Mortgage spreads are the only place to get yield. [Firms] have to take the risk.”
Goedecke said one place lenders are starting to look for yield is the finance gap that’s being exposed by shifting loan-to-value ratios. As loans mature, lenders have taken to refinancing them, but are demanding that borrowers put more equity into the deals.
As an alternative, Goedecke said, he’s starting to see lenders “lining up to provide gap money.” They’re willing to keep a loan that normally would move to a 65 LTV ratio at 75, but that loan will carry a higher rate.
“We’re nowhere near where we were in February,” Goedecke said, characterizing lenders’ appetite for risk. Even so, he added, lenders are well aware the commercial market continues to deteriorate. Lenders are driving high precisely because of that fact. “Nobody thinks the bottom for rents is at hand.”
Hans Nordby, chief strategist at Property & Portfolio Research, relayed a recent conversation with a Connecticut banker to the audience at a recent Real Estate Finance Association conference. The banker’s attitude toward commercial lending, Nodby said, was, “Now is when I get paid for my good behavior. If I think I can get money out of you, you’re paying up.”
