COVER STORY, AUGUST 2011

LENDING IS LOOKING UP
Investors continue to see an increase in available capital and investment opportunities throughout the Northeast.
Amy Bigley

With the steep declines behind us, the lending markets across the country, especially in Northeast, are seeing steady increases in capital and activity. Capital is readily available for strong sponsors and projects, and banks are eager to lend.

“The ability to obtain debt today is excellent, provided that all pertinent information about the property, market and borrower is made available up front,” says Kevin Meehan, managing partner at New York-based Atlas Commercial Capital.

Many organizations and companies, such as insurance companies and hedge funds, are beginning to re-enter the market, which is increasing available capital and funding.

“The abundance of capital flooding the market over the past year has been pretty remarkable,” notes Jason Krane, managing director of New York-based The Ackman-Ziff Real Estate Group.

The lending market is coming back, but it’s also shifting and evolving due to the economic downturn. With tighter underwriting criteria and capital rolling in, banks are ready to lend, albeit under more scrutiny to ensure fewer defaults.

Krane and Matthew Linde, associate at Ackman-Ziff, explain that in previous years lenders were very focused on historical financials, looking back into a property’s trailing revenues, but now, lenders are more willing to lend on properties that have good stories and are using in-place underwriting as the standard loan sizing metric.

Lenders — national and community banks alike — are ready to lend to credit-worthy borrowers and projects within their given markets. However, assuring that projects and sponsors provide due diligence and required documentation is paramount for obtaining loans in today’s tight underwriting environment.

Lenders are looking for stable properties that are maintaining cash flow, and the multifamily product continues to be a shining star in the market, notes Greg Haines, vice president of commercial real estate with Jersey City, New Jersey-based The Provident Bank.

“[Multifamily products] continue to exhibit the stability of cash flows, stable rents and occupancy levels,” says Haines. “They have had some deterioration of factors during the last couple years but it was rather insignificant compared to other property types in the market.”

In addition to multifamily, Ackman-Ziff has seen an increased interest in hotels specifically in the New York market; however, Haines notes that the New Jersey hospitality market has not seen a surge in popularity yet. The hospitality industry, which is starting to recover, led the economic downturn and was probably hit the hardest, says Linde.

Even as the market rebounds, lenders are still facing challenges when it comes to funding properties with vacancy issues and expiring leases, as well as products in secondary and tertiary markets.

While all loans offer unique obstacles, some financing transactions are more complicated than others. Development, redevelopment and construction loans present unique challenges that require continuous supervision, reviews and approvals throughout the construction of the project.

Other obstacles in loan closings are loan document negotiations, which, according to Krane, have become more arduous with “bad-boy” and non-recourse carve-outs being more heavily negotiated. A property’s location can also weigh heavily on its ability to obtain debt.

“Loans that are really hard to close today tend to be for properties located in areas that have extreme overall low occupancies in the marketplace or when the value has declined to such a point that refinancing requires a major cash infusion,” says Meehan.

The Northeast is still experiencing its fair share of distressed and REO properties and will continue to see these situations during the next 12 months; however, with the steep decline in high vacancy levels, lower rents and tight cash flows that have begun to plateau, properties are beginning to rebound.

Continued improvements in the economy will also allow borderline distressed properties to gain some footing and possibly be profitable again, explains Meehan.

While the overall distressed market is making headway, some properties are still in the warning zone for foreclosure, especially those with over-extended sponsors or those that experience increases in rates, as well as those in secondary locations.

“Any material increase in rates could be dangerous for any properties that have maintained floating rate exposure,” notes Linde. “For properties that are currently in trouble, if sponsors are willing inject capital we generally see a much better response from servicers.”

Additionally, borrowers who are willing to play fair and stay current on interest and maintain a property’s condition typically experience a better outcome than borrowers who try to play hardball with lenders, explains Krane.

Although sponsor support and cash flow injections have been necessary for some properties during the last few years, many sponsors are now beginning to exhaust their personal resources to keep their properties afloat. Haines notes that without a quick change in the economy — which does not seem likely in the short term — many of these sponsor-infused properties may default in the near future.

With the many factors that could affect the interest rates during the next year, it is difficult to predict how the federal government and Treasuries will respond.

“It’s no secret that rates are at extremely low levels compared to where they have been historically and will most likely rise at some point in the near future,” note Krane and Linde. “The timing and magnitude of that increase is hard to say, and we are advising our clients, where appropriate, to lock in long-term financing while the environment is still attractive.”

Haines believes that the Treasuries will rise over the next 12 months by an estimated 30 to 40 basis points, although the prime rate will probably stay around 3.25 percent. He also notes that the 30-year rate may be around 4.65 percent and the 10-year rate around 3.50 percent.

With the market in recovery, opportunities continue to pop up across the Northeast, and investors, depending on their risk tolerance, still have opportunities throughout the market.

“Opportunities are everywhere,” says Meehan. “In good times and in dismal times it is all about being realistic about the risk and reward model.”

The multifamily market will continue to outshine other markets in opportunities, due to the high unemployment rate, marginal homeowners transitioning back to rentals and the stalled single-family construction industry, which has created a demand for rental property, note Krane and Linde.

Additionally, the commercial real estate market has settled into a normal cycle in which sellers are being more realistic with pricing properties based on today’s values, which is closing the buy-sell gap in the market. Along with properly priced properties, a large amount of product will be maturing in the collateralized market in the next 12 to 24 months, which will present additional opportunities for investors, explains Haines.

“We’ve all been through tough times,” says Haines. “Banks have been there and are looking to lend to credit-worthy properties within their markets. Talking with my fellow bankers, we’re all dedicated to that.”

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