FEATURE ARTICLE, FEBRUARY 2005

Capital Answers
The Northeast lending environment is expected to remain stable through 2005.
Interviews by Jaime Lackey

Looking into 2005, the real estate industry is wondering where the economy will go. Northeast Real Estate Business talked with lending experts in the Northeast to better understand where the money is and where interest rates are going.

NREB: How does lending in the Northeast compare to lending in other markets?

Scott Chisholm Principal Prudential Mortgage Capital Company Newark, New Jersey

Chisholm: The competition in the Northeast is extremely aggressive given the number of lenders competing for each loan. The sophisticated borrowers in this market use that to their advantage to obtain the best terms possible. This is not to say that there is not intense competition across the country but that it seems to be even more [intense] in the Northeast.

Ferrie: In Pennsylvania, New Jersey and Delaware, lending in 2004 was quite active compared to [lending in John Hancock’s] other regional offices.

NREB: Which markets in the Northeast are hot right now? Which ones are struggling?

Houlihan: The New York metropolitan area is very strong, as well as the Boston and Washington, D.C., markets. Some of the weaker markets are in Upstate New York and some of the less populated areas.

Chisholm: New York City continues to be a strong market for all property types. New Jersey is strong as well, except for some Central New Jersey office product, which remains soft.

John Ferrie Regional Vice President John Hancock Real Estate Finance Boston

Ferrie: New Jersey [is a great market] for apartments, retail, industrial and net lease transactions; ditto for the Philadelphia suburbs. Office lending in Pennsylvania, New Jersey and Delaware [is struggling] — unless the deals have low leverage — because underwritten market vacancy and market rents result in lower proceeds and the need for higher equity.

Giarrusso: This has been a strong year for the New York City market, particularly in multifamily residential. The office market in Midtown Manhattan has also been strong. On the other side of the coin, the suburban office market surrounding New York City is a little spotty right now. In Boston, the office market still appears to be soft. We’re hoping to see a rebound in Boston during 2005 as more space is absorbed.

NREB: Which property types are doing well in the Northeast? Which ones are struggling?

James Houlihan Partner Houlihan-Parnes/ iCap Realty Advisors White Plains, New York

Houlihan: In the good markets, almost all property types are doing well. Retail and residential are the strongest, but there has been steady improvement in office and industrial as well.

Chisholm: All core property types seem to be performing well. Multifamily properties are the most sought-after property type, which is driving spreads down. The hotel sector is also robust because of the increase in hotel revenue and, particularly in New York City, due to growth in tourism. Also, the hotel sector is one where lenders can still obtain a higher spread.

Giarrusso: Everybody is looking for investments in multifamily right now. We would say suburban office space is struggling, particularly older, Class B office buildings that don’t have modern amenities to attract and retain tenants.

Aloise: For-sale housing is very strong, rental housing is relatively stable and strengthening, and retail remains strong.

NREB: How does lending right now compare with lending in the past year?

Houlihan: I think all properties are benefiting from the continued low interest rate environment.

David Aloise Senior Vice President PNC Real Estate Finance Pittsburgh

Aloise: A highly competitive debt market continues to exert pressure on credit structures.

Chisholm: The competition for loans is as intense as ever. Spreads continue to decline while proceeds are increasing. Also, underwriting standards appear to have been relaxed by most lenders.

Giarrusso: There are more people looking to make loans and they’ve shown a willingness to cut rates and sacrifice credit quality just to get deals. This may cause some deterioration in credit quality for the less experienced or more aggressive lenders. We’ve seen some people doing some things that may create challenges for them in the future.

NREB: How do you think the lending environment will change in 2005?

Chisholm: The volume will continue to remain strong.

Sam Giarrusso Senior Vice President Commercial Real Estate M&T Realty Capital Corp. Buffalo, New York

Giarrusso: I think you’re going to see a more challenging market for lenders. Competition is so heavy and the margins have become so thin that people are going to have to find new ideas. I think you’ll see some lenders looking for new market niches to hit their profitability targets. The big question in gauging the evolving market in 2005 is “how much further will rates continue to rise?”

Ferrie: I don’t believe there will be as many refinance opportunities, since [many] lenders have provided forward commitments for borrowers afraid of rising rates but who had stiff penalties for early prepayment. A diminished lending pool should make for stiff competition.

Houlihan: I think, in general, people anticipate that rates have more potential to go up a bit than to decrease from the current level. As interest rates rise, so will cap rates. This will make lending a little more difficult, but it should still be very strong based on the rates forecast for 2005 compared to historic interest rates over the last 40 or 50 years.

Aloise: If long-term rates were to rise significantly, the demand for for-sale housing would likely be curtailed.

NREB: How will changing interest rates affect the lending environment?

Ferrie: From an underwriting standpoint, not much. The 10-year Treasury could easily go up by 200 basis points and lenders would reduce debt service coverage ratios to adjust. On the other hand, rising rates should increase delinquencies and, over time, increase spreads. The combination of rising interest rates and increasing spreads will eventually affect cap rates and loan dollars.

Giarrusso: The rising rates could make things difficult for some property owners and lenders. The cumulative effect of rising interest rates and rising expenses, such as energy costs, is going to create challenges in some circles. Some people, who may have overpaid a little for properties, are going to have trouble supporting the returns their lenders are expecting.

Chisholm: Overall volume, as well as subordinate and junior tranche volume, will continue to increase as investors and lenders look for higher yield.

NREB: Are there any other predictions you’d like to make regarding lending in the Northeast?

Houlihan: Absent any large, unpredictable acts (e.g. the 9/11 attack on the World Trade Center), I think that 2005 should be a good year and business should be relatively steady throughout the year.

Giarrusso: I think you’ll see the lending market start to thin out in the third and fourth quarters. People are going to have a hard time making money due to the thin margins.

Houlihan-Parnes/iCap Realty Advisors Headquarters: White Plains, New York Active: Although we do and have serviced loans nationally, the predominant amount of our portfolio is in the Northeast. Direct Lender or Intermediary: Both Loan products: We arrange all types of debt placement, including CMBS, insurance company, bank, credit company, and both private individual and institutional lenders for first mortgages, second mortgages, mezzanine, preferred equity and constructions loans. — James J. Houlihan, Partner

John Hancock Real Estate Finance Headquarters: Boston Active: Nationwide Direct Lender or Intermediary: Field office for a direct lender, John Hancock Life Insurance Company. Loan products: Fixed or floating rates with terms ranging from 3 to 30 years and amortization to 30 years, or in some cases, interest only. Recent Transaction: John Hancock Real Estate Finance recently closed a $60 million transaction on Brandywine Square, a 613,500-square-foot community shopping center built in 1995 and located in Downingtown, Pennsylvania. The acquisition involved defeasance of an old Nomura securitized loan. As opposed to a typical Hancock funding where we fund after execution of the loan docs, this closing required 3 days in order to effect the purchase of the U.S. Treasury bills, which would replace the mortgage and allow Hancock to have a perfected lien. We had to successfully coordinate diverse interests while running the risk of alienating our best client if we failed. — John P. Ferrie, Regional Vice President

Prudential Mortgage Capital Company Headquarters: Newark, New Jersey Active: Nationwide Direct Lender or Intermediary: Direct lender Loan Products: Prudential Mortgage Capital Company is a national full-service, commercial and multifamily mortgage finance business, originating mortgage loans for Fannie Mae and FHA programs, the capital markets, Prudential’s general account and other institutional investors. Recent Transaction: Scott Miller, a member of the New York City origination team, recently originated a $150 million loan for Prudential’s General Account, secured by a portfolio of properties owned by Mack-Cali Realty Corporation of Cranford, New Jersey. The refinancing loan is secured by a portfolio of seven office properties with more than 2 million square feet of space in Northern New Jersey, specifically in Bergen County. The properties are 96 percent leased by such tenants as Prentice-Hall Publishing and Cingular Wireless. The loan, which carries an interest of 4.78 percent, matures in January 2010. — Scott Chisholm, Principal

PNC Real Estate Finance Headquarters: Pittsburgh Active: Nationwide. Direct Lender or Intermediary: Direct lender Loan products: We offer a full complement of balance sheet and off-balance sheet products, including construction financing (commercial and residential projects), mini perms/term loans, letters of credit, lines of credit, conduit financing, mezzanine financing, REIT lines, subscription facilities, pool financing and tax credit financing. Recent Transaction: We recently agented a $110 million credit facility to acquire and redevelop a hotel site in New York City. The property is located on Park Avenue in Manhattan, and the developer proposes to redevelop the property into a 20-story, 145-unit luxury condominium project. In order to meet a time of essence purchase contract, the developer required closing in 45 days. PNC led a club deal comprising a total of four banks and successfully completed the syndication. In this case, certainty of execution was critical. The experience of our origination and underwriting team, and their close working relationship with our credit function, resulted the seamless delivery of a competitively priced/ structured execution. — David Aloise, Senior Vice President

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