The Real Estate Capital Scoreboard® – December 2009
Chicago, Illinois, December 1, 2009 – Substantially discounted senior loan levels combined with eroding property values force legacy funding sources into difficult decisions in managing technical defaults, monetary defaults and loan maturities. The stage is clearly set for workouts and recapitalizations well into next year, while new lenders are seeking high-yield opportunities with fresh capital for workouts/restructures, partner buy-outs, loan purchases and property acquisitions.
Multifamily and senior housing properties continue attracting low-priced/high-leverage funds via the Triple F’s (FNMA, Freddie and FHA). Otherwise, commercial properties attract capital with mixed results.
For instance, partially leased, Class-B office ventures are considered only if located in Class-A locations. Discounted-cash-flow underwriting for such fundings include trended economic vacancy is trended towards historical norms, often below actual figures as investors brace for more economic storms.
In today’s tight credit market, important metrics for any financing ventures include:
- Quality Sponsorship: Sponsor analysis is tantamount. Lender must have complete information about a borrower’s portfolio performance and maturity schedule. Full understanding required of assets, liquidity, liabilities including all contingent liabilities. All information must be up-to-date, especially valuations and economic performance.
- Reset Valuations: Commercial real estate prices have dramatically declined by more than 30% from a year ago and well over 40% as compared to peak levels of 2007. The most shocking is the steep plunge in prices for multifamily assets, historically considered the most immune sector in the industry. Furthermore, even the most resilient markets in the country (e.g., Northern California) report fundamental weakness in demand.
- Changing Credits: Although numerous credit tenants are contracting, newly forming tenants emerge including governmental agencies, academic institutions, specialty retailers, etc.
- Additional Leverage: Mezzanine loans and preferred equity selectively offered for building up the capital stack. Consideration of additional collateral and partnership interests for leverage enhancement.
In summary, overall market sentiment focuses on avoiding liquefying legacy projects unless absolutely mandatory.
Mark Hayton, an Advisory Board Member of the Real Estate Capital Institute notes, “Credit-tenant commercial properties remain financeable, although strict underwriting standards are necessary.”