Capital Markets Commentary

(This article was reprinted with permission from Mr. Tom Cohen, Director of Johnson Capital’s Kansas City office).

Anyone who generally follows what is happening in our economy today knows that the current status of the capital markets is dismal. It is a challenging year for mortgage bankers/brokers and anyone else connected to the real estate industry. Deflation and a reduction in real estate values coupled with tightening in the credit markets has created real challenges that few in the industry will be able to avoid.

I recently attended the Mortgage Bankers Association’s CREF Conference in San Diego, which helped to shed some light on the current state of the lending market. This conference is usually attended by 4,000 to 5,000 participants and distinguished by conspicuous consumption associated with lavish parties put on by lenders. The only conspicuous aspect of this past conference was the relatively small number of attendees (approximately 1500) and the lack of parties to attend.

At the conference, I met with life insurance companies, banks, and private capital sources, who all offered a consistent theme: reduce leverage, tighten amortization, increase rates, price for risk and take as little risk as possible. Even more surprising was that many of the life insurance companies, once consistent sources of debt capital, were actually out of the market for the first time. They were simply attending the CREF conference to maintain connections with brokers and correspondents, preparing for the time when they would be able to re-enter the market. Life companies still in the market indicated that they had made significant adjustments to their lending criteria. No longer are they offering debt at 75% LTV, 25-year amortization or rates hovering in the low 6% range for a 10-year term. For the most part, life companies have reduced leverage to no more than 65 percent LTV, increased rates to 7% or greater and reduced amortization to 20 years.

I also noticed the absence of the contingent associated with Commercial Mortgage Backed Securities (CMBS) markets, which made it all too clear that this particular market is dead with no chance of return in sight. What will become of the billions of dollars in CMBS loans that will mature over the next eight or nine years as real estate values decline and there are fewer and more conservative lenders in the market place? Clearly, without the ability to refinance, many of these loans will default, leading us into a deeper capital markets crisis in the years ahead.

Hopefully, the government will be able to step in and purchase these loans and restructure them into performing loans through its TARP program. I am not optimistic that any other viable sources of debt capital will become available to handle the tsunami of maturing CMBS debt. As a result, the government may become the largest lender in the nation, much like it was during the days of the Resolution Trust Corporation.

Clearly, capital is severely constrained today. Despite the lack of available lending sources in the market, Johnson Capital does have sources of capital through its agency lenders (Fannie, Freddie and FHA), active life insurance correspondents, banks and credit union sources. We are eager to assist our clients in identifying the best options available in the marketplace to secure debt for their projects, whether it is to pay off construction loans or to refinance these maturing loans.

Founded in 1987, Johnson Capital is one of the country’s top real estate capital advisory firms with eighteen locations nationwide. Their services include debt placement and acquisition financing for permanent, construction and repositioning in addition to joint venture equity placement for individual assets, portfolios, entities and discretionary funds. Johnson Capital transactions have ranged in total funding from $1 million to over $300 million and have financed all property types, including: multifamily, office, retail, industrial, hotels, mixed use, manufactured housing, credit-tenant leases, single-family housing and land developments. For more information about Johnson Capital, log on to their website at:

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