A viewpoint from Eric Fixler, Managing Director of Johnson Capital’s Boca Raton Office
(re-printed with permission from Mr. Fixler)
We are quickly approaching the end of the second quarter in 2012, and financing seems to be getting easier. Lenders that took a hiatus are getting back in the market and sellers, borrowers and lenders are becoming more realistic with expectations in regard to sale price, loan products and financing terms. But are the stars, the moon, and sun really aligning?
Struggling financial institutions and global economic uncertainty have continued to restrain lender appetite and further complicate a much-needed recovery in the commercial real estate market. In addition, maturing loans in 2012 that were made at the peak of the market are presenting refinance challenges for borrowers and servicers. Many of the properties are either over-leveraged or under water based on current lending parameters and will need to be refinanced, deleveraged or sold at a discount.
Now that I have addressed the obligatory doomsayers – it is not all bad news.
It looks like 2012 will turn out to be a strong year for financing as indicators are trending upward and meeting lender and borrowers expectations. Almost a year ago things were looking up for the first half of 2011. Then the summer's disruption caused by the domestic debt crisis and the looming European default, among other things, put a damper on any brewing exuberance. According to borrowers and bankers, the tides have shifted and the ball is rolling once again in the real estate industry as a liquidity trend is underway.
A Cushman report predicts volumes for the year to change very little overall from 2011, which saw transactions for all property types between $805 billion and $815 billion. They forecast a potential 20 percent increase in loan volume between the first and second halves of this year. The report also anticipates activity picking up due to both stronger demand and increased investment supply resulting from bank loan sales and recapitalizations.
With borrowing rates at historic lows, we are expecting larger allocations to commercial real estate this year from life companies, commercial banks and CMBS lenders. The institutions view commercial real estate mortgages as attractive investment opportunities versus alternative bonds or other fixed-rate financial instruments.
Commercial mortgage-backed securities (CMBS) aggregate issuance hit $32.7 billion this past year, 7 percent short of analysts’ expectations as a result of uncertainty in global markets, according to Standard & Poor’s. The volume, however, is an impressive comeback after only $12 billion was issued in 2009 and 2010 combined. The commercial mortgage market clearly needs this sector to recover because it remains the fastest in terms of timing and offers loan-to-value ratios (LTVs) in the 70 percent to 75 percent range.
At Johnson Capital, we have to deal cautiously with the signals in today’s marketplace. We are observing declining cap rates and increasing leverage but need to take a closer look at these indicators. There is not one “golden rule” to follow in today’s financing market. As part of our understanding of any transaction and its ability to be financed, we tend to focus on a few key indicators, of which value and sponsorship are crucial to the process.
Valuation is largely based on in-place cash flows with a cautious look toward pro-forma increases in income and reduced expenses, resulting in an improved net operating income. Financial trend analysis of an asset becomes a focal point of the underwriting process and often directs the expectation of the operations going forward. If the asset has a “story” and the market positioning can corroborate the turnaround strategy, it greatly helps the lenders in pushing value and increasing leverage. The sponsor’s financial strength and track record in operating real estate help complete the overall comfort level with the lender and reduce the operational risk once a loan is in place for the asset. The borrower’s local presence, operational experience and financial wherewithal are key components to successfully closing any transaction these days.
Lending still remains controlled as banks slowly shake off the over-cautious approach adopted in the aftermath of the financial crisis. With these points in mind, it is clear that the commercial mortgage market still has a ways to go to reach stability, let alone a full-fledged recovery. That said, at Johnson Capital we understand the factors that control this industry and are here to provide our clients with the best advice and financing options to help them achieve success in their real estate transactions. Our mortgage bankers recognize the opportunity to meet the growing demand for financing loans either through local banks, life insurance companies, CMBS originators or bridge lenders.
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: http://www.johnsoncapital.com/. Eric Fixler is the Managing Director of the Johnson Capital office in Boca Raton Florida. He can be reached at (561) 337-1449 or ericfixler@johnsoncapital.com.
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