Portfolio Lenders Chasing Yield

A viewpoint from Kristian Lichtenfels, Director at Johnson Capital’s Denver Office

(re-printed with permission from Mr. Lichtenfels)

2011 began with tepid excitement as all the major commercial real estate capital sources returned to the market, including life companies, CMBS, GSEs and even the banks – at least those that received a nod of approval from the FDIC. At that time, everyone in commercial real estate was just happy to hear that lenders were finally back in the market. 2011 originations were up 64% over a very subdued 2010, and the biggest stories to wrap up 2011 were treasuries bottoming out in September (T10 at 1.72%) and the ability of CMBS to weather the unpredictable markets of that year’s third quarter.

As we rolled into the Mortgage Bankers Association conference in Atlanta this past February, the story was similar to the year before. Not only were all the lenders active and hungry, lenders on average targeted an increase of 17% over their record 2011 allocations.

This year, we have seen a continued erosion of lender yield with key index interest rates yet again reaching new record lows. Early in June, the ten-year treasury bottomed out at 1.53% yield. Yes, interest rates are once again at record lows, but the full story is best understood by looking into how the sustained low interest rate environment is shifting the tides of capital. The good news for our borrowers is that lenders are still successfully placing capital in commercial real estate. In fact, many of the top life companies will reach their allocation goals by the end of the third quarter.

The most exciting shift in the markets this year has been the resurgence of capital in the areas of mezzanine, joint venture equity and structured finance. As traditional portfolio lenders place more first mortgage capital at record low interest rates, they constantly have loans maturing with above market coupons, creating an erosion of their portfolio’s yield. The lenders have been looking for a solution to this erosion of yield problem since interest rates plummeted around this time last year. These higher yielding investment models are enabling borrowers to find loan structures with A and B notes and overall leverage ranging from as low as 70% to as high as 95% in some cases. The large majority of higher-leverage structured financing ranges from 80% to 90%, however.

Earlier this month, Commercial Mortgage Alert published an annual review of mezzanine lenders, where they identified 63 active lenders. Many of these lenders, including Principal Life, MetLife and Johnson Capital’s partner Prudential, are not your typical higher leverage or mezzanine lenders. This increased competition has been an asset for our borrowers seeking higher leverage loans. The greatest competition is in mezzanine financing, where the B note is $3,000,000 or greater.

Now that we have reached the year’s midpoint, what can we expect from the capital markets over the next six months? Expect life company lending to slow toward the fourth quarter, and CMBS lending to run strong through the end of the year. The agencies are expected to continue on their record pace. We can also expect the Fed to do all it can to keep interest rates low through the election season, considering the slow economic growth reported in the second quarter. As for 2013, I will wait and see, but the Mortgage Bankers Association forecasts the ten-year treasury to rise above 2.5% by the start of 2013.

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/

Kristian Lichtenfels is a Director in the Johnson Capital's Denver office. He can be reached at (303) 501-8802 or klichtenfels@johnsoncapital.com.

1 comment :

seymourtinsley said...

my advice for these lenders and banks that loan money is to stay away from approving high-risk loans. Not only will you not get your money back, it's also bad for our economy (one of the reasons of the economic meltdown and housing bubble burst). Screen your clients, check their credit scores. After all, you're banks! You're supposed to only loan money if you know people can pay them back.

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