Sam Berns: 2011 Commercial Mortgage Bankers Association Conference highlights

This year's Commercial Real Estate Mortgage Banker's Conference was held in February in San Diego. Last year we reported that the conference was more upbeat than the "doom and gloom" that permeated the 2009 conference. This year's conference was characterized by buzz words such as "cash flows," "income in place," and "lease rollover." This can only mean one thing - lenders, and more importantly lending, have returned to the marketplace! Over 3,000 attendees participated in this year's conference including representatives from life insurance companies, agency lenders, bridge lenders, and commercial mortgage backed securities (CMBS) lenders. NorthMarq Capital had attendees from 32 offices nationwide, as well as, from our Amerisphere Multifamily Finance Group. FNMA and Freddie Mac continued to provide multifamily financing throughout 2010. These Government Service Enterprises (GSE) have almost an exclusive "lock" on this market throughout 2010; however, 2011 appears to be a different story. Life insurance companies are back in the market and are being extremely aggressive for lower loan to value transactions. In addition, the return of CMBS lenders to the lending arena is providing plenty of competition to the GSEs. In 2011, both life companies and CMBS lenders will be adding to the liquidity previously only provided by the GSEs. Following the demise of the CMBS marketplace in 2008-2009, this latest go-around is exhibiting true and tougher underwriting standards. Some are referring to this Wall Street lending market's resurgence as CMBS 2.0. Loan to values are 75% or less, debt service coverages remain over 1.25x and tenant improvements and leasing commission/replacement reserves are the new underwriting orders of CMBS 2.0. It is anticipated that CMBS lenders will be a major player in the commercial real estate market as 2011 continues. Many of the CMBS 2.0 lenders are backed by the largest of the nation's financial institutions. At this time, many of the CMBS players are focusing their efforts on larger trophy properties in larger metropolitan areas. Many of these lenders are focused on transactions in excess of $10 million. As CMBS lenders become more accepted in the marketplace, we anticipate this minimum loan amount to drop. Currently, there are only a few CMBS lenders working in the $3 million and over spectrum. In a March 2011 Co-Star Group article, Mark Heschmeyer tenders his belief that even with the return of life company and CMBS lenders, the market will be bifurcated. His basic premise is that cash-rich borrowers will continue to get credit while smaller and medium-sized borrowers will have trouble. Heschmeyer points to a recent paper published by Delotte, LLP entitled, A Tale of Two Capital Markets. The article asserts that cash for lending is unevenly distributed and borrowing was becoming easier for only the largest of investors, developers, and companies. This may have been true in late 2010, but we believe that commercial real estate loans are obtainable for most transactions at this time in 2011. At this year's conference, regional banks, life companies, CMBS lenders are purporting increased allocations for commercial real estate. Most traditional product types are being financed with hotels being an exception. Most hotel lenders are limiting financings to full service hotels in major metropolitan areas. Loan to values are averaging 65%. We expect loan to values for all product types to continue to increase as the recovery takes hold. Incredible as the resurgence of CMBS lending may appear, what may be even more remarkable is the re-emergence of mezzanine lending. Both FNMA and Freddie Mac have established mezzanine or B-Piece loan programs. These programs are designed to help investors to reach higher levels of loan proceeds, especially for acquisitions. CMBS lenders are also coupling the debt stack with B-Loans in an effort to obtain higher loan to value. Well, it sure feels better in 2011 than it has for the last several years. Hopefully, overtime, we will look back at the recent recession caused by financial and housing upheavals as another cycle that could have been avoided. Perhaps the same mistakes that contributed to the last downturn can be avoided. Lenders will proceed cautiously and patience will be required in order to avoid more mistakes as our commercial real estate lending markets crawl back into the new recovery cycle. The future is brightening, albeit, slowly. NorthMarq Capital provides capital solutions for owners of commercial real estate through 32 regional offices coast-to-coast. We offer clients the ideal combination of a strong national company capable of attracting a wide range of capital sources and an organization strategically positioned to provide vital firsthand knowledge of local markets. Sam Berns is a managing director at NorthMarq Capital, Rochester, N.Y.