Commercial real estate lenders optimistic but cautious in 2010

Commercial real estate lenders got the chance recently to talk about the coming year and reflect on the past year at the annual Mortgage Bankers Association Convention in Las Vegas.

Most conversations about 2009 were dim and short-lived, but views for 2010 were decidedly optimistic. Money from Wall Street to Des Moines, Iowa, is stacking up and poised for investment.

However, the overwhelming notion is, never has so much money been chasing fewer real opportunities.

Despite wanting to invest money in mortgages, most lenders have a cautious view of the current market, so new loans for transactions are conservative.

Lenders' views are formed by two things: macro-level economic data and countless stories of deals gone bad.

Perhaps the best example of a deal gone awry is the stunning downward trajectory of value for one of the largest apartment complexes in New York City.

Stuyvesant Town-Peter Cooper Village is an 11,227-unit apartment complex that was purchased in 2006 for about $5.4 billion by a partnership led by Tishman Speyer Properties LP and BlackRock Realty Advisors Inc. with a total investment of $6.29 billion.

As with the New Jersey Nets, who have gone from making the playoffs in the 2006-2007 season to an abysmal record now, the situation has worsened dramatically - the project's worth has plummeted and currently is valued at about $1.8 billion, according to the Fitch Ratings service. Last month, Tishman and BlackRock decided that the hole they were in was too great, so they handed over the keys to the project to their lender.

Because the lender in this case is spread out among many classes and issues of commercial mortgage-backed securities, the blowup has wreaked havoc on the secondary market for bonds backed by commercial real estate.

But even as investors struggle with CMBS that were originated in years past, a new version of CMBS is gearing up in a serious way.

Bank of America, Citigroup, JP Morgan Chase and Goldman Sachs all have announced plans to amass loan portfolios that they intend to pool together and sell as CMBS.

Unlike in 2006 and 2007, these "conduit loans" will be characterized by conservative valuations and tight underwriting.

Regardless, some predict that this year, $12 billion to $20 billion in new CMBS offerings will hit the market.

While even $20 billion is a small number compared with the $224 billion in domestic bonds floated in 2007, it is a fantastic beginning and necessary for the commercial real estate market to heal.

The confusing contradiction between investors running from "legacy" CMBS but also interested in buying new CMBS is similar to the story of banks with unrecognized problem loans compared with those that have clean slates.

It is a good time to have money and to be lending on commercial real estate because values have collapsed and there is still very little capital.

In essence, those banks with a clean slate can write conservative loans on conservative values, but those hampered by unrecognized problem loans will remain on the sidelines.

A group that recognizes the current opportunity is Abu Dhabi Investment Authority, which is the largest sovereign wealth fund in the world with more than $627 billion to invest.

The fund is looking to put out more than $10 billion in commercial real estate debt in the United States during the next three years.

While many borrowers and banks continue to struggle with loans written in an entirely different market, new money for conservative deals is very cheap.

Commercial mortgage pricing for fiveand 10-year loans is in the 5.5 percent to 6.5 percent range for well-leased, conservatively valued properties, according to the John B. Levy & Company National Mortgage Survey.

A number of deals in the Richmond area are microcosms of the happenings around the country.

Several overleveraged properties already have imploded, such as the former Circuit City headquarters building and Chesterfield Marketplace, and others are showing signs of stress.

But even as the real estate market absorbs these problems, new loans are being originated.

To be sure, these new loans will be underwritten in such a way that the borrower and lender wholeheartedly agree that the risk of default is virtually zero.

Andrew Little is an investment banker with John B. Levy & Co. He can be reached at alittle@jblevyco.com