‘Badly bent’ describes lenders and investors

Abluegrass tune "I ain't broke, but I'm badly bent" recently recorded by The Dan Tyminski Band accurately describes both commercial real estate lenders and investors today.

On the lender side, more focus is placed on managing current portfolios and avoiding substantial write-offs than on new business.

New business for investors is limited to bargain-basement shopping. Most of their effort and time is spent on managing debt that is coming due and property level cash flows.

Commercial real estate values continue to drop from their highs reached in 2007, industry research reports show.

The most often-cited research is the Moody's/REAL Commercial Property Prices Indices, which shows that, in aggregate through April, commercial property values have fallen 29.5 percent from the peak in October 2007.

That is not terribly surprising given the state of the economy, but since the index is based on actual sales, perhaps the best conclusion is that it's just not a good time to sell real estate.

Most owners of commercial real estate agree.

Even in the multifamily market, where capital is still somewhat plentiful, few transactions are occurring. Multifamily sales in May fell 46 percent from April 2009 and dropped 80 percent from May 2008, according to Real Capital Analytics.

While everyone seems to acknowledge a deep problem in the commercial real estate market, those getting hurt are those who are forced to transact.

For everyone else in the market, the crisis is like having a wasp's nest in the attic -- if you don't go up there, it generally isn't a problem.

Further evidence from recently released data from the Federal Reserve shows outstanding commercial and multifamily debt in the U.S. was $3.48 trillion at the end of the first quarter -- a paltry $33 million reduction from the end of the fourth quarter.

So while there is much pressure from lenders to force borrowers to pay down loans and reduce debt levels, most lenders are not willing to go into the attic for fear of the wasp's nest. Existing debt seems destined to remain that way.

New debt on properties is still pretty scarce.

For distressed or non-cash flowing properties, new money is available only if the existing lender is willing to write down a significant portion of their debt.

For stabilized properties that have low loan-to-value ratios and adequate debt service coverage, new loans are available at 6.75 percent to 7.75 percent for 5and 10-year loans, respectively, according to the John B. Levy & Company National Mortgage Survey. Loans from community banks are generally cheaper, but the borrower needs to guaranty the loan.

With the faucet basically shut off for debt on newly constructed projects, it is hard to conceive of grand new plans for projects that are not publicly financed, much less pre-leased.

In Richmond, MeadWestvaco Corp. headquarters building and the Williams Mullen office tower seem almost from another era as they move toward construction completion. Each started when the sky was blue and will be completed in a market that is decidedly overcast with strong headwinds.

As lenders and investors are finding today, it is not a good idea to spit into the wind.