Joe Clementsis co-editor of Debt and Equity Journal, from whichthis article is excerpted.

|

Chicago—Forecasts for the US debt market are moretroublesome than they have been in a decade, and commercialmortgage-backed securities specialist William T. Barry joins otherindustry experts fretting that even swift action from the FederalReserve will not be enough to turn industry fortunes over the nearterm. CMBS buyers have become decidedly hesitant to accept paperhinting of risk, Barry says, and that has curbed production becauselenders are loathe to warehouse notes long-term.

|

"Conditions are much worse than three months ago," the principalat Chicago-based Draper and Kramer tells Debt &Equity Journal. He adds that uncertainty about spread directionis further disrupting the CMBS pipeline.

|

Many CMBS lenders are retreating from the battleground, not onlyrefusing to write new loans, but also trying to maneuver out ofthose already penned. Besides greater use of the "material adversechange" clause often incorporated into loan documentation, somelenders are inviting borrowers to buy back their loans at adiscount to move them off the books. "We are starting to see anuptick of that," says one debt broker.

|

Barry seconds the notion, although he adds the practice has beenrather limited to date. "I've seen it happening on a loan-by-loanbasis, but I don't think it's all that common," he says. Nor doeshe anticipate the concept will ease the burden of conduit lendersto any significant degree. The process is too cumbersome forhandling such a large volume of loans, he offers, and alternativefunding might not be economical enough to make it worthwhile.

|

The life insurance and commercial banking arenas seem to beanother option, and observers concur that such sources have enjoyeda substantial rise in business since July. But since CMBS issuancereached $140 billion in 2006, veteran investment banker GeorgeFantini, founder of Fantini & Gorga in Boston, says,"there are no way banks and life insurers can absorb that amount ofbusiness."

|

Fantini notes that underwriting at such institutions can be moreexacting, particularly at a time when CMBS standards are beingcalled into question. "Everybody has a new appreciation for risk,"Fantini says, further constricting the supply of capital. As aresult, he says, "I think some borrowers will be left on the streetcorner," particularly those with marginal collateral.

|

Most financing experts interviewed anticipate certain producttypes will have trouble being underwritten for a CMBS pool, but noteveryone is anticipating long-term damage to the stream of creditfor CRE. Although he agrees debt will be more expensive, and buyersmay have to invest extra equity to make a deal work, HollidayFenoglio Fowler managing director Michael Kavanau is lessgloomy than many counterparts. The past few weeks have beendifficult, he agrees, but Kavanau, attributes part of the lapse tothe normal summer slow season. "The market is by no means shutdown," he says. "There's still plenty of money out there, even inthe CMBS market."

|

Kavanau believes alternative sources of funds are helping fillthe void. Freddie Mac loaned $1.5 billion in the Midwestduring one recent four-week period, Kavanau says, an amount thattook six months to complete in 2006. Some colleagues such as Barryrelay stories that many life insurers have already met theirlending quota for the year, but Kavanau says he thinks the inherentvalue of real estate and its recent performance will enable buyersto secure the necessary funds somewhere.

|

"The fundamentals are as good as they have been for years,"Kavanau says of CRE. The strength of the Chicago market, whereKavanau is based, helped HFF recently arrange $265 million infinancing for a 1.8 million-sf mixed-use project there, forexample. Kavanau says his group is assisting other clients despitethe murkier waters.

|

At least one national investor who has been active in Chicagoconcurs with Kavanau's outlook. Including a shopping center justacquired in Joliet, IL, Intercontinental Real Estate Corp.of Boston expects to complete 11 CRE deals during the next 30 days,says the firm's acquisitions director, Michael Keyes. "Theinstability of the debt markets has been challenging, but we'vebeen able to work through it," he says. A property that closed lastweek in Waltham, MA, saw substantial competition, adds Keyes, whosefirm secured the building at 281 Winter St. for $13.5 million.Highly leveraged bidders may now be at a disadvantage, but Keyessays he believes that desired assets will continue to garnerattention. "We see it remaining active," he says of the extendedinvestment sales boom.

Want to continue reading?
Become a Free ALM Digital Reader.

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.