GlobeSt.com: So you are snatching away the one bright spot of news for the capital markets?

Boatwright: Well, it is important to put it in perspective. The sources of capital that are expected to have increases in originations in '09 are primarily the GSEs and HUD, which is seeing a tremendous increase in demand for construction financing. But there are issues with the other categories – such as the conduits and life insurance companies.

GlobeSt.com: It is pretty clear that capital will be constrained for CRE for the year even as agency finance increases. Everyone knows CMBS is dead for the moment. It has been difficult to get a handle on life insurance allocations for real estate for the year. Can you provide more insight on that?

Boatwright: It's hard to get a handle on it because not all of the companies are behaving the same way. Some have kept their allocations the same, some have decreased them; a few have raised them. Another complicating factor is that when they tell you about their allocations, they are providing numbers that are based on the assumption that every loan that matures this year is refinanced by someone else. But the reality is a lot of loans – most loans – are out of balance now with the current value of the property. Because not only have property values gone down but underwriting, as you know, has tightened significantly. LTVs are much lower than even a year ago. And some of the life allocations are depending on payoffs, so the numbers are less than they would appear.

GlobeSt.com: Can you give a definitive number for new net allocations?

Boatwright: I would put it at somewhere between $12 billion to $15 billion.

GlobeSt.com: How are life insurance companies dealing with borrowers that need to refinance and don't have the additional capital to fill in the gap?

Boatwright: Life companies have a few options. They can take back the real estate; they can extend the loan after, for example, negotiating to split it into an A and B tranche and charge a higher rate on the B tranche. Or they can do a cramdown; renewing the loan but taking the cash flow to pay down the loan balance.

GlobeSt.com: What other capital options do borrowers have right now?

Boatwright: Private equity funds, in some cases, are offering loans. These are more expensive, higher LTVs than life companies or banks, and they can be 9% to 10% in some cases. This will be palatable to owners that have no equity in the deal and are looking for ways to restructure a loan in order to hold on until the market improves: either cap rates drop or lending starts to flow again. Then they can get their equity out. It's called a hope certificate. Also, a lot of local banks haven't been impacted by the real estate crisis yet and they are stepping up and trying to fill the gap.

GlobeSt.com: We have been hearing more and more about borrowers buying back debt at a discount. It started happening last year but it seems that lenders are becoming increasingly amendable to giving borrowers big haircuts on these deals.

Boatwright: Yes, this is happening as well. It is yet another piece in the loan workout strategies we have been seeing. I have also heard of lenders that are willing to waive yield maintenance if a borrower can pay off a loan.

GlobeSt.com: When do you think CMBS will return? Your report says that 67% of CRE lenders think it will happen by 2011.

Boatwright: Most people expect it to come back. The question is, in what form? The securitization of cash flows, whether it comes from real estate or asset backed securities or credit card debt, is an important part of how our financial system works. I don't know when because there are still issues to be worked out. The perceived conflict of interest between issuers and rating agencies, for instance. There also needs to be a way to put the issuer on the hook for first loss. In other words there needs to be more accountability between the seller of the paper and its ultimate holder or investor.

GlobeSt.com: The funny thing is, CMBS is still performing well. The default rate is still minimal and AAAs are priced at attractive yields. Why aren't investors, private funds for instance, buying these?

Boatwright: Transparency of the data underlying the assets is one reason. Also, a lot of buyers are banks and they have mark to market issues. They don't want to buy assets that may get marked down and then they have to hold even more assets against them and with stock prices for banks hammered right now the last thing they want to do is put aside even more funds. Ultimately there is no market for CMBS paper because there is no way to value it.

GlobeSt.com: What about private buyers?

Boatwright: There are some that are doing that but a lot of these guys are bricks and sticks people. They understand the hard assets, that is what they do, and owning a piece of paper that entitles them to stream of income just doesn't appeal. Also there is still that are-we-at-the-bottom-yet mentality out there.

GlobeSt.com: Last year and this year we heard about foreign investors being the salvation in this country. It didn't really pan out that way last year. Do you think it will this year?

Boatwright: Well I do believe they are interested in deals here. And they do like bigger deals -- $50 million is a minimum for many of them. But their primary markets are Boston, Los Angeles, Chicago, New York, San Francisco and Washington, DC. So salvation? I wouldn't say that.

Instant Insights /

Jones Lang LaSalle's Wes Boatwright

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