BIG PICTURE: Debt Capital Is Plentiful, But Strings Are Attached

"There's more lender interest than there are borrowers," says Peter Berk, director of capital markets for Manhattan-based Sonnenblick-Goldman. He tells Northeast bureau chief Amy Vaughn that "this has been the trend over the past six months, and. I see this continuing through at least the end of the year. Hopefully in 2002 it will return to its historic levels, or at least what it did in 1998-1999."

As far as the cost of capital goes, Green says it depends on the market and the portfolio the lender is trying to fill, and that could be a good thing for real estate at the moment. "Given the stock market volatility, there was a lot of liquidity to the bond market--about a month ago, you couldn't find a bond. Well, a lot of that money is beginning to flow back into real estate and not back into the equity market; because of the feeling there may be inflation, real estate is always that hedge."

Bill Hughes, a senior vice president with Marcus & Millichap Capital Corp., reports that for the typical lenders--life insurance, commercial banks and conduits--"costs are going to move in a fairly limited and narrow arena, from where we are today maybe 15-20 basis points up or down, depending on product type, with apartments preferred and non-anchored retail being less attractive."

After apartments, Hughes says the multitenant industrial is the most likely to be financed, followed by multitenant office and then grocery/drug-anchored retail. "As far as office tenants go," he says, "given the dot-com troubles, any tenants that represent 20% or more of the income stream of a property will be examined closely, and if it is in an industry where there is concern, the lender will underwrite for that."

As for the rest of the year, Hughes says, "the changes we've seen in the marketplace over the past five months or so have been assimilated, and I think we are pretty well where we are going to be. The issues for us are where does the economy go? Where does consumer confidence go" Where do retail sales go."

The retail market has deteriorated in lenders' minds substantially from 4Q2000, says Hughes. For that product type, "interest rates have typically gone up from a 2.60 spread over treasuries to 3.00 or 3.25. Apartments are seeing a 75%-80% LTV, which for retail it would be real difficult to get." As a result, says Hughes, "as the situation continues, either buyers will put more money in or sellers will reduce their price."

Looking at the specifics of each region, Maitland, FL-based Realvest Partners Inc. VP Stephan M. Neveleff tells Southwest bureau chief Alex Finkelstein that the commercial lending spigot is wide open for multifamily and industrial projects. He does note, however, that it slows to a drip on unanchored, big-box and single-tenant retail.

"Generally speaking," he says, "retail is the least desirable product (for lenders); however, for just about any well-designed and located product, there is usually a lender who will do the deal," says Neveleff. "The most evident changes of late are that lenders are giving more scrutiny to the types of products, the borrowers and loan-to-value ratios."

Dr. Jacques Gordon, international director of investment strategy and research for LaSalle Investment Management, tells GlobeSt.com Midwest bureau chief Mark Ruda that for investors and developers looking to finance suburban office buildings or fashion retail projects, this is not the best of times.

"In borderline markets, regions or property types, you're going to be hit with restrictive covenants and risk-based pricing the likes of which you've never seen before," Gordon says. "There's plenty of debt capital around. The problem is hat there are strings attached. Even with falling interest rates and the falling cost of capital, lenders are very cautious."

Jody Thornton, executive managing director of Holliday Fenoglio Fowler in Dallas, tells GlobeSt.com Southwest bureau chief Connie Gore that the state's lending institutions are taking long, hard looks at would-be borrowers. In fact, some are being asked to come to the table with more equity to secure their financing requests, particularly for retail or office lending--but still the money is flowing in Texas.