Liquidity Trumps Loss Reserve Issues

"While the issue of preventing future losses has garnered much attention as of late—it appears at least for now—that commercial real estate lenders would much rather avoid being hamstrung by the lack of funds than avoid write-downs," says Mike Mounts, managing director of JLL's Real Estate Investment Banking team. "Bankers are clearly trying to liquify their commercial real estate portfolios and enhance their ability to redeploy those funds more profitably in the future."

Concerns remain in the market. Commercial real estate in general still lacks confidence and the impending wave of maturities coming due have banks bogged down and therefore halting their ability to increase lending. Even in 2010, a large majority of the capital will be allocated to servicing existing rollover debt. More than 80% of bankers said that up to 40% of commercial real estate allocations in 2009 will be used to refinance upcoming maturities. An additional 13% believe their allocations to service existing rollover debt will account for up to 80% of real estate lending.

2010 might have a bright spot for bankers. Roughly 75% of those surveyed said they expect to increase the number of commercial real estate loans produced in 2010, compared to 2009. While 85% said lending on properties, notes and new construction is likely in crease by as mush ac 30% next year.

With the market so uncertain and the dynamic sector changes that have taken place throughout 2008 and 2009, bankers are looking for new strategies.

"Bankers are telling us that they have limited human capital, time and monetary capital to continue carrying these unproductive loan balances. They're looking for an innovative exit strategy," says Dan Culler, COO of REDC.

This 'exit strategy' could take the form of commercial note auctions. Just shy of half the respondents said they plan to utilize auctions for property and note sales in 2010; 39% said they will auction property, 28% will auction first liens and 17% plan to auction non-performing notes.

"Banks are in the early stages of digesting commercial real estate exposure and we expect the need for note sales to manifest itself in additional activity in 2010," Mounts says. "Those that utilize auctions in the coming months will limit their losses and rally first against the coming wave of maturities."

The survey was completed by 50 nationwide bankers who attended the American Bankers Association's annual convention in Chicago.