George Smith Partners' Josh Roseman

"I don't think this is a fast moving trend but a number of deals recently point to the beginning of a thaw in the capital markets." Namely the activity has been seen among life insurance companies, debt funds and mortgage REITs, which are gamely trying to fill the void left by the CMBS market. That is unlikely to happen, according to Roseman.

"The CMBS industry and the level of debt that needs to be refinanced is still a huge problem." The CMBS industry itself is showing signs of mend as well, though, he notes. That, plus the several recent transactions underwritten by life companies, mortgage REITs and debt funds, however, is enough to give the industry legitimate hope that a recovery is on the horizon.

GlobeSt.com: What exactly is giving you hope that the lending markets are thawing?

Roseman: We are seeing the general appetite to lend dramatically improving -- loan officers are pursuing a broader array of product types and structures that they would not have considered earlier this year. For example, we've recently closed several large deals and received relatively aggressive quotes, even competition, on opportunities to lend. This is in stark contrast to the general disinterest in similar deals during most of 2008 and 2009. Permanent loan interest rates have tightened and leverage ratios, while still conservative, are increasing. Spreads are down 100 to 200 basis points with the gap between life companies and opportunity funds narrowing dramatically. We've even received quotes on forward permanent commitments as far as 18 months in advance of funding.

GlobeSt.com: What was the tipping point, in your opinion, for the shift?

Roseman: Well that is hard to pinpoint.It may reflect some amount of urgency to invest allocations by the end of the year. But I would say that general confidence seems improved, which suggests a longer term swing in appetite to lend. First, alternative investment yields have declined. Earlier in 2009, CMBS spreads were wide and lenders capitalized by allocating funds to their fixed-income desks to buy seasoned CMBS paper. Those yields are less attractive today.

Second, most lenders had problem loans and therefore reserved allocations to solve internal issues. It seems that many feel confident that they've addressed their portfolio risk and are now looking to get their capital to work by originating new loans.

GlobeSt.com: You said something about George Smith Partners increasing its activity. Can you elaborate?

Roseman: We recently closed more than $100 million of permanent senior debt for an institutional client collateralized by a portfolio of Class A assets. The deal was funded by a single life company. The loan is non-recourse with a prevailing market fixed-rate of interest and a 10-year term. Client confidentiality prevents more detailed disclosures, but the number of interested lenders for a large portfolio was encouraging, as was their competitive attitude toward pricing, sizing, and assurances of closing. Also, just before Thanksgiving, we executed a loan application on a large construction project for a special purpose built-to-suit asset, 100% pre-leased to an investment grade tenant. This deal was aggressively pursued by several banks, life companies and pension funds and the firm received strong interest in construction-to-permanent and forward-permanent-commitments. Fixed-rate terms of seven to 25 years were offered at rates of 6.5% to 7.25%. In mid-2009, most lenders would not even consider construction financing, let alone forward funding commitments.

GlobeSt.com: I've been hearing of life insurance companies stepping up allocations for commercial real estate. Are you seeing that as well?

Roseman: Yes. I can tell you that one major life company that was originating $20 billion per year at the top of the market originated only $1 billion in 2009 but has budgeted $6 billion for 2010. On more traditional deals, life company pricing has improved from the mid seven-percent range to as low as the low six-percent range for a five-year deal and high six-percent range for a 10-year deal. Life company leverage has also improved from 50% LTV to 55 to 65 percent LTV based on a "debt yield" (NOI/Loan Amount) sizing around 14%. Some lenders have expressed willingness to further increase leverage, offering up to 70 to75% LTV based on a debt yield sizing around 12%. Pricing at higher leverage is obviously risk adjusted.

GlobeSt.com: Tell me about the activity you are seeing with debt funds and mortgage REITs.

Roseman: In order to compete, debt funds and mortgage REITs are now willing to lend on quality properties with a little more "hair" than what a life company will consider. For example, they might lend on an older property, in a secondary market, or where the asset has near-term rollover risk. More importantly, these funds and REITs have recently reduced their rates from 8-9% to high 6% on five-year deals. At the same time, they are increasing leverage offers from 65% LTV at a 12 to14% debt yield to 75% LTV at a 10 to 12% debt yield.

GlobeSt.com: What does all this signify for 2010?

Roseman: We are far from a return to normative capital markets so a healthy dose of caution is in order when talking about the capital markets. But good news is good news, and we'll take it when we can get it. We're looking forward to a more productive 2010.