Cautious Optimism for Finance

Unlike 2009 when the majority of lenders were out of the market, over 90% of the lenders surveyed by the MBA have indicated they have or plan to return to market to lend in 2010. Even with this positive outlook, lenders appetite for new commercial loans with any degree of risk is tepid and varied.

Multifamily financing dominated the market in 2009. Government sponsored entities Fannie Mae and Freddie Mac represented 84% of the multifamily financing market in 2009. Meanwhile, multifamily financing comprised 60% of all commercial real estate finance market activity. Thanks to the GSEs and the US government's implicit guarantee, pricing for multifamily finance is very competitive. Rates are in the 5.25% to 5.75% range for loan to values up to 80%.

In 2010 lenders appear ready to cautiously entertain financing other asset classes. Most lenders are seeking stabilized, fully leased assets from strong sponsors. Life company lenders are offering proceeds levels up to 65% LTV on new first mortgage financing on office, industrial and self storage properties. Debt for retail and hospitality remains scarce. Mezzanine debt players, who will increase proceeds up to 75% and higher, were in attendance at rates from 8% to 12%.

Economists present believe the recession was over in August 2009. In addition they noted that single family home values troughed in the first quarter of 2009. Home values are now up 10% from their low point. On the other hand, commercial real estate values have declined 31% from their 2007 peak. Economists in attendance predicted a 4% overall decline in values remains to be realized.

Leasing in retail will trough in 2010. In the short term, vacancies will continue to rise. A rebound in this sector will be strong with pent up consumer demand fueling retail sales.

Industry experts indicated the following:

•Delinquencies continue to rise in all asset classes led by hospitality, followed by over-levered multifamily (primarily financed in 2006 and 2007), retail and office.

•Life company delinquencies remain minimal and will remain low.

•Banks hold the majority of real estate assets followed by CMBS, FNMA/Freddie/HUD and life companies.

•Banks will begin to shed poor performing assets in 2010. The recent bank strategy of extend, amend and pretend will diminish.

•Job growth will begin in earnest in 3Q 2010.

The next few years will see increased deleveraging. Lenders will take losses and fresh equity will be committed to properties. However, no new construction will take place. In summary, 2010 will be a year of rising liquidity, increased market clarity and new opportunities for those who can identify and source capital.

Mark Scott is president of Commercial Mortgage Capital, based in Livingston. He can be reached at mscott@newcommercialmortgage.com. The views expressed here are the author's own.