‘Many Levers’ Needed to Handle Maturing Debt

NEW YORK CITY-Asked which factor would have the greatest influence on commercial real estate lending as the year progresses, the 1,200 audience members for Thursday’s Deloitte webcast were pretty evenly divided among three possible sources. New CMBS issuance, relaxation of banks’ underwriting standards and the emergence of new sources each garnered slightly more than 20% of the vote. A reduced role for Fannie Mae and Freddie Mac was preferred by slightly fewer respondents, while only 8% thought insurance companies would be making more loans.

To Deloitte principal Guy Langford, who moderated the hour-long discussion, titled “Real Estate Markets 2011: What Factors Will Influence Your Decisions?,” the audience’s response squared with what his firm is seeing. “It will take many levers” to refinance all of the maturing commercial mortgage debt: some $1.7 trillion between 2010 and 2015, said Langford, leader of the firm’s distressed debt and asset practice.

As for the relatively low ranking given to insurance companies, which have enjoyed the lowest loan default rate of any lending source since the downturn, Deloitte’s Constantine Korologos would concur. “Insurance companies do not like to increase their percentage of loans too quickly,” he said. “So there’s a limit” on how much insurers will contribute to addressing the looming mortgage debt in the next few years.

A director in the real estate consulting practice at Deloitte Financial Advisory Services, Korologos noted that banks are becoming “more aggressive” about making loans, although he added that this doesn’t mean they’re making more aggressive loans. Over the past six quarters, fewer banks have been tightening their underwriting standards, he said, citing Federal Reserve data.

Looking at market fundamentals, Steven Bandolik, a director with Deloitte’s real estate practice, notes that commercial property values have gone back up 32% from the low point they reached in 2009. He noted that transaction volume, too, has increased from the trough, but added, “It’s yet to be sustained for long enough to confirm that ’09 was our bottom.”

Ultimately, the fundamentals question boils down to job growth, and much of the audience saw that as top of mind. In a poll question asking which commercial real estate dynamic would have the greatest influence on planning decisions, 46% cited the economy. The figure was well above those for looming maturities, government regulation, access to capital or the performance of real estate fundamentals.

Similarly, two-thirds of audience members felt that the best way to describe the current market as either “stabilizing” or “in the early stages of recovery.” Only a handful thought it was headed for further decline. “While we’re seeing some black spots, people are no longer talking about commercial real estate as the other shoe to drop,” Langford said.

The phrase “a tale of two markets” has been used frequently in the past several months, and Langford cited a series of bifurcations illustrating how widely that phrase applies. While GDP growth has been positive, job growth has been “very muted and minimal,” he said. There’s also a couple of divisions among lenders: their attitude toward lending on core properties versus anything else, and the current tendency of larger banks to relax their underwriting compared to smaller institutions.