Butler: Lenders Remember Lessons of '07

DALLAS—As CEO of one of the nation's four largest commercial real estate valuation and consulting firms, Diane Butler is at the center of the market's most sweeping trends: the non-stop deal flow, the rise of CMBS and buyers' increasing eagerness—or aggressiveness—to get deals done. The appraisal and valuation veteran—whose firm, the Dallas-based Butler Burgher Group, recently broadened its reach into New York City with April's integration of the Leitner Group into its operations—sat down with GlobeSt.com to discuss those trends and where she sees them heading.

GlobeSt.com: We're seeing buyers become more aggressive about winning deals. How is this influencing their expectations?

Diane Butler: As long as we're in the current interest rate environment, things are okay as far as being aggressive is concerned. One question that comes to mind is, how is this time going to be different, because it has felt like 2006 or 2007 for a couple of years now. There's a lot of CMBS activity, and that's going to increase over the next two to three years, simply because of all the refinancing that has to occur on all of the loans made between 2005 and '07.

But I do think it's different this time: underwriting standards are tighter, not as relaxed as they were in '07. Leverage is not what it was in '07; most of the deals we're seeing are 65% to 75% leverage. With lower loan-to-value ratios compared to the last cycle, there's more equity in these deals. Lenders' memories are short, but they still remember '07 and what happened.

GlobeSt.com: In their eagerness to get deals done, are they looking for faster turnaround in areas such as due diligence?

Butler: We've seen that for the past two years. Certainly technology is playing a big part in that, for us and for lenders. People are more efficient, and it doesn't take as long as to do things as it did five years ago. It's still a very time-sensitive market, in terms of acquisitions and the delivery for due diligence because of the acquisition market. If lenders have a well-oiled lending platform, they can get things done more quickly, and so they expect their service providers to deliver with the same timeliness.

GlobeSt.com: Talking about the increased volume of CMBS, are we seeing two different worlds compared to 10 years ago in terms of the underwriting and the quality of the assets?

Butler: Looking back on '07, the quality of the assets overall is better. Better quality assets and tighter underwriting will help prevent the wheels coming off deals like last time.

GlobeSt.com: So here again, we're seeing lenders remembering some of the lessons from last time.

Butler: Yes. The programs are different, and there are more options for buyers in the various CMBS executions. One thing that will begin to impact this in multifamily is the agencies and what's going on with Fannie and Freddie reaching their maximum loan volumes for this year faster than anybody thought they would. We're seeing more deals in multifamily go CMBS than a year ago. That's going to create more demand for FHA and HUD-type financings as well, if refinancing can be done using the various HUD programs.

Globest.com: Are CMBS deals focused pretty squarely on multifamily?

Butler: No, it's still pretty spread across the spectrum. But we do a lot of Fannie and Freddie work; we manage the appraisal process for Morgan Stanley and for Goldman Sachs, so we know what percentage of their lending is multifamily and what percentage is office, retail, etc. There's more multifamily than there has been in the past, partly related to better pricing but also due to a lending platform that allows them to do things differently and the fact that Fannie and Freddie are reaching their lending maximums. If a massive portfolio came in, they probably couldn't lend on it.

GlobeSt.com: You had mentioned that the low interest rate environment was keeping a number of factors in check. There's a pretty strong likelihood that we'll see some type of increase at some point this year. Do you anticipate refis heating up in anticipation of a rate increase?

Butler: Since the beginning of this year, we've seen that. A lot of the activity is being driven not only by acquisitions but other factors. We saw a number of early refinancings in 2014 that were coming due in 2015. So there's still that dynamic in the market. I don't think interest rates are going to go up a lot, and even when they do go up, we're still historically low compared to previous cycles.

GlobeSt.com: So even if interest rates tick up, you don't anticipate the volume of refi activity starting to taper off.

Butler: No. If you look at the CMBS issuance that's due in '15, '16 and '17, some of that has been refinanced early, but the lion's share of it hasn't been. That will still drive the need for refinancing, regardless of where the interest rates are. They've still got to refinance.

GlobeSt.com: Butler Burgher recently completed its integration of the Leitner Group. What has this meant for your company in terms of capacity?

Butler: It has increased our capacity and our reach into the Northeast. For years, we've had a small presence in Manhattan, but now we have a significant presence that's being led by Joel Leitner, a 25-year veteran in the industry and very widely respected in New York. It really completed our geographic footprint.