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This interview originally appeared in Debt & Equity Journal. Erika Morphy is editor.

It’s no secret the real estate markets have been absorbing unprecedented levels of liquidity during the past few years. Just about every lender has his or her own personal story about deals that stretched the limits or pushed boundaries previously held sacrosanct. Joseph George is no exception. George is a senior vice president with Calabasas, CA-based Countrywide Commercial Real Estate Finance, an aggressive commercial lender. For a competitive transaction, he says, the institution will lend all the way up the capital structure. Overall, the lending environment is still healthy for financiers, he reports, but the liquidity continues to prompt borrowers to raise leverage to increasingly greater levels. George spoke recently about some of the latest manifestations of this ongoing trend in the office sector.

Q: What are borrowers asking for–and getting–these days?

George: In the major markets, such as New York City; Washington, DC; and San Francisco, most borrowers are financing office buildings for the entire term of the loan at interest only. This has been happening during the past six months, not for every deal, but for most long-term loans. In addition, properties in certain markets, especially at the sub-market level, are trading at much higher levels compared to even a short time ago. This is a function of the liquidity, but it’s also an example of loan dollars pushed much higher. Last year, for example, we closed on a loan that was in the low $100s per sf for a portfolio of properties in Silicon Valley. A few weeks ago, we saw four requests within that same submarket for trades at $250 per sf. Another change is that demand for smaller buildings is becoming much greater, at least in Silicon Valley. Buildings in the 50,000-sf range are in demand by such disciplines as biotech and high-tech. They want to take advantage of property values and lock in occupancy costs.

Q: Is that true in all markets?

George: Probably, but I have seen the greatest instances of these transactions in Silicon Valley because the smaller industries have made a rapid recovery.

Q: A lot of these trends-–the liquidity for instance–have almost become fixtures in the real estate capital markets. What has changed in the past six months, in your opinion?

George: I think the tipping point has been the rising cost of construction–which has gone way up because of demand for materials from China–coupled with the lack of available developable land in major urban markets such as New York City and Washington, DC. For example, in Manhattan, Downtown has always been a lagging submarket, at least compared to Midtown. Now, though, Downtown is achieving single-digit vacancies for the first time since Sept. 11.

Q: Can you tell me more about the demand for full term IOs?

George: Nearly all office buildings in major metro areas are requesting full-term IOs as part of the loan structure at a higher leverage, usually 85%. This happened before, but lenders tended to be more selective in their borrowers. Now we’re seeing a greater number of lenders doing these deals.

Q: Do you think they’re taking undue risks?

George: At the end of the day, the lender must be comfortable that it can refinance out of the loan. If you do full term IO, there has to be an economic event at the property that allows you to refinance out of the loan.

Q: You mean like a repositioning or redevelopment?

George: Not even that. Let’s say that 25% of the tenants in the property are at below-market leases. A lender could do a full-term of IO based on today’s cash flows. The expected economic event is that in three years, the tenants come up for renewal at full-market rate leases.

Q: Is Countrywide offering full term IOs?

George: Yes, but the ability to refinance out of a full-term, highly leveraged IO loan is one of the most heavily scrutinized factors when we examine those types of loans.

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