for Commercial Real Estate Professionals
2008 Capital Market Status
The coming
year promises to hold many challenges for the capital markets that are
expected to have a significant impact on portfolio lending. Penstar polled
a wide range of local and national institutional lenders including investment
banks, Freddie Mac, Fannie Mae, credit unions, banks, insurance companies,
and pension funds with regard to their debt capacity for multi-family
and commercial lending. The overall consensus is that credit continues
to tighten. Underwriting standards for all loans also continues to tighten
due to increased pressure from regulators and “B” piece buyers.
Wall Street lenders are underwriting leased Class A assets to a 1.10 to
1.15 debt coverage ratio with spreads of 250 to 275 over the 10-year treasury.
Banks and insurance companies are underwriting the same Class A assets
to a 1.20 to 1.25 debt coverage ratio on 30 year amortization with 200
to 225 basis points over the 10-year treasury. Some lenders are offering
an interest-only component for 1 to 5 years depending upon the leverage.
Fannie Mae and Freddie Mac continue to be a strong and reliable source
of permanent debt for multi-family properties, and will underwrite to
a 1.20 debt coverage ratio on a 30-year amortization with rates of 150
to 200 over the 10-year treasury.
One Wall Street lender remarked that the overall losses for fixed income
products worldwide (residential mortgage backed securities, commercial
mortgage backed securities, corporate bonds, etc.) is approximately $500
billion. To date, $100 billion of those losses have been absorbed and
the balance has been “marked to market,” with $400 billion
of imbedded losses. It is speculated that the only way the capital engine
will run again will be when various institutions and funds clear their
slates and write-down a large portion of their existing losses. The market
will need to absorb these financial hits before it can rebound. Fifty-five
percent of all residential mortgage backed securities that were purchased
over the last five years are held by international buyers, who, given
where the market currently rests, are wary of selling their securities.
The capital markets have never seen a convergence of events like what
we have experienced over the past seven months of 2007. In that short
time frame, the United States has faced escalating oil prices to a record
$100 per barrel; a domestic housing impasse, national and international
buyers of residential securities absorbing substantial hits, a lack of
liquidity for the “AA” through “B” traunches and
growing inflation.
Lenders continue to fund construction, bridge, permanent, and refinance
loans despite such turbulent conditions. Next week, the pension funds
and insurance companies will be receiving their allocations for fixed
rate multi-family and commercial loans for the 1st quarter of 2008. This
allocation is projected to be $15 billion, a comparatively small figure
due to the volatility within the market and a lack of quality projects
to be financed. Equity for pre-leased, well conceived and strong sponsored
developments, as well as value-added transactions continues to be available.
The New Year starts off far from “business as usual,” but
many opportunities continue for owners and developers to access historically
low cost debt and equity. We will keep you posted…
Hot Money
Unsecured Lines of Credit from $3 Million to $50 Million
Penstar is currently working with the Vice Chairman of a California Bank who is originating unsecured lines of credit for owners and developers of commercial and multi-family properties. The bank is focusing on those borrowers located in Southern California with large recurring cash flow from real estate assets, and will advance two times the borrower’s annual net cash flow on an unsecured basis. Net cash flow is calculated by taking the recurring asset net cash flow less debt service. By way of example, if a developer has $4 million of annual free and clear cash flow, he would qualify for an $8 million unsecured line. These lines are priced over Libor or Prime and allow investors the ability to “write a check” to take advantage of quick close opportunities. To discuss, please contact Steven Hamermesh at (818) 883-9609 or at Hamer@PenstarAdvisors.com.
Helpful Humor
|
Penny stocks A stockbroker was cold calling about a penny stock and found a taker. "I think this one will really move said the broker. It's only $1 a share". Buy me 1,000 shares said the client. The next day the stock was at $2. The client called the broker and said you were right, give me 5,000 more shares. The next day the client looked in the paper and the stock was at $4. The client ran to the phone and called the broker, get me 10,000 more shares said the client. Great said the broker. the next day the client looked in the paper and the stock was at $9. Seeing what a great profit he had in just a few days, the client ran to the phone and told the broker sell all of his shares. The broker said “To who? You were the only one buying that stock.” |
30
Day Libor |
10-Year
Treasury |
Prime |
4.25% |
3.87% |
7.25% |
