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| Weekly Interest Rate Tracking |
| February 19, 2009 |
Good Morning,
Attached is a PDF copy of Colliers Meredith & Grew's interest rate sheet that includes current and historical Treasury, LIBOR and Prime interest rates, which are updated daily with real time data from Strategic Alliance Mortgage.
We provide these updates on a weekly basis to keep our clients and colleagues aware of rate movements. We hope you find this information helpful.
DOWNLOAD INTEREST RATE SHEET (125KB)
The World As I See It: Capital Markets
Remarks by David Douvadjian, Executive Vice President, at Colliers Meredith & Grew's 30th Annual Trends in the Real Estate Market Seminar
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Today I want to talk to you about investment opportunities in commercial real estate investments in 2009. However, my role is also to temper these opportunities by managing your expectations. With all the challenges we face in this market, we will need patience, creativity and a reversion to standards of an earlier time. For those of you here last year you heard that “‘07 felt like heaven” and “not to hesitate in ‘08”. I would propose that we try to “FIND THE SHINE IN ‘09!”
But first, let's start with some facts that we've all probably heard more than we care to:
- CMBS is dead, large banks & investment houses are either failed or wounded so badly that confidence fails them. And no one knows when it will return or to what extent. Experience tells us that though some will exit the industry, some will re-emerge in a capacity to work with us again. Many have gone on to raise funds for note acquisitions, new debt vehicles, or equity capitalization—my suggestion is stay close to these folks.
- Alternative investments such as corporate bonds, RMBS and CMBS are competing for allocations with mortgages. Fund managers are dealing with a volatile market where there is a greater risk of redemptions. That risk has created a flight to liquidity, which is why fund managers are investing in treasuries, evident by the 10 year treasury [at 2.08% in mid-December]. This is the lowest in my career. All this, coupled with a lack of lending competition and market fear, is limiting liquidity available for real estate investments.
- Spreads are now a thing of the past as real estate lending is yield driven. For real estate as an asset class to compete for allocations, commercial real estate spreads HAD to move up. In the past, 75% leveraged mortgage pricing paralleled BBB corporate bonds. Today with loan-to-values coming down to the 60% range, pricing is closer to single A corporate bonds. As a result today’s 10 year interest rates are in the high 6% to low 8% range.
- Life insurance company and pension fund allocations, when any allocations are made, are far from filling the void left from the CMBS exit. Still, Life Company lending remains a relationship business between lender, correspondent and borrower. Though limping, life companies stand to greatly benefit from the CMBS debacle as borrowers refocus on certainty, service and flexibility. After taking off the last quarter of 2008, many life companies are, once again, in business and will provide leverage in 50-65% range for terms of 5 to 25 years, with a preference for longer terms, on a non-recourse basis.
- The commercial banking industry consists of those “too big to fail,” those smaller but nimble and prudent, and those flirting with the precipice. In fact, coming out of the last market cycle and through a period of consolidation, a number of very talented and well trained lenders dispersed to smaller local and regional banks. These old friends have done well with their commercial real estate investments, and in fact have been eating everyone else's lunch for the last 12 months, writing what I think are pretty solid loans at good spreads over their own cost of capital. They are the permanent lenders of choice today on smaller and middle markets high quality, well sponsored assets.
Against this economic backdrop, let’s focus on where opportunities lie that will inspire investors who say, “I WANT TO MAKE IT MINE IN 2009.” So, where’s the action:
- Note purchases.
Many holders of notes such as banks and life insurance companies want or need to raise capital. If a bid/ask gap remains between buyers and sellers of fee simple interests in real estate, the door is wide open for investors to pursue discounted note purchases. Notes secured by land and non-performing real estate, and junior note positions, have traded well below 50% of their face value. Notes written for securitization have more typically sold in the 60-to-85 cents on the dollar range. On the other hand, we are in process of closing a portfolio loan sale of higher quality life insurance company loans for 97 cents on the dollar. But let’s be clear, this was driven by the yield, but most importantly by the quality of the assets.
- Note acquisition finance.
This is a new business line for lenders. There are a variety of new lending programs available for financing the acquisition of debt. In the case of better quality, longer term debt acquired by a third party, the likely sources are banks, a debt fund or a life insurance company. Generally, the availability of this type of financing is up to 70% of underlying collateral value for longer term debt and will be priced in the 7-9% range.
- For lenders looking for liquidity, here’s one to think about: Hypothecation of Mortgage.
Much like investors borrow against the value of their security, a lender may pledge its mortgage asset as collateral for a loan. We expect that behind the scenes, more lenders will become borrowers by pursuing this strategy and need a variety of different capital sources – that’s where we come in. Depending upon the loan amount and term requirements, the borrower, in this case the lender, may find capital sources in banks, life companies or debt funds.
- Gap equity investment.
It’s no secret that loans originated over the last few years were aggressively underwritten. These same loans with near term maturity face a difficult challenge. At maturity, with a lack of lender competition and with new underwriting guidelines, these loans will most likely suffer a shortfall of first mortgage proceeds. Currently mezzanine lenders, equity sources and new funds are raising capital to bridge the gap between the new lower loan amount and the required payoff amount. Though this may be financially painful, gap financing provides an opportunity for lenders and borrowers alike to solve an otherwise more serious problem.
- The last thought I’d like to leave with you is that we are in the business of relationships.
Though defaults and delinquencies remain low, in the face of declining fundamentals, portfolio lenders and existing borrowers have the ability to expedite mutually beneficial opportunities by working together – with our help, of course! This may include loan modifications for existing borrowers, such as extending amortization, allowing for I/O, waiver of prepayment penalty, or granting a borrower the ability to realize a windfall in buying back their own debt at a discount. By doing so banks and life insurance companies can avoid taking back assets and can raise capital, reduce exposure and strengthening their balance sheet. Good luck accomplishing the same with a special servicer.
In our Capital Markets view, those are the opportunities presented to us, and to the universe of borrowers, lenders and equity providers, in 2009. |
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| Please contact the Capital Markets Group at Colliers Meredith & Grew with any financing questions. |
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Colliers Meredith & Grew is a Boston-based commercial real estate company with integrated service groups including Brokerage, Capital Markets, Counseling & Valuation, Development & Advisory, Investment Sales, and Property & Asset Management. In addition to representing its core clients in New England, Colliers Meredith & Grew provides national and international real estate services to its multi-market clients as a member of Colliers International and as an owner/member of Strategic Alliance Mortgage LLC (SAM). Colliers International is a worldwide affiliation of independently owned and operated companies in more than 293 offices in 61 countries. |
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