“It Will be a Bleed Out, Not a Tsunami”

Lenders are taking properties back from borrowers, but rather than selling buildings in this market, they’re managing the assets in house, according to Dave Karson, managing director of Cushman & Wakefield Sonnenblick Goldman.

“It will be a bleed out, not a tsunami,” Karson said of the commercial real estate market. “Lenders will hold onto the assets.”

Karson was one of the speakers on a recent National Realty Club panel, “Current Mortgage Financing and Joint Venture Opportunities” that was moderated by Allan Riley.

Panelist Melissa Farrell, a managing director at Prudential Mortgage Capital Company, said life lending totaled $1.3 billion the first six months of the year, but has slowed down in recent months.

She added that Prudential had a $3 billion appetite for lending this year and is looking for the right transactions. Loans for commercial buildings with stable cash flow such as office buildings, industrial sites, and retail regional malls are being sought by Prudential, but not average hotels. In the next 18 months, the company will put out between $5 billion and $6 million.

“We ask where are the deals and we think they are with current lenders,” Farrell said. “We’re not seeing foreclosures and dumping into the market.”

Prudential is a more conservative lender today and is making loans with 55 percent to 65 percent leverage, although it might go up to 70 percent, Farrell said. The debt yield is between 12 percent and 14 percent, and loans range from $10 million to $100 million, and $200 million to $300 million for portfolios.

George M. Klett, executive vice president of Signature Bank, manages a commercial real estate portfolio of $2 billion and makes loans ranging from $1 million to $25 million, but has gone as high as $40 million.

Klett stressed that Signature retains the loans in its portfolio and doesn’t sell them or securitize them, a practice he criticized as risky. He described himself as a conservative relationship lender who also thinks outside of the box.

Signature is interested in multi-tenanted apartments that offer cash flow, Klett said, but is less interested in office and retail projects because of concerns about the economy and unemployment. No one is doing construction or development loans or any loans that Wall Street analysts and regulators will criticize loans they deem to be too risky.

Klett believes interest rates will remain low next year and pointed out that they are currently half of what they were in the recession of the early 1990s.

“People are sitting on the sidelines with money, waiting to invest,” he said.

Simon Ziff, president of Ackman-Ziff, said his firm has taken one deal to market to raise equity this year. Prices aren’t attractive because sellers still think their properties are worth more than they are.

He said the Fed’s efforts to revive the secondary markets through TALF are stimulating new lending.

Ziff said he’s seeing positive activities he wouldn’t have predicted a year ago. First, there has been an increase in foreign investment in the last six weeks; second, a new Commercial Mortgage Backed Securities deal was made through TALF; third, Wall Street has had its biggest year ever issuing new equities; and fourth, when banks start clearing their balance sheets in four to six months, the herd mentality in real estate will kick in and result in more deals.


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