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Navigating Today's Lending Market
Tom Detienne David WoidaInvestors Community Bank NorthMarq Capital860 N. Rapids Road 325 N. Corporate Drive, # 180Manitowoc, WI Brookfield, WI (920) 686-5626 (262) [email protected] [email protected]
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Agenda
Industry Summary Recent CMBS Market Slowdown Where are Rates? Underwriting Changes Examples Q & A
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Industry Summary• Expanded options for CRE finance
– Conventional Banks / Portfolio Lenders– Conduit Lenders (CMBS)– Insurance Companies– GSE’s (Fannie Mae and Freddie Mac)– Private Money Lenders– Mezzanine– Credit Tenant Lease (CTL)– Equity
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Key Differences Between Lenders
Banks – Portfolio Lender, flexible terms, good $’s, shorter terms, typically recourse
Conduits – Securitized Lender, little flexibility, aggressive terms
GSE’s (Freddie & Fannie) – Could be either portfolio or securitized, flexible terms, attractive rates
Life Companies – Portfolio Lender, very flexible, conservative terms
Private Money – Portfolio Lender, flexible and attractive terms, very selective on deals
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Holders of Commercial and Multifamily Mortgage Loans
Record Levels of Just Over $3.0 Trillion of CRE Debt Outstanding in 2007!
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CMBS Spreads
• 1998 – Russian Bond Crisis CMBS spreads jump from 150 to 300 basis points• Current Spreads - widened to all-time highs
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What’s Going On in the CMBS Market?
• Loss of Investor Confidence - Results in billions of dollars in Commercial Mortgages being held on books waiting for Investors
• Risk Adjustment – Increased spreads of over 100 basis points – 200-250 bps over 10-year Treasury– 130-180 bps over 10-year Swap Spread– Current Market Rate Re-established at 6.35%-6.85% (Fixed 10-year Loans)
• Borrower Impact – Underwriting Standards have tightened – Debt Cover Ratios remain at benchmark 1.20 – Interest-Only periods reduced or eliminated– Ultimate impact = lower loan proceeds in today’s market
• Competition - CMBS spread increases have made Portfolio Lenders (Life Companies, Fannie Mae & Freddie Mac) more competitive
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Federal Reserve
Not a Bailout: The Fed is in a position to defend a cut in the fed funds rate based on weak economic data as opposed to lowering the federal funds to address the liquidity and credit problems
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Yield CurveConstant Maturity Yield Curve
3.70
3.90
4.10
4.30
4.50
4.70
4.90
5.10
5.30
1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 20 Year 30 Year
Maturity
Per
cen
t
9/18/2006 8/17/2007 7/18/2007 9/10/2007
Source: Federal Reserve
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How Did We Get Into This Mess?
A Combination of factors…
1. The Fixed Income Market has driven a majority of the spread widening
2. Unlike in the past, the CMBS Market itself has contributed to the recent risk adjustment
Fixed Income Drivers CMBS Drivers
• Sub-Prime Meltdown• Volatility in the Corporate Bond Market• Lack of Liquidity
• Deterioration in Loan Underwriting• Huge Issuance Calendar in Volatile Market• Lack of Liquidity
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Corporate Bond Spreads
Commercial Real Estate Impact: Life Companies primarily set interest rates
based on corporate bond yields, therefore mortgage spreads for this sector have
seen increases in the range of 30-60 basis points
Source: Federal Reserve
Moody's Corporate BondsSpread over 10-year Treasury
-
50
100
150
200
250
300
350
400
450
Jul-
01
No
v-01
Mar
-02
Jul-
02
No
v-02
Mar
-03
Jul-
03
No
v-03
Mar
-04
Jul-
04
No
v-04
Mar
-05
Jul-
05
No
v-05
Mar
-06
Jul-
06
No
v-06
Mar
-07
Jul-
07
Basis Points
Aaa
Baa
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CMBS Outlook
Improved Long-Term Outlook
• Commercial Real Estate Fundamentals Remain Solid
– Rental growth still being seen in many markets
– Higher cost of building helps to moderate supply
– Job growth remains stable
– Companies strong balance sheets
• CMBS Community Responded Proactively to the Situation
– Significantly more conservative loan underwriting
– Result is lower supply in the fourth quarter
Current Spreads offer tremendous value – increasing future demand for Commercial Mortgage Backed Securities
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Capitalization Rates
Cap Rates
Apt
Industrial
Office
Retail
Mtg rate*
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
1 2 3 4 1 2 3 4 1 2 3 4 1 2
2004 2005 2006 2007
* 7 to 10-yr fixed rate conduit loans for properties 5 mil+
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Where are Spreads Today
Property Type2006
Spread (1) CMBS GSE Life Bank (2)
Anchored Retail 100 200 N/A 160 200-300
Un-Anchored Retail 135 235 N/A 170 200-300
Multi-Tenant Office 118 220 N/A 165 200-300
Medical Office 120 220 N/A 175 200-300
Multi-Tenant Bulk Warehouse
100 200 N/A 165 200-300
Single Tenant Bulk Warehouse (non credit)
125 225 N/A 180 200-300
Multi-Family (Class A) 105 200 140-150 150-160 200-300
1. September 20062. Indexed to LIBOR Swaps vs. Treasuries
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How Does All This Affect Underwriting
• Cash flow (Debt Service Coverage)• Leverage (Loan-to-value)• Interest only periods• Reserves / Escrows• Costs of issuance• Personal guarantees• Prepayment penalties • Assumptions
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EXAMPLES / Q&A
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Sources
• MBA Website
• Federal Reserve
• Real Capital Analytics
• REIS
