"Lenders Bounce Back" CONTINUED...
Though last summer's crisis created a troubling situation, conduit lending will always be up and down, says Soliz. "It's cyclical. They come in and out of the market. Securitizations take a fair amount of time to complete, so they go to the market for funds after substantial intervals," he points out.
A significant change among conduits is the demand for reserves. Traditional lenders had already instituted clauses requiring assurances that money would be available for repair and re-tenanting costs, but prior to September only a few conduits asked for set-asides.
Jeff Jones, executive vice president of Kansas City, Mo.-based Midland Loan Services, says virtually all lenders now require either reserves or proof of sufficient available financial assets to cover unexpected costs.
"It's to the borrower's advantage," he explains. "If an anchor leaves, he will be able to pay leasing commissions and tenant improvement costs to land a replacement. And if he sells, the reserves are a salable asset."
Both Cunningham and Lituchy say a frequently overlooked factor in the dearth of lending in the last quarter of '98 was the fact that lenders had such a strong seven months from January through July.
"Many lenders had already met their goals for the year, so they sat back during the crisis," Lituchy notes.
Most observers anticipate a strong '99, with most responsible lenders gearing back up for high-volume business. As a signal of the change, Surber reports, the stalled $150 million deal got back on track in December, with closure set for early January.
Many lenders say they plan to lend more in '99 than they did in '98. Cunningham reports that Liberty did about $300 million in loans last year but expects to do $500 million this year. Retail accounted for about half of last year's total, and he projects the '99 ratio will remain about the same. |
Johnson Capital Group has averaged $350 million to $400 million in loans per year, about two-thirds of it retail. The level will be at least as high this year and probably higher, Arrobio says.
Lituchy says KeyBank has set a goal of $1.6 billion in retail lending for the year, compared with $100 million from from September '97 to December '98.
According to Arrobio, spreads dropped 25 to 50 basis points in December. He doubts they will drop much more before spring. If prime rates remain low as expected, loans should remain very attractive.
Some recent deals give a fair indication of what borrowers can expect in the near future. Johnson Capital Group arranged a $6.5 million loan for a 39,000 sq. ft. Bristol Farms-anchored center in Pasadena, with interest in the mid-7% range, a 10-year term and 30-year amortization. Arrobio says the borrower got an 80% LTV because the center offered strong sales and demographics and a good location.
Johnson says Midland refinanced an unanchored center in the Midwest at $64 per sq. ft., with a 70% LTV, 10-year term, 30-year amortization and a spread of 290 basis points over Treasuries. American General Investment Corp. provided Win Properties Inc. $38 million to acquire a mixed-property in Rye Brook, NY with 150,000 sq. ft. of retail. The loan has a 7.14% fixed rate and 15-year term.
Although some analysts caution that another brief downturn could occur, most believe the long-term outlook is good.
"The CMBS meltdown and global financial crisis were unrelated to the fundamentals of real estate," says Lituchy. "And while the past period was painful, it was also encouraging. Unlike the late '80s when lenders continued to lend despite signs of trouble, this time the market did what it was supposed to do. It imposed instant discipline and cooled things down. That is a very good sign for the future."
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