|
|
|
| KEY RATE INDICES |
FANNIE MAE RATES * |
| Prime Rate |
8.00% |
| 11th District |
5.514% |
| 3 Mo. T’s (YTM) |
4.28%
|
| 6 Mo. T’s (YTM) |
4.27% |
|
| 5 Yr. U.S. T’s |
4.45% |
| 10 Yr. US T’s |
4.78% |
| 30 Yr. US T’s |
5.29% |
| 12-MAT |
5.871% |
|
| LIBOR - 1 mo. |
5.05% |
| LIBOR - 3 mo. |
4.85% |
| LIBOR - 6 mo. |
4.64% |
| LIBOR - 1 yr. |
4.56% |
|
|
| Tier 2+ (80% LTV) |
6.82% |
| Tier 3+ (65% LTV) |
6.67% |
| Tier 4+ (55% LTV) |
6.47% |
| 10 yr. term/30 yr. amort. |
|
|
|
|
GEORGE SMITH REPORT FROM 3-DAY COMMERCIAL PROPERTY WORLD MEETING
IN NY (3/19-3/21) WHERE HE CHAIRED ONE OF THE FINANCING PANELS |
| The general theme was that the markets (particularly the "Street") does not like uncertainty. Spreads widen to account for perceived increases in risk. Certain product categories get hit the hardest. Right now the Lemmings are running. It is definitely a "Buyer's Market". Area of Greatest Concern: "Bursting of the Technology Bubble and Ripple Effect" (1) Sub-lease space that will hit the market; (2) anecdotal stories of rent drops and market softening- but no hard facts yet; (3) concerns are in those office sub-markets that had the greatest technology driven office and tech/industrial rent spikes; (3a) some concern that technology build-to-suits can become "spec space"; (4) underwritings are starting to use 1999 numbers, even if markets are still above those levels; (5) not sure where we are in the various property cycles. Real Estate is city specific, property specific and there is need for current information, both statistical and anecdotal (from the brokers on the street); (6) Flight to Quality is favoring properties with the greatest stability and least down side risk. The Favored Asset Classes: (1) Apartment; (2) Industrial; (3) Office (focus on 24 hour cities and barriers to entry); (4) Retail - Focus on "Fortress Malls" and Market/Drug Anchored In-Fill. Hotels are "case by case" with focus on "flags", full service with barriers to entry. Healthcare sees little interest. Single tenant and credit tenant lease properties are under pressure, particularly retail. Apartments: Cap rates for new, Class A in major markets quoted at 6.5%-7% for pension buyers. However, in many cities there are low barriers to entry and local construction lenders, i.e. not invulnerable to over building. Office: Concerns with B & C buildings, suburban product and 2nd tier cities. Feel 8-10 major urban areas, 20 primary SMSA's and then the market drops off the charts. Audience Survey: A quick audience survey to start the program set the mood for the conference. (1) Values: 48% saw values declining in the months ahead; 43% the same; 9% increasing; (2) Apartments would see the least impact; (3) The best office markets (1) NE-66%, West-11%,SE-5%, Mid-West-7%, NW-3% (might have been impacted by the mix of attendees). Economic Growth: U.S. <2% both 2001-2002, and the world is slowing. Supply and Demand: Largely in balance. The recession (scope uncertain) is not being led by real estate in this cycle. Credit for this is given to greater discipline in lending helped by more information flow and faster reactions from the construction lenders. Real Estate as an Investment Class: (1) Is measured relative to alternative investments; (2) is outperforming equity markets in this cycle as the Technology Bubble has burst; (3) One speaker emphasized "We still have the bricks and mortar as collateral in a down cycle."; (4) As institutional stock portfolios have dropped in value, real estate as a % of asset allocation has grown. Catch 22 since many institutions maintain strict allocation guidelines; (5) Many institutional investors are over weighted in office where some of the best "buy" opportunities may be occurring, i.e. value declines, cap rates up 1 to 1.5% in many suburban markets, fewer buyers while the Opportunity Funds, having completed repositioning and need to sell to fill business plans. Buying Opportunities: Widest spreads in memory between fixed rate mortgages (low 7% range) and sale cap rates (north of 10% for other than apartments and industrial and selected core assets-in most parts of country. (1) Still wide spread in buyer "asking" and seller "bidding"; (2) Some former sellers electing to refinance after repositioning instead of selling, i.e. taking part of the money off the table and enjoying mid-teen cash-on-cash returns on remaining equity; (3) Anticipate that more sellers will lower expectations than buyers will be increasing purchase prices; (4) Buyers are uncertain about near to intermediate growth potential, therefore more conservative projections, lower net present values from discounted cash flows. Utilities: Lots of concerns- not only electricity with CA singled out repeatedly, but OPEC cutbacks. Result is difficulties in projecting, even with pass thru's. Mezzanine Debt and Equity: At least 30 funds already capitalized and more on the way. Trend by several Life Co's to enter business, particularly filling gap between lower leveraged properties, locked out to refi, where can lend to as much as 85% of value, pricing the increment to the risk. Securitization Goes Global: See increasing emphasis on CMBS in Europe. REITS: Have performed well. Total market cap in $150 billion range. Has not driven the rest of the world out of real estate. Good fundamental values. Many institutional investors have REIT allocation as part of diversification strategy. Securitization Comments, Volume and Mix: Estimate 30 active conduits remain. Year 2000 Volume: $59 billion ($40 billion fixed and $19 billion floating). Break-Even: Originators need spread of 205 to 210 between bonds and mortgages to break-even. Every additional 15 bps equates to 1% profit. Product Type: 47% conduit- fixed rate; 19% single tenant; 17% floaters (mostly repositioning structures); 6%- seasoned refis; 11% other, i.e. resecuritizations, etc. Securitization Product Mix: Office 30%, retail 30%, apartments 16%, hotel 8%, industrial 7%, nursing/healthcare 3%, mobile home parks 1%, other 5%. Hotels can typically be 5% of pool without causing problems (was 8%). Each pool has room for some "out of the box" product as long as well underwritten and small % of total. CMBS Performance and Spreads: Has performed exceptionally as an asset class. Diminimus default rates, virtually no losses. Excellent liquidity for bond buyers. AAA pieces were trading + 40 bps outside of AAA corporates for 6 months. Has widened as T's have dropped. Who Buys the Investment Grade Pieces: Money managers 46%, Insurance Companies 31%, Depositories 12%, Pension and Other 11%. Non-Investment Grade Buyers: Money Managers 42%, Insurance 20%, Credit Companies 23%, Depositories 7%, REITS 8%. Sub-Levels: "The B Piece buyers still running the show". Same group of approximately 8 players - but more money flowing into these investors. Defeasance vs. Yield Maintenance: Agreement that cost to defease is $50K+ in addition to yield calculations. However, to get CMBS loan with yield maintenance there is a 15 bp to 20 bp premium, i.e. equivalent of 1%+ in origination cost. A reality of the CMBS bond market and investor requirements. The Rating Agencies Prevail: Originators conforming increasingly to guidelines instead of trying to negotiate exceptions. Tired of taking "hair cuts". Average CMBS loan size is $6MM. Less than 25% of CMBS loans are on properties recently stabilized and lacking operating history. The Rate Outlook: Consensus that long rates at or near bottom. Reason is that spreads are widening as T's go lower. Investors are demanding minimum yields. For CMBS, the B piece buyers don't narrow their yield requirements. 7%-7.25% appears to be the bottom currently for full dollar loans (multifamily 10-15 bps lower- except for FNMA and FHLMC). Banks Under FDIC Pressure: Recurring theme. FDIC moved in 6-9 months ago, putting pressure on credit quality and requirement for lower loan to cost ratios. Has made it harder to do the larger deals. FNMA and FHLMC: Winning most of apartment fixed rate business. Selectively Life Cos. compete. CMBS wants for pools and will give more dollars. FNMA has supplemental loan program for future earn-ups (FHLMC also has, but less refined). Pension Funds: Many are leveraging purchases - up to 50%. More are teaming with private developers. General Loan Underwriting Trends: Focus on sponsorship and experience; closer look at tenant mix, credit quality and reason for locating in building. The Good News and the Wrap Up: Technology is not going away. Business continues to embrace the new technologies. For many of the speakers, these are the lowest interest rates in their collective careers. More important, the lowest vacancy factors. Break-evens typically underwrite to 25% vacancy unless rents drop. Recommendations from the "experts": (1) Lock up financing at these rates; (2) Focus on weaker tenants and help them to consolidate space or vacate and replace with stronger tenants with longer term leases; (3) look for mezz. or equity partners with shared visions and aligned interests; (4) mezz. and equity is shorter term. Forget the 10 year partner. 3 years is preferred and 5 years is available. The further out, the murkier the crystal ball; (5) With low rates, can afford mezz. to reduce equity needs and own greater share of property. |
|
| TRANSACTION OF THE WEEK!!! |
| $5,622,000 (98% of Total Project Cost) Construction Loan/Mezzanine Financing for 56-Unit Apartment Building: GSP arranged an 80% of cost construction loan and mezzanine financing covering 90% of the equity requirement for this to be built apartment complex in the LA's Mid-Wilshire district. The property, which projects a 10% return on cost, will feature 2 stories of subterranean parking under the 4 story complex. Amenities will include a gym, recreation room, and a 12-machine laundry room. The property is located on one of the last available land parcels in a dense apartment sub-market with occupancy of 97+%. The borrowers specialize in construction and rehab of multifamily properties, both as developers or contractors for hire. Financing Terms: Construction Loan: (1) Loan Amount: $4,650,00 (80% of cost); (2) Pricing: Prime + 0.75%; (3) Term: 18 months with one 6 month extension; (4) Amortization: Interest only; (5) Lender Fee: 0.75%; (6) Recourse. Mezzanine: (1) Loan Amount: $972,0000; (2) 90% of equity; (3) 10% interest rate pari passu then 40-50% participation in sale proceeds depending on time of payoff. (Steve Bram, David R. Pascale, Jr.) |
|
| REMEMBER TO FILL OUT YOUR WALL STREET PREDICTION SURVEY! |
|
WIN a Table for 10 at the 7th Annual George Smith Partners Real Estate Luncheon (To Benefit the A-T Medical Research Foundation)
Click here to fill out the Online Survey or to Fax Your Predictions to David Pascale @ 310-557-1276 or dpascale@gspartners.com
The deadline for your response is April 2nd
|
|
| * GSP is an L.A. correspondent for ARCS Commercial Mortgage, the nation's largest FNMA/DUS originator. |
| Note: Lender pricing and loan points are subject to change and exclude GSP loan placement fees. |
|
|
|
|
|
|
