John B. Levy & Co. Weblog

While not even on the menu six months ago, the market for commercial mortgage-backed securities (CMBS) has become a front-burner entrée as lenders finally have all the ingredients for making new loans.  According to “Mastering the Recipe,” the latest podcast produced by John B. Levy & Company (available online at www.jblevyco.com),  commercial real estate lenders continue to search for the right mix of leverage level and loan pricing as they try to bring a tepid secondary market to a simmer.

“After groping around in the dark for the right combination of ingredients, commercial lenders just might have found the right recipe for exciting the current market,” says John Levy, founder of John B. Levy & Company.  “And this is happening as the Federal government – through the TALF program – seems to be backing away from helping private enterprise, both for the commercial and the single-family markets,” Levy adds.  “Interestingly, only one of the three CMBS deals completed last year came through TALF, and this program expires shortly.”

As the TALF program comes off the lending menu, the market is seeing an uptick in the number of borrowers who have decided to access mezzanine debt.  Today, rates for mezzanine debt fall in a range between 10 and 13 percent, a collapse from the 15 to 20 percent range of six months ago.  These lower rates give borrowers additional leverage.  Investors need either more equity, which they are now able to raise, or they need mezzanine debt because their existing borrowings cannot be replaced by a new first mortgage.

“The surge in the Dow certainly isn’t hurting matters,” says Levy.  “A year ago, we were at around 6,500, and the banking system was on the verge of collapse.  Today, the Dow is approaching 11,000.  The banking system is starting to be profitable again, and people are paying off their TARP loans.  It’s understandable that people look at the Dow and feel confidence.  And in the financial markets, confidence expresses itself in a willingness among lenders to make new loans.”

But not all is well.  Despite the growing confidence that comes from a rising Dow and upbeat loan market, smaller retail and community banks continue to be pruned.  Those institutions with an asset base between $100 million and $10 billion that fall in the bottom 5 to 10 percent of their competitive set are at the greatest risk.

“Loan markets are definitely up,” says Levy.  “People are entertaining new investments in the form of loans, preferred equity, mezzanine debt – for all types of property.  We’re even finding an active market for shopping centers,” adds Levy, “and that’s after all the talk around the Christmas season that retail was dead.  This doesn’t mean we’re running at thoroughbred pace, however.  We’re more like the tortoise.  But when you consider that we weren’t running at all six months ago, tortoise pace is good.”

Firm Background

John B. Levy & Company, Inc. is a real estate investment-banking firm headquartered in Richmond, Virginia.  Since John Levy founded the company in 1995, the firm has structured over $3.5 billion in financing for developers and owners of commercial and multi-family projects nationwide, often investing its own proprietary funds into transactions with its clients. 

Mr. Levy is an expert on commercial real estate financing and the effects of interest rates on commercial real estate markets.  He is the originator and author of the Barron’s/John B. Levy & Company National Mortgage Survey, which Barron’s published for 23 years, and co-creator of The Giliberto-Levy Commercial Mortgage Performance Index (sm), the first and pre-eminent index to measure and analyze the performance of investments in the commercial mortgage industry.  Additionally, he is a former member of the Board of Directors of Anthracite Capital Inc. (NYSE: AHR), a New York Stock Exchange REIT managed by BlackRock, Inc. and a former director of Value Property Trust. 

A seasoned speaker, Mr. Levy has presented nationwide to major real estate associations and key industry groups, including the Mortgage Bankers Association and the Urban Land Institute.  He has also appeared on Bloomberg and CNBC.  Most recently, Mr. Levy appeared as a guest commentator on FoxBusiness.com and FoxNews.com.

For more information about John B. Levy & Company, please visit our website at www.jblevyco.com or call Andrew Little at 804-644-2000, extension 260.  You can also follow us on Twitter at www.twitter.com/jblevyco and become a fan on Facebook.

ANDREW LITTLE – TIMES-DISPATCH COLUMNIST

March 8, 2010

Virtually everyone in commercial real estate these days will say things are better than they have been in some time.

Though not altogether supported by the data, a positive outlook is spreading slowly but surely into the business.

Nothing compares well with commercial real estate activity in the good old days of 2007, but “off the bottom” is not a bad place to be when the industry’s prospects over the next few years “could threaten America’s already-weakened financial system,” according to a recently released government report.

The 183-page report was completed by the Congressional Oversight Panel, whose task was to assess commercial real estate loan loss risk to the country’s financial stability.

Other observations in the report include that $1.4 trillion of loans come due between now and 2014, and 50 percent are underwater; and that there are nearly 3,000 banks with problematic exposure to commercial real estate.

The panel’s bleak assessment of the industry is probably close to accurate if all banks with more than 30 percent of their assets tied up in commercial real estate loans closed shop tomorrow and liquidated.

The reality is much different.

Most banks that are overexposed to commercial real estate loans will continue to tread water, and those with capacity to lend will quite likely excel in growing their brand in the coming years.

Interestingly, it is the large banks that currently have the most capacity to lend. The top 20 banks in the country possess more than 80 percent of total bank assets. Of those, only two have commercial real estate exposure that exceeds 20 percent of their total assets (BB&T and Regions).

Conversely, all others – the 8,080 smalland medium-sized banks – have an average exposure that is closer to 40 percent (i.e., 40 percent of their assets are commercial real estate loans).

Another troubling commercial real estate trend is that loans are going into default and over to special servicers at an alarming rate.

Special servicers are tasked with handling problem conduit loans – the loans originated by Wall Street firms, bundled together and sold as commercial mortgage backed securities (CMBS).

According to data provided by Trepp, 10 percent of all CMBS loans are now specially serviced. Property types with the largest problems are hotel, multifamily and retail properties, with 19.7 percent, 13.8 percent and 10.7 percent, respectively, of each category being specially serviced.

According to Fitch Ratings Service, the actual delinquency rate for the same CMBS loans sat at 6 percent at the end of January, but with specially serviced loans at 10 percent, delinquencies are expected to rise.

So with all kinds of bad news, what’s making commercial real estate people more optimistic?

As Franklin D. Roosevelt said, “There are many ways of going forward, but only one way of standing still.” Said another way, things are starting to move.

Special servicers are so overwhelmed with problem loans it’s forcing them to take action and dispose of what they can. The market has been waiting for this and views it as vital to commercial real estate’s recovery.

Another disturbing problem for many institutions was lack of clarity and direction from the government. While this problem still haunts many lenders, those that have good controls in place and are not overexposed to real estate are back in the game.

The FDIC has not provided explicit direction on new lending activity, but its lack of ability to shut down banks with problematic loan exposure allows relatively healthy banks to move forward and go about their business.

The other positive factor is a pickup in transaction activity, particularly in larger cities.

The latest data from Real Capital Analytics indicate that December 2009 transaction volume for commercial real estate deals larger than $5 million was up 75 percent from the same period a year earlier.

Activity is a telling sign that we are moving away from the bottom.

Surprisingly, money is available at reasonable rates from the revised CMBS market as well as institutional lenders, such as pension funds and life insurance companies.

According to the John B. Levy & Company National Mortgage Survey, commercial mortgage pricing for five-and 10-year loans is in the 6 percent to 6.75 percent range for conservatively valued properties with good sponsors and solid leases.

The Richmond area is also showing promising signs.

Several large office properties are being marketed, and the Reynolds land near the Canal Walk is under contract.

Another positive example: A significant loan closing took place on the MeadWestvaco headquarters building. PB Realty Corp. financed the building for $68.4 million with a guaranty from NewMarket Corp.