Real estate owners in need of loans are still finding them on Wall Street, but the mounting European debt crisis is fueling worries that lending could slow down, imperiling the real estate market's recovery.
Wall Street lenders that package real estate loans into commercial mortgage-backed securities originated and sold $11.6 billion in loans in the first five months of the year, vs. $24.2 billion for all of 2011, according to Trepp LLC, a New York-based research firm.
Tom Fink, senior vice president and managing director at Trepp, projects that national CMBS loan volume will total about $30 billion this year, a 20% increase over 2011.
The market is rebounding from the financial crisis of 2008-'09, when CMBS lending stopped altogether.
“The pipeline right now is strong,” Mr. Fink said. “The machine is starting to work again.”
Yet jittery financial markets once again are casting a longer shadow over the Wall Street lending machine. In the interconnected global financial system, what happens in Athens and Madrid can influence whether, and under what terms, an office landlord in Chicago can get a loan.
Under a worst-case scenario, European leaders would fail to contain the debt crisis, investors would pull out of riskier investments like CMBS and lenders would move to the sidelines like they did nearly four years ago.
“If something goes amiss like it did last year — and it feels a little shaky right now — then volumes are going to be off,” said David Hendrickson, managing director in the capital markets group at Jones Lang LaSalle Inc., a Chicago-based real estate firm.
To account for the higher risk, CMBS investors and lenders are demanding that borrowers pay a higher interest rate, or spread, over benchmark U.S. Treasury bonds. But yields on Treasuries have fallen at the same time as investors have flocked to safer investments, so rates remain attractive for borrowers, below 5% for 10-year CMBS loans, Mr. Hendrickson said.
Unlike a bank or insurance company, which typically will hold a loan on their balance sheet to maturity, a CMBS lender will issue a loan, pool it with other mortgages in a trust and then sell bonds backed by the debt. Mortgage payments pass through from the borrowers to the bondholders.
Aggressive lending in the CMBS sector helped fuel the commercial property boom, leading to a wave of defaults during the bust. Nationally, the delinquency rate on CMBS loans hit 10.04% in May, an all-time high, according to Trepp.
Yet CMBS lenders are more conservative today, demanding, for instance, that borrowers invest more equity in properties and using existing rather than projected cash flows when they underwrite loans, Mr. Hendrickson says.
“Everybody's doing the right thing,” he said. “We're just kind of at the whim of Europe right now.”
Alby Gallun is a reporter for Crain's Chicago Business, a sister publication of Pensions & Investments
