Commercial whistling the subprime blues?
COMMERCIAL REAL ESTATE by Sean Roth | Real Estate Editor
Several real estate brokers report capital woes are impacting their commercial closings.
The past two months have been even tougher than normal for the residential market, as lenders' subprime worries choke loans for potential buyers.
Commercial real estate sales and new development, which cycle behind residential and have remained strong, may just be feeling their first crossover pains from the residential with the recent credit crunch. Several local commercial brokerages say the capital markets are having some effect on commercial real estate transactions.
"Deals have been getting a little more challenging than even six weeks ago," says Travis Prince, an associate with The Jackman Group at Marcus & Millichap Real Estate in Tampa. "What we're starting to see is that with the residential collapse in the subprime market, conduit lenders have gotten wary of buying bundled loans."
In general, what brokers are reporting is a slight tightening of commercial lending requirements and an increase in the lending rate. The explanation for the cross-industry pain appears to point to a reluctance on the part of investors to buy mortgaged-backed bonds of any kind, leaving lenders holding the loans longer.
"This increases the cost of borrowing," says J. Patrick Duffy, president Colliers Arnold. Borrows were able to get an interest-only loan with a 10-year spread for about 75 basis points, Duffy says. But now, lenders have quit offering that type of debit and require everything to be amortizing. Further, he said, the spread that's being offered has gone up 175 or 225 basis points. So the real cost has increased significantly.
This results in buyers needing a better capitalization rate to meet their investment-yield requirements.
However, not every borrower or project is facing the same level of trouble, brokers emphasize. Much like the residential market, it's the less-than-perfect borrower or the more questionable project that's most like to feel the squeeze.
In the roughly six weeks following news coverage of the subprime troubles, the Fort Myers brokerage Gates D'Alessandro and Woodyard saw 40 deals disappear, according to Frank D'Alessandro.
(The Review interviewed D'Alessandro before his death over the weekend in New Jersey. The cause of the death while kayaking at night is under investigation.)
Duffy says he has only seen two deals that completely failed and another five that required major adjustment.
Scott Sosso, president of Sarasota's Prudential Palms Realty, says he also has seen commercial deals that went south because of the recent financing issues, and in one particularly unusual case, a large institutional bank even pulled a rate lock from a client.
Gary Tasman executive director of Cushman & Wakefield's Southwest Florida office in Fort Myers, sees the real impact of the change in the capital markets falling on buyers of larger institutional-grade investments.
"What we've found is that locally, Southwest Florida is much more of a private equity market," Tasman says. "So we are seeing less of an equity crunch locally and more of a hangover as the subprimes work their way through the system."
He expects this to be temporary, however.
Dennis Dahm, director of the commercial division for Michael Saunders & Co., attributes a slowdown in activity and asking-price reductions the last two months more to the impact of the residential market and concerns about the economy, with the capital market problems only playing a tiny factor.
"We're seeing customers that are waiting to see if prices will soften a little," Dahm says. As a result, prices for industrial and warehouse space is falling. However, retail remains strong.
D'Alessandro is one of the few commercial brokers worried that commercial real estate could slip into a slump, also.
"This is not the first time that lenders have overreacted and pulled back on commercial loans," he says. "It's a cycle, but in this case it's just exacerbated by the slowdown in residential."
Brokers are already seeing some credit relief after the Federal Reserve cut the federal funds rate half a percentage point at its Sept. 18 meeting.
"We're okay with the [bank] spread hikes as long as other rates come down," Sosso says. "The appetite for commercial is still very strong. Banks are going to figure out a way to lend money, that's their job."
The silver lining: Self-capitalized buyers should be able to get even better deals.