HARP – On This. . .

May 14, 2013:  The Chicago Real Estate Council hosted a panel of experts during a lunch meeting today to discuss the current state of commercial real estate industry capital markets.  The panel was moderated by Dave Hendrickson of Jones Lang LaSalle, and featured panelists Steve Kay, from Cantor Fitzgerald representing CMBS markets, Matt Napoli of PPM America, Inc. representing the life insurance company perspective, Mark Witt of Pearlmark Real Estate Partners, an equity funded mezzanine lender, and Dave Patchin SVP of Fifth Third Bank.

The panelists discussed the tremendous uptick in commercial real estate lending over the past year in all product types, and the prospects for dramatic growth 2013 and beyond. Interest rates in the 3% to 4% range are prevalent with loan to value ratios of 60% to 75% typical.  The spread on LIBOR based loans is typically around 200 basis points above LIBOR.

All primary loan panelists agreed that they prefer to finance projects without the use of mezzanine financing, but in certain circumstances they will consider permitting mezzanine financing.

The consensus was that interest rates are likely to remain flat for the next 12 to 18 months, but that over the next five years interest rates are likely to rise roughly 200 basis points.

None of the panelists expressed concern about the Chicago market overheating in the foreseeable future, but they are being more diligent in evaluating multifamily development and acquisition loans due to rising concerns about absorption of all the recently announced new apartment developments in the City of Chicago.  Generally, however, the sense is that multifamily projects in desirable downtown locations remain attractive, while projects in fringe locations pose rising risks.

Nationally, some markets show signs of overheating – with cap rates and purchase prices skewed. This is likely a consequence of historically low interest rates permitting increased cash on cash rates of return.  The concern is, once again, the potential loss of value when these loans must be refinanced in 3 to 7 years if interest rates have risen significantly.

A general consensus was expressed that the Chicago commercial real estate market continues to have strong growth potential into the foreseeable future, and that secondary and tertiary markets also represent significant areas of opportunity for CRE investment.

Bottom Feeders – and Bottom Feeder Funds – Our New BFF?

Bottom feeders have a distasteful reputation with some – but, truth be told, they are among the most reliable leading economic indicators of recovery for the commercial real estate industry.

There is a stunning disconnect between equity markets and the economy as a whole. The Dow Jones Industrial Average is at record highs, with 15,000 in plain sight.  Equity investors are betting on a bright future. To gauge the economy by that measure, the economy appears to be healthy and rebounding nicely.

Leave Wall Street, and drive through urban and suburban retail districts, and the picture is not so bright. Vacant and boarded up storefronts are common. Parking lots are in disrepair. Shopping center signs are blank – or filled with half burnt-out signs displaying names of tenants past.

Sure. Commercial deal flow is beginning to pick up, but compared to what? A car travelling three miles per hour can triple its speed, but it is still moving at a remarkably slow pace by most standards.

I went for a drive recently, touring retail shopping centers and office parks to find out where the action is.  The answer?  Almost nowhere.   It didn’t really surprise me. Although deal flow is picking up in my practice, most deals are with cash-rich bottom feeders (or bottom feeder funds)  buying up distressed properties.  Not that I’m knocking bottom feeders. Chances are good they will (more…)