Commercial lending outlook bullish: A review of three regional markets shows the country's commercial real estate lending and investment markets remain vibrant. Last year closed strong in terms of loan volume, and if rates cooperate, this year should bring much of the same.

Author:Bell, John

The nation's commercial lenders are seeing loan volume gains in the wake of growing demand for commercial real estate. Fueling increased lending activity is the seemingly endless influx of capital earmarked for commercial asset classes. [??] Confirming the trend, E.J. Burke, executive vice president and head of Cleveland-based KeyBank Real Estate Capital (KBREC), the commercial real estate division of Cleveland-based KeyCorp, says, "There's more demand for commercial real estate across the board. It has created an environment I've never seen before in my 29-year career. There's incredible liquidity in the market." [??] At the same time, real estate fundamentals are improving on a market-by-market basis with no explosion of new development, enhancing the appeal of commercial real estate as an attractive alternative to stock market investment. [??] According to Chicago-based Real Estate Research Corporation's (RERC's) RERC Real Estate Report, issued during the first half of 2005, investor demand for commercial real estate remains strong even as cap rates and yield rates decline further and some of the highest prices ever paid for commercial properties are being recorded.

Burke expects 2005 commercial real estate loan volume to be up 20 percent to 25 percent over 2004, citing low interest rates and a "very, very hot" refinancing market.

Sees no dark clouds

In a third-quarter 2005 interview, Burke said, "The market is healthy, with no dark clouds on the horizon. It's a fantastic financing environment for borrowers, and that's the No. 1 reason why loan volumes are up. Ten-year Treasuries are at low levels, and the demand for commercial real estate has driven lending spreads down 25 to 30 basis points across the board," Burke says.

"The market is also seeing innovative lending structures, such as mezzanine loans enabling borrowers to obtain 75 percent to 90 percent loan to value [LTV] financing," he added.

Brian Stoffers, president of CB Richard Ellis--L. J. Melody Capital Markets, Houston, a subsidiary of Los Angeles-based CB Richard Ellis, foresees commercial loan volume up 20 percent in 2005 over 2004. As a primary reason, he cites the perception that interest rates will continue to rise in the next 12 months, motivating borrowers to lock in lower rates now.

"Commercial real estate is an attractive asset class, and there's more acquisition financing. In addition, investment sales are strong," Stoffers says.

Speaking for the conduit market, Charles Krawitz, managing director of Chicago-based LaSalle Bank's Real Estate Capital Markets Group, expects loan volume to be up more than 25 percent in 2005 compared with 2004.

As reasons, he cites broader acceptance of securitized lending, more creativity in loan structures and better response on the part of borrowers. In addition, life companies are opting out of direct lending and purchasing commercial mortgage-backed securities (CMBS). "Conduits are adept at lending in areas vacated by life companies," he says.

With respect to debt lending, Thomas Jaekel, chief investment officer of Chicago-based Wrightwood Capital (formerly Cohen Capital), commercial real estate finance company, expects loan volume to be up 10 percent in 2005 versus 2004. He foresees a comparable increase on the equity side.

"We're seeing investment markets starved for yield and certainty of principal," he says. "Commercial real estate is benefiting from demand and an oversupply of capital."

Joseph Franzetti, a director of New York-based Citigroup Global Markets, a division of Citigroup, sounds a note of caution. While the economy is recovering on the business side, he says the recovery is not as apparent on the consumer side. "Rising interest rates may dampen consumer spending," he notes.

However, he says, "Commercial sales are up, and the only property type in question is apartments because of low interest rates on single-family home purchases."

Franzetti looks for a 30 percent to 40 percent increase in commercial loan volume for 2005 over 2004. "Low interest rates have created borrowing opportunities. There are plenty of lenders, cap rates are down and values have appreciated. That creates opportunities to refinance properties," he says.

What's ahead

Rubbing their crystal balls, sources are optimistic about the commercial lending outlook for 2006, but concede that 2005 will be a hard act to follow.

Burke said in third-quarter 2005, "We look for moderation--3 percent to 6 percent loan volume increases--both for our company and the nation."

Krawitz foresees a considerably higher 25 percent to 30 percent increase in conduit loan volume. He points to continued strength in the economy and a relatively low interest-rate environment as the cause. "A lot of product will find its way into the conduit market, and there's a big wave of refinancing coming as 10-year loans come due," he says.

Jaekel expects a 10 percent gain in mortgage loan volume for 2006 over 2005, providing the economy continues to expand at a 3 percent projected annual growth rate. "Gains will be driven by a stable interest-rate environment and international capital flow looking for debt investment," he observes.

Stoffers' optimism is based on more loan refinancing in 2006 and strong investment sales. Franzetti says the outlook hinges on interest rates. "It's positive to the extent that rates remain in a tight trading band," he says.

Sources generally look for a favorable interest-rate environment ahead. Stoffers says, "Rates will slowly trend up, but hopefully there'll be no spikes." Krawitz also anticipates continued stability. "We don't...

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