by Scott Lynn
Four years ago, at the height of the Great Recession, a commercial real estate financier would have been hard-pressed to find a capital source that could do both an “On-Book” loan plus an “On-Book” mezzanine loan all from a single provider. Translation: a one-stop shop lender willing to go high up the leverage curve.
During 2009 to 2012, the concept of high leverage headed for the exits while an abundance of great property and note buys got snatched up by All-Cash or Low-Leverage Investors. That was a mighty fine time to be making well-secured, low-leverage, and profitable loans, but it was not a time for financial creativity, exotic structuring, or pushing the envelope, as the saying goes.
What a difference four years can make. Today, we’ve returned to a vibrant and balanced commercial real estate capital marketplace. According to stats from the just-released Mortgage Bankers Association Data Book, the fourth quarter of 2013 marked the highest volume of commercial and multifamily mortgage originations since 2007.
Providers across the spectrum of capital have reentered the market. Originations from commercial banks have increased over 50% from the previous year while life insurance loan production increased over 40%. CMBS loan origination topped $85 billion exceeding estimates by 20%.
By the end of 2013, commercial and multifamily debt outstanding was at a new all-time high.
Meanwhile, property performance, property income, and property values are all on the uptick, which has helped boost the performance of commercial mortgage portfolios. Delinquency rates are now back in the lower end of their historical range.
As the skies have cleared from the recession, the cast of characters and the wares they brought have expanded dramatically. Last week we received a flyer from a lender who opened its doors during the recession with a single lending product. Today, the same lender has multiple product lines including:
- Fixed-Rate Loans
- Floating-Rate Loans
- Balance Loans
- Mezzanine Loans
- Preferred Equity
- Equity Investments
Now that is variety, and you can add spice to your deal by layering on leverage or an equity component.
As the recovery has progressed and more capital providers have returned to the market, competition for deals has increased, pushing down transaction profitability. It’s obvious by the arrival of last week’s flyer that capital providers are widening their offerings as well as increasing their willingness to play at higher levels within the capital stack. While the variety of capital providers entering the market has increased substantially since the depths of the recession, the notion of finding “THE One Single Source ” to provide both the debt and equity component for a property acquisition or a development deal, while appealing from an efficiency standpoint, may not provide the best solution based on the cost of capital.
Most entrepreneurial commercial real estate deals are financed by separate/multiple providers if for no other reason than the inherent conflict of interest between the debt and equity side of a transaction, not to mention a vast difference in personalities, underwriting perspectives, and investment objectives. There is no question that capital providers are increasing their stance on leverage and risk tolerance as the current cycle has progressed. That said, the majority of the recent assignments closed by Metropolitan Capital Advisors have been best executed by separating the providers for the debt versus the equity component(s), and by doing so, our Clients have clearly benefited from multiple options (variety) and deal structures (spice).
To further discuss how our firm can help you optimize the available financing options for your next commercial real estate transaction, contact any one of our Senior Directors or visit our website at www.metcapital.com