Eastfield Mall
Springfield, Massachusetts

   
  Slowdown Reaches Commercial Mortgages
 

By Andrew Tangel
The Record
September 9, 2008

   
  Turmoil in the residential real estate market has been well-documented as banks have suffered massive write-downs or even failed because of non-traditional loans that have gone bad. Now it appears the days of easy money in the commercial real estate market are over, too, at least for now.

For buyers of commercial properties, financing projects has become more difficult, even though commercial loans have performed much better than residential loans in recent years. The difficulty is evident in the slowdown in the market for commercial mortgage backed securities, the business twin to residential mortgage backed securities, or RMBS.

Last year, $225 billion in commercial loans – 44 percent of the estimated total $508 billion originated – were bundled into CMBS and sold to investors, according to Orest Mandzy, co-owner and managing director of the Pennsylvania-based publication Commercial Real Estate Direct. So far in 2008, $12.2 billion worth in commercial loans were securitized - on track to be the lowest level in 10 years, according to Commercial Real Estate Direct.

"If somebody wanted to buy a multi-tenant industrial building in Bergen County, they could go to the CMBS market and there would be a number of different CMBS lenders who would compete on the deal," said Michael Fasano, New Jersey regional director for Marcus & Millichap Real Estate Investment Services in Elmwood Park.

But since late 2007, the market has been dry, forcing buyers to instead turn to lenders such as savings banks and regional lenders and insurance companies, Fasano said.

CMBS lenders might have readily financed commercial properties based on forecast earnings, Fasano said. But now lenders are more likely to finance based on current, not expected future, earnings, and they may only be interested in certain projects, exclusively retail or industrial, for example.

"Certainly it is more challenging" now, Fasano said. "You need to understand your pool of lenders."

Commercial loans have performed much better than residential loans. Delinquency rates have increased slightly, but they remain at historic lows, below 0.5 percent, according to a recent report by Marcus & Millichap. The Mortgage Bankers Association reported last week the delinquency rate for one-to-four-unit residential properties was 6.41 percent at the end of the second quarter, the highest recorded in the 29-year history of the association's survey.

Other casualties of the crisis are large commercial deals, said Michael Seeve, president of the Mountain Development Corp. in Clifton.

"It didn't seem like there was a size limit on the kind of deals" in the CMBS market, Seeve said. Regional banks filling the void seem to be comfortable with deals below $25 million. And borrowers seeking multiple lenders may invite delays, too.

"Any time you've got 10 lenders looking over a set of loan documents, that's a recipe for a slow-moving deal," he said.

Mandzy expects the federal government's bailout of Fannie Mae and Freddie Mac to help the RMBS market, and he said that should have a positive psychological impact for the CMBS market.