By: Daniel Hilpert
Capital is pouring back into the most active commercial real estate investment markets as lenders are responding to improving property values and rising expectations of future income growth. Banks are loosening lending standards for the first time in close to five years despite a still volatile economic recovery and pending legislative changes.
Lenders and intermediaries alike are reporting a substantial increase of lending activity. Loan originations have increased substantially in 2011, albeit still substantially down from the $500 billion of commercial and multifamily loans closed in 2007. According to the Mortgage Bankers Association, loan originations reached $108.8 billion in 2010, a 44% increase compared with the $82.3 billion of commercial and multifamily loans closed in 2009.
Fueled by cheap money, higher leverage and increased availability of capital, investors are paying stunning prices, often at cap rates of 5% for top-tier properties. Intense competitionamong lending sources is driving up leverage to 75% with a 1.20 DSCR. Debt yields have dropped below 8% for multifamily assets in primary markets allowing borrowers to encumber their properties with more debt for every dollar of cash flow.
While capital is mainly flowing to trophy assets in top-tier markets, yield-driven investors are beginning to gravitate towards value-add opportunities in smaller metros that are beginning to recover from the recession.The loosening of underwriting standards has opened up the market for properties in transition such as semi-vacant office buildings, retail centers and apartment buildings in need of capital to realize their full potential.
Our firm, Mortgage Equicap, arranges debt and equity for real estate owners and developers. In 2011, our clients took advantage of unprecedented low interest rates and refinanced from single buildings to entire portfolios. Multifamily owners have access to rates as low as 3.50% depending on leverage, location and asset class. We look forward to an active 2012. Rates are expected to stay low and lending appetite will stay healthy as most lending institutions are driven to improve earnings.
Daniel Hilpert is the managing director of Mortgage Equicap LLC, a real estate investment banking intermediary arranging debt and equity for real estate investors and developers. dhilpert@m-equicap.com.