By Hook Harmeling, Senior Director
What you thought was going to be the “new” real finance market for 2011, has yet again pressed the reset button. Both Debt and Equity may have gotten up from the crash a little too early and are now starting to feel dizzy again.
We saw the Conduits, Banks and Life Companies all pushing up the leverage curve as early as June of 2011, only to see some of that “aggressive” lending fall back down to a more conservative level. We even had some Capital Providers pushing 80% LTV’s again as Lender’s got competitive, but quickly retreated just one month later as the B Piece Buyers put the conduit lenders in their place.
Moreover, Equity Investors seem to have followed the same path as Lenders…starting out 2011 with a bang and pushing cap rates lower as “pent” up funds starting grabbing for real estate as quickly as they could. Just as fast as Equity Investors entered the market, they have now retreated to re-group. The same issue that got us in this mess appeared to be happening again, but at least this time, it appeared to be at a lower basis.
Not even a full year into our commercial real estate recovery and the financing world has once again hit the reset button. What we thought was the new norm in lending, has once again been redefined. Luckily for us though, both Lenders and Equity Investors did not go away, rather they are just pausing after a long sprint when they realized this is really a marathon.
So, what do you do now? What are the Lenders looking for? Lenders are looking to make as conservative and as stable loans as they possibly can and still have loan production. They are back in the driver’s seat and it probably feels pretty good. Real Estate fundamentals are back, where sponsorship, quality of the asset, location and tenants all matter again.
What are Equity Investors trying to get their hands on? Investors want some of the same thing the lenders want, with good locations, asset quality and sponsorship all top priorities. The main difference is, the equity wants a “story” and that story better include the word “discount”. Bring an equity partner a clean deal with no issues and good cash flow and they are probably going to pass. A lot of funds were raised with high IRR hurdles, so they can’t invest in many stabilized deals without any hair. This is not to say that stabilized deals can’t get done, they just won’t draw as much attention.
Lender and Investors are constantly changing the rules and what was true last week, may not be true this week. We have already “hit the reset” button twice in 2011 and I promise, we are going to hit it again.
Want to learn more? Contact Hook Harmeling, Senior Director.