By Brandon Miller
National Real Estate Investor recently published the results of their 9th annual Borrower Trends Survey outlaying some commercial real estate trends for 2013. In summary, both Borrowers and Lenders are optimistic that the amount of available credit in the capital markets will increase over the course of 2013. For a financial intermediary, this is encouraging news and a validation of our firm’s optimism for 2013.
Here are a few highlights from the survey, which was published in the January/February 2013 issue of National Real Estate Investor:
- 54% of Borrowers and 68% of Lenders expect the availability of credit to increase in the next 12 months, compared to 44% of Borrowers and 56% of Lenders last year.
- 92% of the Borrowers surveyed said that they had worked with commercial banks while only 8% said that they had secured loans from CMBS lenders or life insurance companies.
- Refinancing, not surprisingly, was the most common reason for borrowing in 2012, but other areas, such as new development, renovation/redevelopment, and acquisitions, also improved compared to the prior year.
- Loan-to-value (LTV) ratios increased somewhat in 2012 while the use of recourse also increased significantly. In 2013 both Borrowers and Lenders expect LTV ratios to continue to increase while the use of recourse to level off or decrease.
Among the numerous statistics provided in this survey, these four encapsulated the optimism for 2013. The first statistic is especially encouraging as almost 70% of lenders expect availability of credit to increase over the next 12 months. With more money available in the marketplace, Borrowers will reap the benefits as Lenders become more aggressive to win business. Moreover, the continued re-emergence of the CMBS platform will provide Borrowers with an attractive and viable option for permanent debt. Expect to see a dramatic increase in CMBS and life insurance company loan volume compared to 2012 when only 8% of Borrowers surveyed secured loans from CMBS lender or life companies. As the availability of credit increases from a variety of capital providers, Borrowers will benefit not only by finding a lender to do their deal but also by having more favorable terms, such as higher leverage, lower pricing, or less recourse. Increased capital, more lenders, and better loan terms will turn the optimism into a reality in 2013.
The Survey also asked Borrowers what the most important qualities were that they look for in a lender. The most popular response was, “Certainty of Execution.” This is very near and dear to our belief as intermediaries and something we encourage our clients to focus on when selecting a potential lender. Borrowers tend to push Lenders to the limit on loans whether it is leverage, pricing, or fees. On the other hand, Lenders will aggressively quote a deal in order to win the business. Unfortunately, these deals never get approved when someone finally wakes up and realizes that it was too aggressive in trying to “win” the business. Certainty of execution is paramount, and as an advisor, we look for indications from a lender who gives us the comfort that they can actually deliver what they are offering. Our ability to advise our clients based on past track record with many lenders is helpful; however, we often find ourselves working with new capital sources, now more than ever, where there are many unknowns. In that case, here are some of the signs we look for to increase “certainty of execution” for a deal:
- Asking Questions – Be wary of capital sources that quote terms without asking questions. If they haven’t asked any questions related to the property or about the Borrower, then you know that quote is worthless.
- Running the deal up the flag pole – Many lenders will seek a “green light” from key decision makers before quoting a deal. This can be frustrating for a Borrower because it does delay the process, and it is not a commitment. However, the certainty of execution increases exponentially when a deal has been properly vetted up the chain of command.
- Touring the Property – visiting the property, inspecting the physical condition of the asset, and driving the surrounding area will help solidify a Lender’s interest in a deal. As we all learned recently from Manti Te’o, things may not be what they appear to be in pictures or in word. It is always good to see it with your own eyes.
- Beware of the Outliers – Simply stated, beware of the guy that offers you the shirt off his back, or, in other words, if the deal is too good to be true, it probably isn’t a deal.
Optimism abounds for 2013 in the real estate capital markets. With more and more capital across many lines (i.e. construction, bridge, acquisition, refinance) becoming increasingly available, the volume of real estate transactions should be brisk. Outside of uncontrollable market conditions, Borrowers, Lenders, and Intermediaries can help make 2013 even better by making sure the element of “certainty” exists in every commercial real estate finance transaction.