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COMMERCIAL MORTGAGE LENDING STAYS TIGHT

By Steve Bergsman

If the volume of commercial mortgage lending in the fourth quarter is any indication, this is likely to be a challenging year for real estate finance, including retail. Loan originations in the fourth quarter fell 16 percent from a year before, the Mortgage Bankers Association reported at its commercial real estate finance conference in February. “The decrease was seen across most property types and investor groups,” said Jamie Woodwell, MBA's senior director of commercial and multifamily research, in an interview with SCT.

The slowdown comes most directly from disruptions in the capital markets, although a few large portfolio transactions buoyed the numbers, Woodwell says. “Decreases in total commercial mortgage originations were led by a drop in commercial-mortgage-backed-security conduit loans,” Woodwell said. “These numbers show the impact of the recent credit crunch and other market disruptions.”

Full-year projections for CMBS issuance in 2007 anticipate a record $230 billion, but most of that was completed early in the year, before the subprime mortgage blowup of the summer.

In fact, whereas CMBS originations during the first half of 2007 were 70 percent higher than in the comparable half in 2006, second-half 2007 volumes ran 30 percent lower than the previous year's second half.

Some of the MBA conference attendees were saying that commercial mortgage lending could drop by 50 percent this year, though Woodwell insists that the markets are too murky to allow predictions beyond a downward trend in originations. In 2006 and 2007 a large number of big portfolio sales and REIT privatizations and mergers buoyed markets. Real Capital Analytics tracked some $151 billion in such mergers and acquisitions for 2007, which were driven by wide spreads (pricing over Treasuries or swaps) and a scarcity of loan-repackaging lenders, factors unlikely to reoccur this year.

In 2007 Prudential Mortgage Capital Co., a unit of Newark, N.J.-based Prudential Financial, completed some $3.6 billion in commercial-mortgage-backed securitizations.

But David Twardock, Prudential Mortgage's president, says volume will decline precipitously this year, mostly because there will be much less capital markets lending. A survey of Prudential's mortgage brokers revealed a range of loan volume expectations for this year — the most extreme of them being a two-thirds decline from 2007.

At the beginning of 2008, securitization volume projections for the year stood at about $100 billion, says Rick Coppola, managing director and head of commercial mortgage investments for TIAA-CREF in New York. And TIAA-CREF, the largest U.S. retirement fund, is one of the more optimistic of the balance sheet lenders (loans kept in portfolio instead of securitized) in that it expects to maintain the same level of lending ($2.5 billion) to the commercial real estate sector in 2008 as it did in 2007.

The decrease in lending during the fourth quarter ran across several property types. Loans for retail properties dropped 38 percent, though the pain was even greater in other property sectors. Industrial property loans fell 50 percent, and office real estate lending sank 70 percent. Multifamily real estate loans, meanwhile, declined just 7 percent, and hotels, health care properties and other smaller classes saw volume surge.

Commercial real estate loan originations tend to increase as the year progresses. Indeed, fourth-quarter 2007 total loan volume jumped 73 percent from the third quarter, thanks mostly to lending increases of 25 percent on the multifamily side and nearly 300 percent for hotels. Again, retail performed decently compared to other asset classes: Fourth-quarter retail originations were flat with the preceding quarter. Health care properties, meanwhile, dropped 50 percent, office properties 48 percent and industrial properties 21 percent.