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LOANS GALORE FOR RETAIL, BUT FEW TAKERS

Even demand for formerly hot mezzanine financing is flagging

A scarcity of retail real estate property sales has created more money for investment than there are borrowers to lap it up.

This slowdown is playing out on the mezzanine lending scene, say industry professionals. Mezzanine loans, which consist of a combination of debt and equity that is repaid after a property’s first mortgage, surged in popularity early this year. But not anymore.

“We saw new entrants almost every month at the beginning of the year,” according to Randall L. Fleisher, director at L.J. Melody & Co., a Dallas-based broker of mezzanine loans, speaking at the ICSC Spring Convention in May. Even senior lenders, who traditionally hold liens on a property’s primary mortgage, became players in the mezzanine market in an attempt to hold the mezzanine piece of a property and get returns for the whole group of loans on the real estate, said Peter S. Ginsburg, a director at New York City-based Capital Trust.

Both were panelists at a session titled “Mezzanine Real Estate Loans” at the convention.

Fleisher said he expects traditional mezzanine lenders to bring very few new funds to the market in the third and fourth quarters, mainly because those lenders are already having trouble making loans, and they have already missed targets for semiannual lending volumes.

One culprit is the slowdown in the number of property sales, said another panelist, Victor Woolridge, managing director of the real estate finance group at David L. Babson & Co., Springfield, Mass. Babson is a unit of Boston-based Massachusetts Mutual Life Insurance Co.

But real estate is not the only investment product becoming scarcer, said Woolridge. The commercial-mortgage-backed securities and whole-loan markets are also below where industry players would like them to be.

However, industry insiders are still seeing plenty of money flow into the acquisition and development markets, said Steve Vittorio, principal of Prudential Real Estate Investors.

“We’re seeing a lot of capital sources pinpointing retail, and particularly grocery-anchored retail,” he said.

Retail real estate financiers continue to launch funds in hopes of snagging juicy investments, said Vittorio. Prudential Real Estate Investors is considering launching another fund by year-end for retail and nonretail real estate. New York City-based Ashkenazy Acquisition Corp. in May launched its Ashkenazy Acquisition Fund I, which will invest $1 billion in regional centers. On the corporate equity side, New York City-based Teachers Insurance and Annuity Association-College Retirement Equities Fund said it might launch a mutual fund for REIT stocks. The TIAA-CREF REIT Fund is among six mutual funds slated to hit the market in the fourth quarter. The current lull notwithstanding, Vittorio said he expects increased market activity for the second half of 2002.

NCREIF PROPERTY INDEX: RETAIL RETURNS

The National Council of Real Estate Investment Fiduciaries (NCREIF) property index tracks capital appreciation and net operating income returns for retail properties nationwide. Both numbers are combined for a total return. For the first quarter of 2002, preliminary total returns on malls were 1.42 percent, up from the previous quarter’s 0.44 percent; initial returns for power centers (including freestanding stores) were 1.59 percent, up from an adjusted 1.36 percent; and preliminary returns on strip and neighborhood centers were 2.2 percent, down slightly from 2.23 percent. The index is updated quarterly.

Source: National Council of Real Estate Investment Fiduciaries

 

PROPERTY AQUISITIONS BY REITS

Source: National Association of Real Estate Investment Trusts

The National Association of Real Estate Investment Trusts tracks the dollar amount of property purchased by all REITs since 1992. For the first quarter of 2002, REITs purchased $3.1 billion worth of property, the first major upswing in property purchases since the fourth quarter of 2000. The retail sector accounted for $697.7 million.

 

 

MARKET SCANNER

The Mortgage Bankers Association of America reported $12.4 billion in commercial mortgage originations during the first quarter of 2002, down from $22.5 billion in the fourth quarter of 2001. Further, the level of new lending activity declined by 16 percent from the same period a year earlier, due mainly to a sharp decline in the average loan size. The retail sector accounted for $1.4 billion in commercial mortgage originations, 12 percent of the total. • Real estate loans registered more delinquencies in the first quarter of 2002 than in the previous quarter, reports the American Council of Life Insurers. According to ACLI’s poll, which covers $205 billion in loans, commercial real estate loan delinquencies rose to 0.22 percent from 0.12 percent in the fourth quarter of 2001. Despite the 0.10 percentage point increase, it is still the third-lowest level posted in the poll’s 37-year history. Retail loans posted a 0.33 percent delinquency, up 0.18 percent from the previous quarter. • In a quarterly survey of the real estate underlying commercial-mortgage- backed securities released in April, Moody’s Investors Service said the retail sector had a majority of green – or strong – real estate markets. Also, neighborhood and community shopping centers received an average score of 79 out of 100. • Large lenders have placed on hold or canceled more than $7 billion in commercial mortgage loans, a recent Bond Market Association survey found. The association blamed the canceled deals, which amount to 10 percent of 2001 large-loan volume, on a lack of terrorism insurance. That means the amount of commercial-mortgage-backed securities (CMBS), which are secured by large loans, issued this year may shrink. The New York City-based group surveyed leading underwriters of CMBS and received responses that accounted for nearly 75 percent of CMBS issuance in 2001. • U.S. consumer spending rose 0.3 percent in April to an annualized rate of $7.32 trillion, posting its fourth consecutive increase. Personal income also grew 0.3 percent in April to an $8.93 trillion annualized pace, according to the U.S. Commerce Department.

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