For real estate entrepreneurs, 2011 should be seen as the year of the possible – but not as a time when all dreams come true, says Sheridan “Schecky” Schechner, managing director and U.S. co-head of real estate investment banking at Barclays Capital in New York City. The conventional wisdom, he continues, is that given the current fundamentals, commercial real estate has reached bottom and the sector appears headed upward.
“Commercial real estate again has become a favored asset class,” says Schechner, a ULI Trustee and vice chair of ULI’s Commercial & Redevelopment Council. “REITs are trying to buy real estate as are private equity firms. Many investors feel that it is a good time in the cycle for equity investments. For debt investors, today’s commercial real estate spreads seem wide compared to other investment alternatives. That attitude, combined with the widespread availability of mezzanine money, means the shortfall in many real estate loans that existed a year ago has largely evaporated or decreased materially.”
Conduit loans are being done routinely with 9-10 percent debt yield, and mezzanine financing is available for higher leverage, he explains. “Putting it all together, there is capital available —especially in the major coastal markets —for all types of real estate,” says Schechner. “Outside the major markets, capital is available to a lesser extent but it is still available.”
Investors expected a rebound in real estate, Schechner notes, but not to this extent and not this quickly. “Real estate is viewed as the last bastion of getting the appropriate yield for the risk taken,” he says. “Where else can people invest their money nowadays?”
While more capital is available for existing assets and valuations are higher, the current rosy scenario won’t benefit everyone —particularly developments or existing properties that are underwater. “ Assets are less underwater than they were a year ago. Yet, you can drown in an inch of water or 12 feet of water,” Schechner adds, “You’re still drowning.”
While well thought-out projects should be okay, the industry is not yet at the part of the cycle where construction loans are plentiful. Some financial firms are getting back into construction lending business, though. “Financing for construction is not abundant,” says Schechner. “There is a high barrier for construction loans, but there are companies lending money for new construction. Wells Fargo, for instance, is leading the pack in terms of construction loans.”
After a drought of several years, the commercial mortgage backed securities (CMBS) sector is showing signs of life, and new issues are expected to revive one of the most important funding sources for commercial real estate, as hundreds of billions of loans for office buildings, strip malls, and industrial projects come due. ”To put the CMBS market in perspective, during all of last year, there was north of $10 billion in securitization,” says Schechner. “In the 2011 first quarter, we’ll probably see $13-16 billion in CMBS issues. Estimates for all of 2011 run from $30 billion to $65 billion. That’s compared to $250 billion of securitization in 2007.”
When the CMBS market is not functioning, there are few sources of long-term capital for developers and owners outside of the life companies, he continues. “Those life companies are being extremely selective,” he says. “With the CMBS market coming back, the credit void is beginning to be filled.”
2012 will be better for the real estate industry, he predicts, “We’ll probably look back at 2011 and say it was the inflection point, with underwriting not deteriorating until the end of the year and spreads being compressed from today’s levels. We may look back on 2011 as the year interest rates went up, and cap rates didn’t rise commensurately.”
