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Commercial Lending Rebounds, Open-Air Conference

Commercial real estate finance has regrouped amid improving economic conditions and there’s now an abundance of lenders chasing down a growing number of mostly Class A retail real estate purchases, said a panel of high-profile lenders Thursday at the ICSC Open Air Conference in Dallas.

The controversial commercial mortgage-backed securities (CMBS) loan market, written off for dead a few years ago, has been resurrected. “Right now there are 25 [major financial] firms trying to place CMBS loans,” said Sheridan Schechner, managing of New York City–based Barclays Capital. “From a value standpoint, we are starting to see real estate as where capital needs to be. Of course, that’s what was said in 2007.”

Schechner predicts that by the end of 2011, the stricter underwriting of commercial real estate loans of the last three years will be replaced with 80 percent loan-to-value (LTV) loans with five-to-seven-year terms and periods of interest-only payments by the end of 2011. In fact, it’s already happening. Deals that originated late last year were done mostly at 70 percent LTV while new deals are typically 75 percent LTV, said panelists at the session, dubbed “Who is Buying and Who is Selling in 2011.”

As a result of looser terms, several deals are in the works, said Michael Cochran, managing director of New York City–based Eastdil Secured. “We are seeing an incredible resurgence in the flow of transactions,” he said. “Companies have resized their balance sheets and a lot of REITs are poised to grow instead of worrying about deleveraging.”

The job and retail-sales numbers are improving and the economy “is coming back more robustly than we could have logically believed it would,” said Adam Ifshin, president of Tarrytown, N.Y.–based DLC Management Corp. Said Ifshin: “This clearly feels like there is more supply of capital than there is a supply of deals.”

Thomas Caputo, president of New York City–based Equity One Inc., said a decision by new management in 2006 compelled the firm to liquidate $700 million in real estate just before the bust, giving Equity One a leg up to acquire several portfolios and individual properties over the past couple years while other players were sidelined. “We will continue to search out deals that have great NOI [net-operating income],” he said. Responding to a question about whether the present is still a good time to be investing in retail real estate, Caputo responded that the best deals were to be had in 2009.

On Wednesday, Developers Diversified CEO Daniel Hurwitz predicted the current cycle will last as long as a decade. Barclays’ Schechner believes the cycle is already at year four of about a 10-year term.

There were other notes of caution. Several deals in the pipeline are being held up by tough-to-resolve appraisal and valuation issues that are resulting in much push-and-pull between buyers and sellers, Ifshin said.

Moreover, cap rates are averaging 6.2 percent at present compared to a 10-year average of 8 percent, noted panel moderator Ken Bernstein, president and CEO of White Plains, N.Y.–based Acadia Realty Trust. “And with the spread between 10-year treasury yields and the implied cap rates, it’s probably an indication you should be very careful where you deploy your capital,” Bernstein said.

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