Is Credit Loose or Tight?
By: Ellen Rand and Ron Derven, contributing editors, Development
Panelists at a Development ‘13 session on capital markets agreed that as of fall 2013, credit is neither too loose nor too tight; it is just right.
John Menne, managing director of MetLife Real Estate Investors, does not see aggressive underwriting terms. But he does believe that the pendulum is swinging in that direction. Session moderator Bradley Wilmot, managing director of Wells Fargo Bank, discussing commercial mortgage-backed security (CMBS) financing, said that “bond investors still have solid appetite for the paper. Prudent underwriting is still taking place.”
Menne explained that MetLife, seeking additional yield, is looking at riskier mezzanine financing opportunities. He believes that income streams will continue to rise, and therefore MetLife is comfortable “moving up the risk profile.” Most lenders are confident that fundamentals will maintain property values. The company had been heavily invested in multifamily development but in the last 12 months has migrated to infill industrial.
MetLife structures real estate development investments as either all equity or joint ventures with debt. Its hold periods differ according to property type. For core properties, the hold is for seven to 10 years or longer; for value-add, the hold is three to five years, while for opportunistic investments, the idea is to build and sell. Menne noted that “levered returns have been terrific in the last few years.”
Panelists (from left to right) Bradley Wilmot, Daniel MacDonnell, David Krumwiede and John Menne at the Development ‘13 session titled “Is Credit Loose or Too Tight?”
David Krumwiede, executive vice president of Lincoln Property Company, said there is plenty of capital available except for construction financing and for value-add properties, but terms are “not crazy.” In fact, he said, “there are too few deals and too many [lenders] chasing them.” He noted that six banks were competing for the opportunity to refinance an 80 percent leased office building in Scottsdale that Lincoln Property bought from a special servicer. Krumwiede observed that returns have dropped in the last 12 to 18 months for value-add and core-plus properties. Two years ago, returns were 20 percent; now they are in the mid to high teens.
Daniel MacDonnell, managing director of Cushman and Wakefield, sees financing activity from international investors — particularly from Asia — and sovereign wealth funds as well as more opportunity investors. Conduit financing is back, too, and going into secondary and tertiary markets, he said.