Deja Vu Again?
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Lenders: Their Outlook for 1999
By Anthony Gramza
At the end of 1998, there was an estimated $1.25 trillion of commercial mortgage debt
outstanding. The good news is that lenders of all kind have an increased appetite for just about
all forms of commercial product that will be used to either increase their existing portfolio, or to
fill an existing or proposed commercial mortgage backed security (CMBS) pool.
As lenders proceed into the marketplace, they will take into consideration the debacles that took
place in the market in 1998. They will price their risk better, will demand more liquidity in the
project, will place some type of "floor" on all forward commitments, and will pay closer
attention to both the domestic as well as the global markets. Hopefully, they will not be caught
in the financial crisis that occurred in August of last year.
Let's look at some product and see what the "soothsayers" are forecasting for 1999 production.
The markets have been performing well, mortgage delinquencies continue to decline, and the
outlook continues to call for a slow demand growth. There are some areas of the country that
have started to indicate an overbuilding position. Although vacancies have moved up to a 9%
level nationwide, there are other areas where demand is extremely strong. Currently, we see a
rate scenario of 7%+ on the low side, with a high of 8.25%, fixed for 10 years, over 30-year
amortization schedules. Most loans carry a 1% lender fee, and are closed on a non-recourse
Vacancies have declined and rents have increased. The market has been the strongest in the past
30 years, it should continue on a solid performance, and delinquencies have fallen to a new low.
The interesting forecast for many areas is that downtown properties will outperform suburban
properties, competition will keep pace with the market, and that as long as the city is vibrant, the
downtown market will continue to do good. Rates should stay in the 7.75 to 8.50% interest rate
range, fixed for 10 years over either 25- or 30-year amortization schedules.
This is one area that has been oversold and will now and in the near future present some low
occupancy levels, due to the overbuilding in many areas of the country. Most lenders have
pulled back on this market, and will only review those projects that are existing and have a
minimum three-year tract record. The plus side of this story is that average daily rates (ADR's)
have risen and operating efficiencies have improved. The outlook for luxury and upscale hotels
remains very positive, with definite requirements of "flag" status, feasibility/market studies, and
high qualifications regarding management. Current quotes on a flag type (Courtyard by Marriott)
new construction was 60-65% LTV, rate of 400 basis points over Libor (9%) 12-15 month term,
converting to a mini-perm @ 350 basis points over Libor (8.50%) for three years. Lender fee is
2%, with both loans on a "recourse" basis. Lender will consider option to a permanent status
after seasoning, @ 75% LTV, 350 basis points over the 10-year treasury on rate, fixed for 10
years over a 25-year amortization schedule. One additional point for the permanent.
A good bet for 1999. Performance has been very good, demand is high for inventory, and rents
continue to increase. The outlook calls for solid performance in both warehouse and R&D
sectors. Increasing global trade, the strong performance of the high-tech companies, and
distribution centers makes this type of financing a want on the "wish" list of many lenders.
LTV's are in the 75% range, but can be considered up to 80%, with some lenders approving up
to 90% of cost. Rates are in the high 7's, with a range to the mid 8's, depending on the strength
of the tenant(s). Rates are fixed for 10 years or longer, depending on the various leases in effect,
and amortized over a 25-year period. Typical lender fee is 1% and on a "non-recourse" basis.
An area to watch. The outlooks are fair, retail sales continue to grow, but at a much slower pace.
The long-term outlook is not encouraging, especially for regional malls and power centers. Some
forecasts indicate ghost centers on the rise, and conversion of these centers to be difficult and
costly. Internet retailing is a factor that is being looked at very seriously, and is estimated to
increase as the years go by. According to the most recent figures, 30 million families are
connected to the Internet! The potential is much more far reaching than many have thought. The
area, type of leases, terms, and credibility of the tenants will play a major role in the decision-making process of financing. Rates are in the 8-9% range, fixed for 10 over a 25-year amortized
schedule. LTV's still range in the 75% with a 1.30 DSCR. Lender fees can range from 1-2%
depending on quality.
The marketplace will be open to a variety of project types, and financing will depend on the
location, type, need, strength, and liquidity of the borrower. With the longevity of our senior
population, senior and assisted living care facilities are in need in many areas of the country.
Moneys are available to the right client.
Overall, most lenders will look at submissions if they are presented properly and "make sense."
Only time will tell as to the final rates, terms, and conditions placed on each transaction. But
overall, the forecast is positive, and the word on the street is "charge forward with gusto!" Good
Anthony Gramza of AMG Commercial Group can be reached at (716) 671-5250 or fax (716)
Photo: Anthony Gramza
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