Even as real estate fundamentals continue to decline, incredibly low interest rates have enabled many borrowers to refinance their loans on commercial properties. As a result, financial intermediaries across the board report that loan volume is up by about 10% to 20% during the first several months of 2003, and in some cases much higher.

Holliday Fenoglio Fowler LP, which currently ranks No. 2 on NREI's survey with $10.4 billion of loans arranged in 2002 — second only to Bank of America — is a prime example. The Dallas-based company's debt transaction business is expected to grow by a minimum of 10% in 2003. John Pelusi, executive managing director of HFF, reports that the company's debt volume business was up 7.8% through May compared with the same period a year ago.

Rates Remain The Catalyst

The increase in dollar volume arranged by HFF and other intermediaries in early 2003 is hardly surprising in light of the fact that the 10-year Treasury yield has been as low as 3.10% early this year, rising to 3.4% in late June.

The increase also marks a rebound of sorts for HFF. The company, which recently completed a management buy-out from Australian real estate giant Lend Lease, experienced a 10% drop-off in debt financing in 2002, after posting $11.6 billion in volume the previous year.

John Fowler, executive managing director at HFF, describes the dip in 2002 as an anomaly. “The decline was due to two things: the industry lost some business in the first quarter of 2002 as a spill-over from 9-11, and some deals that were supposed to close at the end of 2002 were done in the first quarter of 2003.”

Earlier this year, HFF arranged a $245 million construction/permanent loan for the redevelopment of Boston's Charles River Plaza. The 10-year, fixed-rate loan was secured from three lenders: CIGNA Investments, Teachers Insurance and Annuity Association of America and the New York State Teachers Retirement System. Considering that the average loan deal for HFF is $14 million, this was an unusually large transaction in a sluggish economic environment.

When it's complete, the Charles River Plaza near Beacon Hill will be a 645,000 sq. ft. complex that includes office, research/laboratory, medical and retail space along with a 950-car parking garage.

HFF, whose business lines include debt, private equity, structured finance and investment sales, posted a record year in 2002. Business volume grew 8.3% from 2001's $12.23 billion to more than $13.25 billion in 2002. Since 1998, the company has arranged more than $63 billion in loans, says Pelusi.

Last year's record volume was achieved through 791 debt, structured finance, private equity and investment sales transactions. It was a typical year for HFF; since 1998 the company has averaged between 800 and 900 transactions annually.

MBA Stats Reflect Growth

The growth in HFF's debt financing business in 2003 is consistent with industry trends, according to the Mortgage Bankers Association of America (MBA). A survey of MBA's key members indicates that new commercial and multifamily mortgages in the first quarter hit $18.9 billion, up 38% over the same period a year ago.

“The pace of new lending is particularly impressive in light of uncertainties during the first quarter about the future of economic growth, the weak fundamentals in many commercial real estate markets and the course of the war in Iraq,” says Doug Duncan, MBA vice president and chief economist.

Two key factors, according to Duncan, helped boost loan production in the first quarter: the 10-year Treasury rate was below 4%, and yield spreads on commercial mortgages fell noticeably during the first half of the year.

The multifamily sector — which comprises 40% of the total loan volume reported by MBA and is the largest class of loans in the survey — accounted for $7.6 billion in new mortgages, a 10% increase over the same period last year. The majority of the increase came from a strong performance in FHA loans, where lending rose more than $400 million over the same period a year earlier.

The 75% rise in the volume of retail loan originations, the third largest category in the survey, was the most dramatic year-over-year increase. Even the beleaguered office sector showed signs of strength in the first quarter. Office lending originations rose 38%.

What is Pelusi's view of the marketplace for intermediaries going forward? “Given the current state of the economy,” he says, “the bulk of the business will be financing existing real estate vs. financing new development.”