Wildcards such as government intervention and the broader economy notwithstanding, banks and life companies project their lending volume will drop by 30% to 80% this year. What’s more, 80% of the lenders polled in Jones Lang LaSalle’s 2009 Loan Production Outlook Survey, say 40% of their loan allocations will be used to refinance maturing loans within their existing portfolios.
The survey also indicated that, as borrowers seek to avoid default, 59% of all different lending types will provide forbearance from six to 12 months. A further 18% would extend between one and six months, and nearly a quarter, or 24%, would extend beyond a year. Those extensions will not come easily, as 79% of lenders will be requiring different terms, such as principal pay-downs, to restructure maturing loans.
“I think most lenders don’t really want to own this real estate and that will continue,” says David Hendrickson, managing director for real estate investment banking for-based Jones Lang LaSalle. “It’ll be lockbox cash-flow sweep for the lender so that borrower will be motivated to work out of it. But the reality is most times I think the lender is just giving the owner an opportunity to sell the property.”
Jones Lang LaSalle distributed their survey to 50 lenders nationwide, including life insurance companies, commercial mortgage-backed securities dealers, private lenders, commercial banks and government agencies during the Mortgage Bankers Association Commercial Real Estate Finance/Multifamily Housing Convention and Expos in San Diego this week.
While much of the loan production this year is slated to take care of loans that are rolling over, there will still be some amount of capital available for new loans. “It’s just more restrictive — lower loan to value, higher interest rate, more conservative underwriting so that it’s harder to qualify,” explains Hendrickson.
On the construction side, however, Hendrickson says, “There’s a true lack of capital.” To get shovels in the ground, the future is likely to hold more “club” loans or multiple lenders joining together to finance a. For instance, large loans bigger than $100 million for a single asset are “absolutely clubbed.” “The lenders are all pairing up. They have to. Nobody wants the exposure.”
Bringing liquidity back to the market will largely depend on the ability of the industry to revive the commercial mortgage-backed securities (CMBS) market. More than two-thirds of survey respondents, 67%, expect some sort of securitized lending to return to the capital markets by 2011 or beyond. Only 22%, however, say they expect securitized lending to return in 2010 and another 11% believe securitization will never return.
“The TALF is a great start,” says Hendrickson referring to the Treasury Department’s expansion to $1 trillion of the government’s Term Asset-Backed Securities Loan Facility (TALF), which allocates part of the program to purchase AAA-rated commercial mortgage-backed securities. “I think if there’s enough [capital], it should firm up the AAAs and when the AAAs firm up then that allows pricing to come in on all the other tranches.”
Hendrickson believes that the structure will not return as a viable source of capital until 2011. Starting next year, CMBS rollovers will start to build and the need to CMBS will be even greater than today. Assuming the finance vehicle does return, he says, it is unlikely to return as its’ most recent “crazy” incarnation.
The CMBS of the future will be more conservative and likely require the issuer to hold some of the risk of their books, says Hendrickson. “If I’m buying the paper and I say to the issuer, ‘I’ll buy it but you have to hold X’ and the issuer has to decide if they can live with that.”