There is a silver lining for some commercial real estate players in the ongoing credit crunch that has slowed business. With the capital markets in retreat, there is an opportunity for portfolio and agency lenders — including Fannie Mae, Freddie Mac and the Federal Housing Administration — to capture a larger share of the business.

Prudential Mortgage Capital president David Twardock says that life insurance companies are prepared to take advantage of this shift of fortunes. “It's a chance to get some of the best borrowers back in our stable, to earn attractive returns and to rebuild relationships that over a period of time had been hard to retain because of the aggressive capital coming from the securitization world.”

The Newark, N.J.-based affiliate of Prudential Insurance Co. ranks No. 12 on NREI's list of top lenders with $14.5 billion in commercial real estate loans made in 2007. For this year, Prudential and Prudential Mortgage together have an allocation of $7.5 billion for portfolio loans. Prudential Mortgage expects to channel another $3 billion of loans through agency lenders.

Agencies to the rescue

In the absence of the capital markets large deals are more difficult to complete, creating opportunity for those willing to invest in these transactions. And there are fewer takers for the more marginal deals. That's particularly true in tertiary markets where valuations and liquidity at the height of the market were driven more by the flow of money from capital markets than by real estate fundamentals.

Over the last 15 years, the two biggest sources of financing for commercial real estate lending have been banks and conduit lenders, with agency lenders a distant third. Now, the government-sponsored enterprises (GSEs) and the FHA are making their presence felt in the multifamily area. In the first quarter, the GSEs increased their holdings of multifamily debt by $10 billion, a 7% jump over the fourth quarter of 2007, reports the Mortgage Bankers Association. “A few years ago everybody was questioning how relevant they were, and there is no question that they are once again very relevant,” observes Twardock.

Brian Stoffers, president of capital markets for CB Richard Ellis, says that lenders are happy to have the liquidity from GSEs. “When they were all feverishly competing for loans, it was the case that they sometimes thought perhaps GSEs had an unfair advantage,” notes Stoffers. Houston-based CBRE Capital Markets, which ranks No. 4 on NREI's list of top financial intermediaries, arranged $25 billion in financing during 2007.

Banks under pressure

Commercial banks also face problems that have put them in a capital preservation mode. “Until banks repair their balance sheets and feel more comfortable, they are not as likely to extend credit for commercial real estate lending,” says Stoffers of CBRE. “They have already done a lot of equity raising from different sources, a lot of it international.”

Banks are curbing their commercial and multifamily originations, which are likely to revert to 2004 levels of about $135 billion. Stoffers doesn't expect to see a significant refinancing wave until 2010. That's because many of the loans that normally would be coming due about now have already been refinanced, particularly in the commercial mortgage-backed securities (CMBS) arena. In many cases, borrowers were willing to pay a yield maintenance penalty or take the defeasance route in order to refinance their loans.

Meanwhile, there has also been heightened regulatory scrutiny of banks. Twardock's view is that while “regulators are trying to selectively decide which banks have too much exposure, they are not going after this in the same wholesale way they did in the early 1990s.”

CMBS regains a pulse

At mid-year, there is some life in the CMBS market. Dan Gorczycki, managing director of Savills Granite, a New York-based real estate investment bank, says that new securitizations are occurring but expects issuance this year to be no higher than $75 billion. “Some of the deals that occurred were done at a break-even point and the first couple were maybe even done as money losers to get the market jump-started,” notes Gorczycki.

While the economy has managed to avoid an outright recession so far, commercial real estate is feeling the ill effects, say experts. Twardock expects some more distress in the commercial property markets as “some of the more highly leveraged assets and loans struggle to get through the downturn in the economy.”