Borrowers expect conditions to remain favorable in 2013, according to the results of NREI’s Ninth Annual Borrower Trends survey.
Overall, 55 percent of respondents expect their total commercial debt to increase in 2012, while only 17 percent expect their debt to decrease. Last year, only 40 percent of respondents thought their debt loads would rise while 25 percent expected to lower their debt.
Optimism continues to grow, as 54 percent of borrowers [Figure 1] and 68 percent of lenders expect the availability of credit to increase in the next 12 months, compared to 44 percent of borrowers and 56 percent of lenders last year.
The most common reason for borrowing in 2012 was refinancing [Figure 2]. In all, 53 percent of respondents said they had borrowed for this purpose, with about a quarter of respondents saying they had borrowed for the purposes of new development, acquisitions and renovation/redevelopment (26 percent, 28 percent and 25 percent, respectively). However, about one-third of respondents said they had not borrowed funds at all in 2012.
Lenders reported a somewhat different breakdown. More than two-thirds said they had financed acqusitions while 65 percent said they had refinanced loans, 42 percent responded they had financed renovation or redevelopment projects and 36 percent had provided loans for new development.
Borrowers secured financing on only small portions of their portfolios. About 40 percent said they had borrowed on more than 20 percent of their assets. The remaining 60 percent said they had borrowed on less than 20 percent of the properties they owned. The most common activity was securing long-term financing (81 percent), followed by construction loans (44 percent), lines of credit (36 percent) and bridge loans (17 percent).
On the lender side, 55 percent of respondents said they had provided senior loans, followed by construction (39 percent), bridge loans (32 percent), preferred equity (26 percent) and mezzanine loans (23 percent).
The vast majority of borrowers (92 percent) said they had worked with commercial banks. Meanwhile, few respondents in the survey (8 percent) said they had secured CMBS loans or loans from life insurance companies (8 percent).
When working with lenders, respondents said the most important quality is certainty of execution, which 66 percent rated as “very important.” In addition, 32 percent said “speed of execution” and 32 percent indicated “flexibility of loan terms” as very important. Of lesser importance were “personal relationship with lender,” “lowest available rate,” “loan-to-value ratio,” “low fees” and post-closing service.
Going forward, borrowers indicate that they plan to rely less on short-term adjustable-rate debt and more on long-term fixed-rate debt. Only 26 percent of respondents plan to increase their use of short-term debt. In contrast, 28 percent said they plan to decrease and 43 pecent said their use of short-term debt would remain the same. Last year, only 17 percent said they saw their use of short-term debt decreasing.
Meanwhile, 51 percent of borrowers expect their use of long-term debt to increase in the next 12 months, compared to 35 percent who expected an increase last year.
Borrowers pointed to loan-to-value ratios as having the biggest impact on their ability to obtain financing, just ahead of debt-service coverage ratios, the cost of capital and the overall health of the U.S. economy.
What has changed
In comparing the results of the survey with previous years, the outlook on apartments—which have enjoyed a run as the most popular investment target—has started to dim. This year, 55 percent of respondents considered apartments the best opportunity, compared to 76 percent last year.
In addition, the percentage of lenders who indicate they exercise the most caution when reviewing loan applications for apartments has jumped from 6 percent to 16 percent.
That’s not the only area where lenders are expressing greater caution. The percentage of respondents who exercise the most caution when reviewing suburban office properties leaped from 38 percent in 2011 to a whopping 61 percent in 2012. Other areas of caution include hotels (42 percent), unanchored strip centers (42 percent) and undeveloped land (39 percent).
On the flip side, neighborhood and community centers are considered more favorably, with 42 percent of respondents saying they offer the best lending opportunities, compared to 24 percent last year.
When it comes to rates, borrowers and lenders have a similar outlook. Both expect long-term and short-term rates to rise or stay the same [Figure 3].
However, lenders have a slightly greater belief that short-term rates will rise (52 percent to 47 pecent) while borrowers seem more certain that long-term rates will increase (64 percent to 52 percent). Last year, those perceptions were flipped: 59 percent of lenders expected long-term rate increases, compared with 57 percent of borrowers who believed that.
Another dramatic change from a year ago has to do with expectations on the use of recourse. This year, borrowers reported 51 percent of debt as recourse and 49 percent as non-recourse, compared to 35 percent recourse and 65 percent non-recourse last year.
Going forward, 57 percent of borrowers think the use of recourse will stay the same while 26 percent think it will decrease. Only 9 percent expect to see more use of recourse.
Both borrowers and lenders reported that loan-to-value (LTV) ratios increased somewhat in 2012. Lenders indicate the LTV ratios they are currently seeing average 68 percent, while borrowers report 73 percent rates. Twelve months ago, lenders saw rates averaging 65 percent, compared to 70 percent for borrowers.
For our annual Borrower Trends Survey, NREI e-mailed print and e-newsletter subscribers an invitation to participate in the online research conducted between Dec. 18, 2012 and Jan. 7, 2013. Combined, 53 borrowers and 31 lenders completed the survey.