Borrowing has slowed, and lenders are demanding more equity

Further, roughly 20 percent of the respondents in the Federal Reserve’s loan officer survey for the first quarter say they are tightening standards, although that is down from a peak of roughly 30 percent at about the middle of last year.

“This is part of a continuing theme since 2009,” observed Gabriel Silverstein, managing director of New York City–based SVN/Angelic and chairman of the firm’s institutional capital markets division. “It means more equity in deals, regardless of the lender and regardless of the deal. We have never returned — and this is a good thing — to the leverage points that prevailed in 2004 to 2007. Except in multifamily, where you can get 80 percent or low 80 percent loan-to-value, the leverage points of most loans today are 5 basis points or even 15 basis points of total LTV. Instead of getting 80 percent leverage, you get 65 percent to 70 percent.”

According to Silverstein’s breakdown of commercial real estate financing sources, 12.3 percent of outstanding debt levels come from debt funds, private lenders and similar nonregulated providers; life insurance companies account for 14.2 percent of the pie; CMBS (the only group that experienced shrinking loan balances) hold 15.5 percent; agency and government-sponsored enterprise lenders (concentrated in multifamily properties) represent 17.6 percent; and banks and thrifts (shorter-term and often floating-rate loan providers) make up 40.4 percent. 

MBA numbers show that bank lending to commercial real estate was flat between 2015 and 2016. “Remember, 2015 was the second-strongest year for borrowing and lending, and 2016 was the third-strongest,” said Woodwell. “We saw an active bank sector, but not growing in terms of origination.”

To be sure, looking at the market as a whole, the banks are going to be the biggest lenders, particularly with deals below $5 million, reports Bradley Feller, a senior director at Stan Johnson Co., a Chicago net-lease specialist firm. “That’s a huge portion of the marketplace, but the thing with banks is, you are lumping so many firms into a broad category — putting Wells Fargo and JPMorgan in the same category as ‘XYZ Community Bank.’” But still, he said, “we have seen tightening from these guys. We have seen a more conservative approach, higher debt service coverage ratios and shorter amortization periods. These guys believe there is going to be some pullback in the market, and [they] are trying to insulate themselves from it.” 

What has remained constant is the loan-to-value ratio, Feller says. If one goes back a decade to 2007, the heyday of the last cycle, a borrower could get an LTV ratio of 80 to 85 percent, sometimes 90 percent. After the recession, lenders tended to be more comfortable with 65 to 70 percent, or, occasionally, 75 percent LTV for nonrecourse loans. Lenders have not wanted to be above that ratio, notes Feller. “LTVs haven’t changed all that much from 2013 to now,” he said. “That’s good, because it means a lot of equity has to be in the deal.” 

Other metric considerations have changed, however — specifically, stress levels in regard to vacancy factors, debt-service coverage ratios and lease-rollover considerations. The effect of tightening standards across all product types “is that you can’t get high leverage,” said Silverstein. “Private property buyers aren’t competitive. REITs, pension funds, insurance companies and well-capitalized owners dominate in deals that are bigger than $10 million.”

Silverstein cites some noteworthy things: “First, it is hard for a syndicator to raise 30 percent or 35 percent equity in these deals, because that lowers the internal rate of return significantly, versus an 80 percent leveraged deal,” he said. “Secondly, the rich get richer. The bigger you are, the more equity you have and the more likely you are going to be the guy getting the deals.” Two of the biggest CMBS deals in recent months involved Simon super-regional malls, he recalls.

Then, too, there is a bit of property-type redlining going on, Silverstein says. On the retail property side, unanchored shopping centers and midtier malls are hard to finance, he points out, whereas neighborhood shopping centers with a well-performing grocer or regional malls that average upwards of $400 in sales per square foot can find a lender at the drop of a sales receipt.