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Crain's New York Business

Lenders return to real estate; Financiers queuing up for quality projects; competition cuts rates

November 29, 2010


DAVID SPENCE'S lunch calendar is an unusual but accurate indicator of the health of the city's real estate market.

In all of last year, he had such appointments with just two or three lenders interested in financing his real estate company's projects. Recently, though, he has been sitting down to lunch with that many would-be funders every month.

"In the past two to three months, everyone seems to be more willing to do business deals," says Mr. Spence, senior vice president of finance at Paramount Group Inc., which owns 10 office buildings in the city. Three lenders competed to refinance Paramount's tower at 745 Fifth Ave., and DekaBank and HSBC won the $180 million contest last month.

Real estate lending is back, roused from its recession-induced hibernation by an improving economy, relatively strong property values and low interest rates. Motivated in part by ultra-low returns on such investments as Treasuries and corporate bonds, banks and insurers are vying to finance property-related projects.

Through the first three quarters, an index of new commercial mortgages in the city soared 23% over the year-earlier period, according to CB Richard Ellis Inc.

By mid-November, the number of commercial mortgage-backed security issues launched in the U.S. this year had skyrocketed to 30, worth a total of $16.3 billion, compared with nine deals totaling $2.28 billion in the corresponding period of 2009, says data provider Dealogic.

"We were getting a lot of calls because we were among the only ones lending," says Bill Smith, chief lending officer of Bank of China's New York branch, which earlier this month provided $800 million to refinance 245 Park Ave. "Now there is a lot more competition."

Not for all deals, however. Lenders are willing to do business only with owners and developers that have established track records-and deep pockets, as borrowers are routinely asked to put up 25% to 40% of a property's purchase price in cash. That's a sharp rise from the 5% equity stake that many lenders happily accepted in the boom years.

It pays to get Met

LENDERS' STANDARDS are higher, but at least money is flowing back into the real estate sector. MetLife is a prime example. The insurer is on track to lend about $8 billion for projects this year. That's up 60% from 2009's depressed levels and equal to those at the peak of the boom.

The amount may go higher next year, says Mark Wilsmann, managing director of real estate investments at MetLife.

"There is significant improvement in the multifamily, hotel and office markets," Mr. Wilsmann says. High on Met Life's wish list are opportunities to finance office deals in New York, where signs of a recovery abound, he says.

The volume of new leases signed rose 66% in the first nine months of 2010 compared with the year-earlier period, according to Cushman & Wakefield Inc. Meanwhile, asking rents have finally stabilized.

The mounting competition for the best deals is driving down lenders' returns. Landlords can borrow at rates below 5% today, compared with 8% last year. Lenders are hardly thrilled by such terms but are accepting them.

"Other fixed-income returns are even lower," says Melissa Farrell, managing director at Prudential Mortgage Capital Co.

Prudential might relax its standards for the right deal, Ms. Farrell says. Typically, insurers insist that lenders put up as much as 40% of the price. But for a well-performing multifamily property, her company might provide 75% of the financing.

Insurers are under pressure to ease up with investment banks, which are far more comfortable with risk, re-entering the fray.

"We want our share of the market," says Anthony Orso, CEO of commercial real estate at Cantor Fitzgerald, which has been building a team to assemble and trade commercial mortgage-backed securities. Mr. Orso says Cantor has already made individual loans and plans to sell about $5 billion in CMBS in 2011.

All the trends are encouraging for borrowers. For example, Paramount is considering refinancing two other buildings, even though their loans don't come due for years. Low interest rates will more than compensate for any prepayment fees, Mr. Spence says, adding, "We want to lock in the good rates while we can."

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