Commercial Mortgage Market Cautious After Terrorist Attacks

Real estate investors saw Sept. 11 as the beginning of an "instant recession" with the effects on commercial real estate yet to be determined, according to the Barron's/John B. Levy & Co. National Mortgage Survey.

While the 10-year U.S. Treasury dipped below 4.50 percent for the first time since the Russian bond default and subsequent bond market crash of 1998, the 5-year U.S. Treasury dipped to a level not witnessed since John F. Kennedy was in office. Reminiscent of Nov. 22, 1963, the events of Sept. 11, 2001, will forever be etched in our memories.

For many of our colleagues in New York, the events and experience of that day were traumatic. Physically, logistically and emotionally, market participants will be affected to varying degrees for the foreseeable future. Despite the lasting impression of the horrific losses suffered, the commercial mortgage market was struggling to regain some normalcy last week.

Perhaps the most noticeable change for commercial mortgage lenders is the widespread use of interest rate floors. In general, lenders imposed floors in the 6.50 percent to 6.75 percent range on 5-year business and floors of 6.75 percent to 7 percent on 10-year business, with the lower end of the range reserved for low-leverage and multifamily loans.

More than $20 billion of commercial loans are sitting on the books of Wall Street lenders in preparation for sale as commercial mortgage-backed securities. If September had gone as planned, about 33 percent less inventory would be sitting ready for sale.

The backlogged inventory of loans, combined with economic and political uncertainty, has made lenders nervous about new transactions. New borrowers will face a difficult environment despite historically low interest rates.

Before Sept. 11, the slowing economy was beginning to affect real estate, particularly hotels because of their dependence on a day-by-day income stream. Hoteliers have felt the "instant recession" in a dramatic way since Sept. 11. For example, Lehman Brothers scuttled a planned $300 million securitization of the Swan and Dolphin Hotels at Walt Disney World, arguably two of the strongest hotel properties in the country, because of lack of investor interest after the terrorist attacks.

This brings into question the ability of Gary Beller, president of Chicago-based ECI Investments Advisors Inc., to raise capital to purchase and convert the former Miller & Rhoads building across from Richmond's expanded convention center into a hotel and master development he calls City Center Park.

"I will get it financed," Beller said. He also indicated that public purpose streetscapes, utilities and parking are an important component of the master plan, and he hopes to get much of that financed through public bonds offered by a proposed Community Development Authority.

With regard to the actual hotel, Beller said, "I am a long-term investor and will raise long-term private equity" to get the project done. He also stated, "If you put enough equity into it, you can get it done."