Conditions are declining but money keeps coming
Author: Andrew R. Little
Source: Richmond Times-Dispatch
Date: 12-16-2002
Conditions are declining but money keeps coming
"De-coupling" is a word that has been used to describe the uncomfortable relationship that currently exists between real estate fundamentals and real estate investment.
In short, while real estate fundamentals are declining, investors and lenders are enthusiastically putting money into the assets.
Typically, the two patterns are coupled. When real estate fundamentals are good or improving, more money flows in; when fundamentals are bad or getting worse, money flows out.
Still paying top dollar
Today, while vacancies are growing, rents are slowing, and rent concessions are looming, investors are paying top dollar for properties, and lenders are clamoring to put more money out.
In fact, according to the Barron's/John B. Levy & Co. National Mortgage Survey, almost $6 billion of loans will be sold by year end as commercial mortgage-backed securities. (So-called "CMBS" are bundled commercial real estate loans that are sold as bonds.)
Some analysts predict that commercial mortgage rates will increase by the end of the year, but others expect rates to decline by mid-January.
Volatility unnoticed
With rates still hovering in the 5.125 to 6 percent range for 5and 10-year fixed-rate mortgages, the volatility is likely to go unnoticed by most developers.
Dave Brown, principal and head of the Eastern Region for Atlanta-based Prudential Mortgage Capital Co., noted last week that rates are close to the lowest levels they have been in the past 40 years.
Brown was among three panelists assembled last week for a quarterly Urban Land Institute District Council meeting here in Richmond.
Flight of capital?
Also speaking was Kieran Quinn, president and CEO of one of the largest conduits in the country, Column/CS First Boston.
Quinn responded to a question about the perceived flight of capital away from all but the largest 25 markets in the country. Richmond is not included in the top 25, but Quinn said, "For standard loans [funding in Richmond] it is not a problem, but for single-tenant or very large loans it could be difficult."
Incidentally, he mentioned that Column closed a $265 million transaction in five days, leaving the audience to wonder what loan in Richmond would be considered large.
'Speculative bubble'
The panelists also responded to a question about how a deflated "speculative bubble" in the residential real-estate market could affect commercial loans.
Fred Harper, president of Transamerica and the third panelist, didn't think there would be much effect on well-located B and C (lesser) quality properties, where Transamerica looks to make loans.
Quinn added that retail properties were vulnerable to a slowdown in new-home sales and that could occur if rates went up.
A positive note
On the positive side, he noted that apartment properties stood to gain tenants if fewer people were buying homes.
Brown thought the bubble risk was evident in specific markets, but Richmond was not included in those he mentioned.
Andrew Little is an investment banker with John B. Levy & Co.