December 21, 2009


Richmond Times-Dispatch
Published: December 14, 2009

Commercial real estate is starving for credit Smart money continues to pile up on the sidelines, anxious to take advantage of bargain-basement pricing for broken commercial real estate loans.

Government policy, however, seems geared toward preventing breaks by letting bad loans go unrecognized on banks' books in hopes that they will become good loans.

And despite Treasury extending the Troubled Asset Relief Program (TARP) for a year, the program is now focused on other areas of the economy.

The gyrations have credit-starved commercial real estate participants screaming, "What's going on!?"

Markets are no longer in a free-fall, so optimism can be seen in some quarters. But 2009 is ending with as many or more questions as when it started.

Credit to commercial real estate is still virtually nonexistent, and there is no clear path defining from where more will come.

Bank examiners have guidelines to follow when they review banks' books, but none of the guidelines forces banks to ultimately resolve problem loans.

Through a combination of low interest rates and forbearance on problem loans, policy seems designed to allow banks to continue earning money so that they can write down problem loans over many quarters, and, perhaps, years.

The alternative, the argument goes, would be to put many of them out of business.

This policy may prolong life for many banks and their borrowers, but the larger impact is that potential problem areas of the economy, such as commercial real estate, are starving for credit.

The latest Federal Reserve data regarding commercial banks in the United States show total assets (of all commercial banks in the U.S.) of approximately $11.8 trillion at the end of October 2009 compared with $11.96 trillion at the end of October 2008 -- a shrinking of $160 billion in one year.

Commercial real estate loans accounted for $60 billion of the shrinkage during that time span, while consumer loans represented $6 billion.

The original intent of TARP money was to allow banks to continue lending, but the data show outstanding loans have decreased.

This has put most commercial real estate players on the sidelines. Credit for deals is as tight now as it was earlier in the year.

TALF (Term Asset-Backed Securities Loan Facility), another major government program intended to bring back the securitization market, has been ineffective.

The rebirth of the CMBS (commercial mortgage-backed securities) market is starting, but TALF has little to do with it.

JP Morgan's recent underwriting of the Inland Western deal is a template for future deals.

It provided a 75 percent LTV (loan-to-value) loan versus the 50 percent offerings from Fortress and Developers Diversified Realty, which was the only new offering that was TALF eligible.

The problem for the majority of commercial real estate borrowers is that they are not the size of Inland Western, and JP Morgan and the other banks have little appetite for small transactions or those in secondary or tertiary markets.

As large loan portfolios begin to make their way through the securitization process, many smaller borrowers wonder when the money will trickle down to them.

In the meantime, according to the John B. Levy & Company National Mortgage Survey, rates for 5-and 10-year fixed-rate mortgages range from 5.75 percent to 7 percent for low leverage loans secured by real estate with good tenants and operated by solid borrowers.

Andrew Little is an investment banker with John B. Levy & Co. He can be reached at