The commercial real estate market should have a strong year, but growth likely will not be as great as last year, according to analysts and experts at the Regional Conference of Mortgage Bankers Associations

In fact, all property types within commercial real estate should fare well this year.

The cost of lending is now more tied to factors not immediately related to the commercial real estate market.

The lack of liquidity caused by the European financial crisis last year resulted in a slowdown of commercial real estate lending and made borrowing costs higher for some looking to secure a commercial real estate loan.

Concerns about too much supply is one reason that some investors are turning back to cities.

Central business districts of cities have fewer barriers to entry, Carol Nichols, senior managing director at the capital advisers group of Insignia/ESG Inc., told Reuters.

Also noted as a defining factor in the coming year is that the cost of borrowing in the commercial real estate market has declined from the highs seen following financial crises overseas last year.

Borrowing costs rose dramatically after a liquidity crunch on Wall Street that resulted from financial crises abroad in 1998.

Lenders were not able to sell pools of their loans within securities in 1998 because investors shunned spread products such as corporate debt, asset-backed and commercial mortgage-backed debt, conference participants said. U.S. Treasuries were a safe haven for investors fearing the worst, and Wall Street dealers found it difficult to make markets for spread products because their own funding costs rose sharply, they said.

As a result, funding a commercial real estate loan became more costly and, in some cases, became impossible because some lenders quit the market.

Panelists at the annual Regional Conference of Mortgage Bankers Associations said commercial real estate loans for some types of properties were being underwritten at a spread of 150 basis points over 10-year U.S. Treasury notes prior to the crises overseas last August.

That spread was a cost of funding not seen since the early 1990s, when commercial real estate securitization was in its early stages.

Today, this spread has narrowed to 190 basis points for some properties such as multifamily deals.

Improved liquidity on Wall Street has helped bring these financing costs down, but conference participants attributed some of this narrowing in spread to aggressive lending by life insurers, some of whom have allocated as much as 50 percent of their capital to real estate.

Panelists also discussed the changes in the profile of investors.

Recently, small investors -- traditionally a minor source of demand for commercial real estate financing -- have become a more important force in a business long driven by Wall Street investment banks involved in big property deals.

The interest from individuals that cropped up in the second half of October continued until early this year.

Today, Wall Street investment banks are more willing and able to provide capital for larger commercial real estate loans because it can more readily find buyers of debt backed by the fixed payments of these loans -- a process known as securitization.

Published: March 22, 1999

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