4th Quarter Comeback For Commercial Real Estate

After stumbling around on a wet playing field for three quarters, trying to establish momentum despite being mired in a soggy economy, the commercial real estate market has finally found its rhythm and is ready to snatch victory from the proverbial jaws of defeat. According to “Fourth Quarter Comeback,” the latest podcast produced by John B. Levy & Company, institutional investors have switched from defense to offense, sending a clear signal to everyone on the sidelines that buyers have taken the field and that the outlook for the commercial real estate market is healthy.

“The real bright spot in commercial real estate is that CMBS 2.0 – the updated version of the old CMBS that fell off a cliff in 2007 – is back, and that’s no hype,” says Andy Little, partner at John B. Levy & Company. “We’re actually seeing a lot of deals getting done, and there’s a whole new depth to the market. While some businesses might look at the results of the mid-term elections and think we’ll have a lot more clarity going forward,” Little adds, “I believe we’ll have a lot more gridlock. Either way, commercial real estate is going to come out of all this just fine.”

One of the reasons Little is optimistic about the health and stability of the market is that he sees a pricing efficiency in place. Today, CMBS lenders are pricing loans within 5 to 10 basis points of each other. Six months ago, even three years ago, differences in loan prices ranged from 25 to 50 basis points. This tighter range of prices indicates that there are bond buyers in the market for CMBS securities and that there is a depth to those buyers.

“The mood of the institutional investor has changed,” says Little. “In the third quarter, investors took the defense off the field and put in the offense, and that move has set the stage for a fourth quarter comeback. What we need now  is for banks to get back in the business of lending. There’s always a necessary tension between fear and greed that drives the market,” Little explains, “and banks need to stop operating in a fear mode and start working in the greed mode.”

Three of the four legs of the commercial real estate finance market are strone insurance companies are actively lending, as is CMBS 2. The government sponsored entities – Fannie Mae and Freddie Mac – have remained strong throughout all this turbulence. The problem, according to Little, rests with banks. On the whole, banks just aren’t lending, and records show that they are still shedding real estate loans from their books.

“The top 25 banks – JP Morgan, Bank of America, Citibank, and the like – they’re going to lead us out of this,” says Little, “but it may take the next three to six months. But the smaller banks, the community banks . . . they’re another matter. Community banks are the ones who have the construction loans, who were doing retail. They are still heavily concentrated in real estate loans, and that problem will take some time to clear.”