Jones Lang LaSalle's Tom Fish dissects the market financing requirements borrowers have in today's lending environment.
A new proprietary survey defines the likely universe of capital available for commercial real estate lending in 2012. Conducted by Jones Lang LaSalle (JLL) and Penton Media Research, it compiled direct feedback from 186 borrowers and 136 lenders who together comprise a median $73.3 million in commercial real estate asset value. Specifically, the "2012 Borrower Sentiment" report details the borrowers' sentiments for 2012 funding aims. In the last 12 months, these respondents borrowed a median $21.1 million for commercial real estate ventures.
While borrowers used to bemoan the slow loan closing speed and the post-closing service process, "both areas have improved as of late," shared Tom Melody, co-head and executive managing director of JLL's real estate investment banking business. "We anticipate that improvement will continue throughout the year. It is a great time to be a borrower."
It "makes sense" that a majority of borrowers still need more capital lending in 2012, added Tom Fish, co-head and executive managing director of JLL's real estate investment banking business, noting there is $415 billion of mortgage maturities on the horizon in 2012 alone "and opportunistic plays in the market." Even with the existing global economic concerns, he predicts debt financing "will remain very strong in the core space from life companies and domestic banks, and we expect the CMBS market to continue to regain footing in 2012."
Here are some report highlights:
- The health of the United States economy has the greatest impact on borrowers' ability to obtain financing. Borrowers further noted that debt-service coverage ratios and loan-to-value ratios also impacted their ability to refinance.
- Borrowers need more debt in 2012, as 40 percent expect their total portfolio debt to increase this year--up six percent over last year's increase expectations.
- Commercial banks are the most active lenders, borrowers find, as 77 percent of respondents borrowed from banks in 2011. One in three borrowed from life companies and one in four borrowed from private-equity investors in 2011. The report said this flags a trend expected to increase in 2012 as more borrowers seek funds from alternative sources.
- In 2012, 44 percent of borrowers and 56 percent of lenders expect credit to increase.
- Most borrowers (74 percent) are sourcing primary loans or short-term construction loans (41 percent) followed by 30 percent sourcing a line of credit.
- The debt process is improving since commercial real estate borrowers report feeling satisfied with the certainty of execution from lenders, which they say is the most important factor when seeking a loan origination provider.
- Expectations for an increase in long-term mortgage rates have subsided. Only 57 percent of borrowers predict an uptick in interest rates in 2012, while 78 percent thought rates would rise in 2011.
Regarding financing requirements, the survey found that in 2012, "debt in all forms, deleveraging, bank stability and currency movements will dominate the global financial picture." Domestic borrowers indicated the majority of their 2011 financing needs (51 percent) were used for refinancing, followed by 42 percent for financing acquisitions where opportunistic buys existed. "Contrary to typical wisdom, a large portion of borrowers' funding in the last year went to new development (24 percent)," said the report .
The market is expecting rates to remain low during 2012 with generally favorable commercial loan pricing, said Melody. "We're at an absolute 25-year low for fixed rate loans on the best, low leveraged, quality assets. Borrowers with core, well-located properties will have a lot of competition and bidding wars from lenders willing to be aggressive on their pricing even though absolute rates are low given the spreads to those benchmark interest rates are still extremely attractive."