This week, MortgageOrb checks in live from the Mortgage Bankers Association Commercial Real Estate Finance/Multifamily Housing Convention in Orlando, Fla., where Person of the Week and conference attendee Jeffrey R. Sadur, principal at River North Mortgage Co., describes the state of the commercial mortgage market in a special expanded conference edition of this weekly feature. River North Mortgage Co. is a Chicago-headquartered boutique mortgage banking firm that maintains relationships with a number of life company lenders.
Q: How is transaction volume these days? Are you seeing the slowdown that many in the industry have observed? This conference's tag line is, of course, ‘where business happens.’ Is business happening here?
Sadur: Deal volume is a little slow for the industry because the borrowers and lenders are definitely unsure right now about where they want to be. The industry is in a state of turmoil and flux right now.
But definitely, business is going to happen – even if we have to force a round peg through a square hole, as some people describe it.
Q: Cap rates are one popular item of discussion these days. Where are they heading right now, and how important is their stabilization for returning to any sense of market normalcy?
Sadur: Cap rates are increasing, and it will cause values to decrease. Normalcy is cap rates is skewed because for the last two to three years, there have been artificially low cap rates due to all the money in the marketplace chasing deals.
Cap rates will go back to where they were – or higher – which is where the market should have been all along. They never should have gone down.
Q: Your company is active in transactions with a wide range of values. What role does deal size play, especially now that securitized lenders are generally out of business? Are deals on the larger end of the scale more difficult to complete now? Do you agree with the projections that many life companies may be out of capital by the middle of this year?
Sadur: Right now, larger deals are harder to do right now because the securitized lenders were doing them, and now that they are not in the market, there is no one to replace that money. The life companies' appetites are not as vast as the securitized lenders.?
Some companies may run out of capital by mid-year because they don't have much to start with. Also, a company like Met Life might have $2 billion, but they may not be doing products that they were doing last year. These companies might be constrained by their boards, for example.
Q: What timeline do you anticipate for the return of conduit lenders? How will their return affect the mode of operation for portfolio lenders, such as the life companies you work with?
Sadur: That's the million-dollar question. Perhaps the middle of 2009?
The way securitized lenders historically come back, they will come back like gangbusters, and they'll blow everybody out of the water – because they'll figure out how to do so in some way that they can get paid. Risk does not seem to be a factor for them, whereas life companies are more conservative.
David E. Smith, senior vice president at River North Mortgage:
What it all comes down to is whose money they're lending. Life companies are lending their own money, so they have got a stake in the deal. A life company worries about the beneficiaries of its policies. Once a CMBS lender packages a deal, it's out the door – a faded memory. There are CMBS lenders out there that are more reliable than others, but inherently, their perspective is different.
Q: You mentioned that you service a large portfolio of loans. To what degree is that process conducted electronically? What about other parts of the loan life cycle? Would you say that in general, the commercial real estate finance world is slower to adopt new technology than the residential side?
Sadur: Most of our payments are all paperless. Everything is electronic these days.
Smith: It might be slower here. The commercial real estate finance space does fewer deals, for one, and it's inherently been a business that has been slower.
Q: One statement we keep hearing is that in commercial real estate, the fundamentals are sound. Do you agree?
Sadur: The fundamentals are totally whacked. Borrowers in the next two to five years are going to have to refinance a lot of their debt, and the values that they thought were there are not going to be there. They will need to come up with money out of their pockets, which developers do not usually have.
The replacement financing is where the question mark is. For example, a borrower might have an existing loan of $10 million dollars; in two years, that loan is going to come due. The property is now worth $10 million dollars, and the lender is going to lend $8 of that $10 million. Where is that $2 million in debt going to come from?
Smith: We are in a correction period right now. Underwriting was so aggressive in the past two to three to four years that financing in the next two to three to four years are going to challenging for those developers who do not have additional equity to put in for those overvalued loans.
