The largest commercial banks in the U.S. and Europe are basically out of business when it comes to providing financing for commercial real estate. Unfortunately, the Troubled Asset Relief Program (TARP), which was supposed to provide low-cost capital to the banking system that eventually would have been utilized for commercial mortgage financing, is a total lie.
The stated goal of the program, according to the U.S. government, was to purchase assets and equity from financial institutions to strengthen the financial sector and encourage banks to resume lending at levels seen before the crisis, both to each other and to consumers and businesses. But it hasn’t exactly worked out that way.
Many believed that if the TARP could stabilize bank capital ratios, it would allow them to increase lending instead of hoarding cash as a cushion against future losses from troubled assets. The government hoped this “loosening” of credit would improve investor confidence in financial institutions and the markets.
But instead, as each day brings news that Bank of America, Merrill Lynch (which owns commercial banks), Citibank and Wachovia have lost billions and billions of dollars, we find these institutions have no desire whatsoever to provide any source of funding for commercial real estate.
William McCahill, a partner at AREA Property Partners (formerly known as Apollo Real Estate Advisors), who previously served as the head of commercial real estate for Bank of America, said, “With the total shutdown of a securitization and syndication market, the banks have no place to go to move their paper. Until TARP or the marketplace changes, the outlook is rather gloomy. Rising defaults on commercial real estate debt are also making lenders cautious about adding to their balance sheet exposure.
“A ‘drip of dollars’ will be available, but at a very high price. This will be a very tough market for the next two years,” he added.
The chairman of the board of one of New York’s leading residential and commercial development companies, whose firm has been in business for more than a century and who prefers not to be named, said, “The banks who have received the TARP funds are hoarding their money. No one is putting out money to anyone. Everyone thought they would provide money to needy companies to stimulate the real estate market.”
Sam Chandan, the president and CEO at Real Estate Economics, said, “In spite of infusions into the banking system, lenders are drawing down their exposures to the commercial real estate sector. Regulatory pressure, as well as pressures from investors, is limiting banks’ willingness and ability to extend credit.
“While banks’ borrowing costs are falling, concerns about deteriorating fundamentals and falling property prices are driving risk premiums for commercial real estate lending,” he said.
A senior vice president at one of the largest commercial banks in the nation who continues to lend to established real estate owners and investors and prefers to remain anonymous said, “The investment of the TARP funds to banks is no panacea for the banks, nor particularly effective in re-starting lending. TARP only improves Tier 1 capital. It does not improve tangible common equity, [which] supports both loan and securities losses.
“The TARP was effective in preventing an immediate collapse of some of our largest financial institutions this fall, and has somewhat cushioned the blow of sharply declining asset values, but it cannot be effective in returning underwriting standards or debt availability to 2006 or 2007 levels,” he added. “Nor should it. The economy will continue with a painful de-leveraging and eventually work its way out, but only over time and after continued declines in asset valuations make it irresistible for investors currently sitting on the sidelines to commit capital to real estate.”
David McLain, a principal at Palisades Financial, said, “There is a tremendous amount of fear and uncertainty as to how far the commercial real estate market will continue to fall. Bankers traditionally only want to make a sure bet, thus there is little incentive for them to put money out in this unstable environment. As a result, you have many lenders now focused on using the TARP monies to shore up their capital base versus providing more loans. Most major lenders that I have spoken to said they do not have any allocation for new loans in 2009.
“Conversely, this vacuum of loan supply has allowed those few groups who are making loans to pretty much dictate the terms and conditions to even the most qualified of borrowers,” he added.
“We plan to continue to provide close to $5 billion in mortgage financing in 2009,” said James Carpenter, senior executive vice president and chief lending officer at New York Community Bank. “We have tightened our underwriting standards [and are] concentrating on existing cash flow and increasing our spreads. We are worried about the fringe neighborhoods, where prices tend to decline. The majority of our lending in the New Year will be for multi-family, rent-stabilized apartments.”
George Klett, the executive vice president at Signature Bank, which provided close to $1.3 billion in mortgage financing in 2008, said, “We will continue to lend to the multi-family, yet we are very cautious of providing financing for office and retail. We believe that with initial and future layoffs, office and retail will get hurt in the New Year.”
Chris Lama, a principal at NY Urban, said, “Most life insurance companies are lending, offering rates equivalent to corporate bond yields of 7.25 to 7.75 percent while others are completely out of the market. Many borrowers who have near-term maturities who have always been life company borrowers are now forced to borrow from the limited number of commercial banks who offer shorter maturities with amortization and personal recourse. Today, those banks providing lending are holding the cards even if the deal makes economic sense.”
With the lack of strength of the economy, the limited number of alleged credit tenants, rising unemployment, retail and other corporate bankruptcies, in most cases real estate lenders will remain on the sidelines instead of providing financing. At this time in the cycle, I must concur with Chris Lama when he says it is probably “one of the worse times we have seen in financing for commercial real estate, yet the most important goal is survival, which is a difficult task in these conditions.”
Michael Stoler is a columnist for The Real Deal and host of real estate programs “The Stoler Report” on CUNY TV and “The Michael Stoler Real Estate Report” on 1010 WINS. He is a director at Madison Realty Capital and an adjunct professor at the NYU Real Estate Institute.