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News release

San Diego, CA

Bright Times Ahead for Debt Markets According to Jones Lang LaSalle’s 2011 Commercial Real Estate Financing Outlook

CMBS issuance to surge in 2011 as cap rates continue to fall and note sales increase


SAN DIEGO, Feb. 7, 2011– A combination of brightening economic prospects, strengthening and more consistent employment growth, highly expansionary monetary policy and still-low, long-term risk-free interest rates is expected to significantly improve lender and investor confidence in 2011.   Brighter times are ahead in the new year for the commercial real estate debt markets due to the gradual recovery of the Commercial Mortgage-Backed Securities (CMBS) origination market, which is expected to broaden and accelerate in the coming year, and the expected production increase by lenders of all types, according to Jones Lang LaSalle’s 2011 Commercial Real Estate Financing Outlook.
 
There are increased signs of resurgence in the U.S. CMBS market. In 2010, total new CMBS issuance in the United States rose to US$10.9 billion, up fivefold from the US$2.1 billion overall issuance in 2009. Investors of U.S. CMBS have driven prices on bonds to their highest level in more than two years as they wager that the worst is over for commercial real estate. Total issuance in 2011 is expected to top US$40 billion, providing added liquidity to owners with maturing loans to refinance. The first quarter of 2011 is already off to a strong start with upwards of US$10 billion in the pipeline.
 
“Two years ago, lenders and investors here at the MBA show were saying: “We’ll be in heaven in 2011", and we’re far closer to that fully functioning debt market than we’ve seen since the recession. Given the financing spigot temporarily turned off, a natural evolution occurred last year in which lenders returned to safe lending—targeting only low-leveraged, trophy assets.  Now, demand has begun to exceed supply, and lenders are moving more aggressively to place capital,” said Tom Fish, Co-head and Executive Managing Director of Jones Lang LaSalle’s Real Estate Investment Banking practice.  “In the following months, we expect to see lenders move increasingly up the risk continuum as we’re still in a low overall yield environment, and there’s a high demand for yield generation.”
 
Fish says lenders of every type, including life companies, pension funds, commercial banks and REITs, will all be ramping up allocations in 2011.  That increased liquidity will seek three different asset types, including:
 
  • Trophy Deals—the highest quality transactions in the best markets.  A great deal of money continues to chase those relatively few deals driving a scarcity premium in that market.
  • Trauma Deals—assets in secondary or tertiary markets that are not well conceived or well located.  Opportunistic capital is still available for these highly distressed assets; however, these opportunities have not materialized in the quantity the market-at-large had originally anticipated.
  • Tweener Deals—those assets in between the Trophy and the Trauma, which are well-located quality assets, but not fully stabilized.  This asset class should see the most targeted capital in 2011, and this is the area the CMBS will more strongly target for value plays.

“The primary impediment to financing will be the significant number of overleveraged assets that still require recapitalization and deleveraging,” said Mike Melody, Co-head and Executive Managing Director of Jones Lang LaSalle’s Real Estate Investment Banking practice.  “However, a lack of capital is definitely not the problem.  With more capital than transactions currently available, borrowers will be placing a greater emphasis on asset type and real estate risk, with core market multifamily and office receiving the best terms."

Competition is impacting investment sales terms as cap rates peaked in the first quarter of 2010 and are now clearly compressing.  At one end of the spectrum, robust demand for trophy office properties in top-tier and some secondary markets has pushed cap rates down by nearly 200 basis points and caused values to rebound by up to 50 percent from the market’s trough in certain cases.  Interest in multifamily properties has also been very strong and is expected to stay that way due to pent-up demand as the residential housing market remains weak and potential renters are tired of living at home, or sharing space with roommates. 
 
In terms of distressed loans, the tidal wave of sales activity that was widely predicted in 2009 never materialized as lenders and borrowers worked together to stave off defaults.  Loans that were re-set two years ago with short-term financing in hopes of hurdling the drought will be coming due in the months to come, and there should be increased opportunity in loan-to-own plays, as well as deed-in-lieu transfers for many savvy investors.
 
“Following nearly two years of loan modifications and workouts, we should start to realize a very liquid market in note sales,” said Peter Nicoletti, Managing Director of Jones Lang LaSalle’s Special Asset Services.  “There are a lot of small balance loans in the current outstanding CMBS universe as 72 percent of loans by count are $10 million and lower and 91 percent by count are $25 million and lower. These smaller balance loans will likely be liquidated at a faster pace than others, and mezzanine loan positions, in which a buyer can take control of the asset, are becoming increasingly valuable as well.”
 
Added Tom Melody, Co-head and Executive Managing Director of Jones Lang LaSalle’s Real Estate Investment Banking practice, “We are near bullish on the state of commercial real estate financing and activity for 2011.  Granted, we’re starting from a much smaller base of transactional volume than we were four years ago due to stricter underwriting, but values have stabilized and capital has definitely returned to the marketplace.  Opportunities abound and we are poised to capture them for our clients.”
 
Jones Lang LaSalle has already captured an increasing percentage of capital markets transactions available in the market. The firm is clearly positioned as one of only two global real estate capital market players with global volumes that surpass the remaining global, regional and local competitors by at least two times the volume. The firm’s 2010 global capital markets volumes, including investment sales and debt and equity transactions, rose an estimated 47 percent to $39 billion.
 
In 2010, the firm’s U.S. real estate investment banking team closed $8 billion of financial transactions, which includes debt/equity origination, note sales and advisory/consulting work for clients.

The firm’s growth path is well paved following the firm’s recent announcement that Jones Lang LaSalle has entered into a definitive agreement to acquire certain assets of the Atlanta-based commercial real estate lending and servicing group of Primary Capital™ Advisors.  This acquisition will allow Jones Lang LaSalle to operate as a Freddie Mac Program Plus® Seller/Servicer and will include a $2 billion loan servicing platform.

“We have a great deal of runway in our business today, considering the improvement in the lending markets and the investments we’re making to deepen the bench strength of our Real Estate Investment Banking team,” Tom Melody. “We’re planning a significant expansion program in 2011 and plan to add additional market-leading debt and equity originators in Boston, San Francisco, Dallas, Denver, Tampa and Atlanta. We also plan to continue to build our existing service platform, with a focus on adding talent in Los Angeles, New York, Washington, D.C., Chicago and Miami. This is only the beginning of the market moves we have underway we’re also moving quickly to expand our servicing capabilities as well as other services within the REIB business.”
 
Jones Lang LaSalle Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. The firm’s in-depth local market and global investor knowledge delivers the best-in-class solutions for its clients — whether a sale, financing, repositioning, advisory or recapitalization execution. In the last three years, Jones Lang LaSalle Capital Markets completed more than $143 billion transactions globally. The firm’s Capital Markets team comprises approximately 1,500 specialists, operating in 180 major markets worldwide.
 
About Jones Lang LaSalle
Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2009 global revenue of $2.5 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.6 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with approximately $40 billion of assets under management. For further information, please visit our website, www.joneslanglasalle.com.