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News release

San Diego, CA.

Commercial Real Estate Lenders are “Back in the Black” at MBA Conference According to Jones Lang LaSalle’s 2011 Lenders’ Production Expectations Survey

CMBS predicted to reach $30 to 50 billion of new issuance in 2011


SAN DIEGO, FEB. 25, 2011 — A stronger economic environment and greater confidence in the fundamental performance of commercial real estate in 2011 is giving lenders across the board heightened optimism as they move “back in the black” with a marked uptick in new originations expected in the coming year, according to findings from Jones Lang LaSalle’s annual 2011 Lenders’ Production Expectations Survey. 

An increasing amount of debt and equity capital is headed for direct placement in the commercial real estate sector this year as 26 percent of respondents expect their loan production to exceed $4 billion in 2011—a number that is more than double the number of lenders surveyed who reported that level in 2010 at 12 percent. Showing even more future optimism, an additional 23 percent of respondents say their loan production will ramp up to $2 to 4 billion in 2011. The number of respondents who believe that they’d put out less than $1 billion in 2011 dropped by 51 percent down to 24.2 percent, compared with 50 percent who believed their production would be anemic last year. 
 

Jones Lang LaSalle’s survey—administered directly to 75 of the nation’s largest lenders through a face-to-face questionnaire—included a mix of insurance companies, commercial mortgage-backed securities dealers, private equity lenders, commercial banks and government agencies. It was conducted during last week’s Mortgage Bankers Association’s Commercial Real Estate Finance/Multifamily Housing Convention and Expo in San Diego, California.

“The mood at the MBA conference this year was that lenders were ‘back in the black,’ with an abundance of capital targeting commercial real estate lending in 2011. A new frenzy is returning to the debt and equity markets as broad sources of capital are now moving aggressively back into the sector,” said Tom Fish, Co-Head and Executive Managing Director of Jones Lang LaSalle’s Real Estate Investment Banking. 

Reviving Capital Sources

Commercial Mortgage-Backed Securities (CMBS) dealers are now re-entering the market with strong performance expectations. The majority of respondents (32.35 percent) predicted that CMBS issuance would land between $30 and 50 billion this year. An additional 26.47 percent pegged CMBS between $20 and 30 billion in 2011. The 19.2 percent of the most bullish respondents believe CMBS will exceed $50 billion in 2011. 

This growing conduit issuance trend is set to continue in 2012, according to nearly half (46.15 percent) of respondents who indicated that CMBS issuance next year will land in excess of $50 billion. An additional 38.46 percent see CMBS landing between $30 to 50 billion in 2012. 

“We’ve heard from at least 26 new conduit players that are entering the market with plans to place upwards of $30 to 70 billion of CMBS transactions in 2011. Liquidity in this part of the market is a crucial step forward, given CMBS players will target a broader range of asset classes and help restore health in the broader commercial real estate lending environment,” added Fish.
 
Production Allocations
 


The number of lenders  willing to lend greater sums toward single-asset acquisitions is also shifting. In 2011, the majority of respondents (62 percent) indicated that the maximum they would lend is $100+ million. The number of lenders expected to be willing to lend $100+ million rose by 8 percent to 70 percent of respondents in 2012.

Lenders have shifted their product focus. In 2010, respondents indicated the greatest demand for office and retail product (tied at 20.8 percent) followed by industrial (19.91 percent), multifamily (17.26 percent) and Hotels (11.50 percent). In 2011, the league tables have changed, with the top spots going to multifamily and office (tied at 19.8 percent), followed by retail (19.4 percent), industrial (18.95 percent) and Hotels (13.3 percent).

New money is slowly starting to move up the risk curve and into speculative development, as 16.7 percent of lenders said they’ve already started to lend on spec. An additional 7 percent are prepared to start thus year and 15.3 percent expect to start in 2012. Yet, the floodgates are not quite fully open, as the vast majority of respondents (59.2 percent) do not expect to lend on speculative development in the near future. 

“We’ll see a number of construction, life companies and mezzanine lenders that will originate on multifamily development this year, but that will be limited to the core properties in key demand markets,” added Mike Melody, Co-Head and Executive Managing Director of Jones Lang LaSalle Real Estate Investment Banking. 

Approaching maturities will continue to share the stage in 2011, with 91 percent of life company respondents confirming that up to 40 percent of their portfolios will be allocated to the refinancing of maturing loans. In 2010, the majority life company respondents (64 percent) acknowledged 0 to 20 percent of their allocations went toward maturing loans. In 2011, 83 percent of bank respondents indicated that up to 40 percent of their capacity will be on recapitalizing existing loans. 

“While there is an abundance of problem loans—roughly $450 billion—that are maturing in 2011, that doesn’t mean that financial institutions will be taking back assets and selling them back into the marketplace as quickly as they receive them. While they are ready to clear their balance sheets and recognize more losses this year, it is still relatively easy to extend and restructure for three to five years while interest rates remain low and there is a decent chance that asset could perform over the next few years,” said Tom Melody, Co-Head and Executive Managing Director of Jones Lang LaSalle’s Real Estate Investment Banking. ‘We’ll see a higher degree of note sales this year, but that is because sellers can get decent returns as competition increases among buyers vying for limited loan-to-own product.”

Of lenders who are selling performing and non-performing loans, many are still experiencing significant discounts to face value, though not as high as in the previous year. In order to create liquidity and rid themselves of these non-core or problem assets, 83 percent of lenders indicated they’re going the note sale route. The recovery rate for note sales ranges from 30 percent reclaiming $0.60, with 15 percent noting their getting $0.70, and an additional 15 percent getting $0.80. Only 20 percent of respondents reported recovering $0.50 or less in their note sales. 

“The recovery rates available for note sales today range across the board and it depends on the quality and location of the asset and upside potential that is driving value today,” said Peter Nicoletti, head of Jones Lang LaSalle’s Special Asset Services. “Many lenders have taken to the auction arena or a third-party servicer to assist with loan sales, workouts asset management and other asset recovery services.”

Loan Terms and Standards

Liquidity has definitely returned from to the lending market, with slight changes when it comes to underwriting standards. In 2010, 73 percent of lenders were providing loan-to-value ratios in the 60 to 80 percent range. This year, 80 percent will lend on 60 to 80 percent LTV, but those willing to lend at more than 80 percent LTV jumped from 8 percent of the lender community in 2010 to 13 percent this year. 

As for new conventional commercial real estate loans in 2011, the largest percentage (38.7 percent) say most loan terms will range from eight to 10 years, with another 25.8 percent declaring their terms would fall between four and five years.

When asked about average debt coverage ratios or debt yields they are quoting, industry participants expressed a wide range of opinions and the following averages per product type.

• Hotels: DCR average 1.4 and all in debt yields average 10.9 percent  

• Multifamily: DCR average 1.1 and all in debt yields average 8.7 percent  

• Office: DCR average 1.3 and all in debt yields average 9.5 percent  

• Retail:  DCR average 1.3 and all in debt yields average 9.4 percent

• Industrial: DCR average 1.3 and all in debt yields average 9.4 percent

To see Jones Lang LaSalle’s full opinions on the commercial real estate debt and equity markets, view our video blogs from our suite of executives at the MBA show:  www.us.joneslanglasalle.com/mba 

Jones Lang LaSalle Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. Our in-depth local market and global investor knowledge delivers the best-in-class solutions for our clients — whether a sale, financing, repositioning, advisory or recapitalization execution. In 2010 alone, Jones Lang LaSalle Capital Markets completed an unaudited total of more than $41 billion in investment transactions and debt and equity globally. The firm’s dealmakers completed $33 billion in global investment sales and buy-side transactions, equating to nearly $140 million of investment trades completed every working day around the globe. In the United States, Jones Lang LaSalle grew its office broker volumes by 257 percent in 2010 and is quickly gaining market share across all property types. Our Capital Markets team comprises approximately 800 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 2010 global revenue of more than $2.9 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 1.8 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 more than $41 billion of assets under management. For further information, please visit our website, www.joneslanglasalle.com.