RE financing still strong, despite trade center hiccup

Real Estate Weekly, Nov 7, 2001 by Michael Sherman

Prior to the devastating World Trade Center attacks on Sept. 11, the real estate finance market had been moving at a fairly brisk pace, even though a marked slowdown in the economy had begun earlier in the year. There was ample money available for most product types, with the exception of hospitality properties, and most lenders were eager to fund new loans.

Not surprisingly, Sept. 11 had a significant impact on the finance market, as it did on every aspect of the real estate industry. But, I don't believe the long-term impact will be permanent and predict that the market will resume its buoyancy once some of the dust settles and the economy begins to recover.

Following the attacks most lenders moved to the sidelines to take a breather and to plot a strategy as to how to proceed. Within two to three weeks after Sept. 11, some of our markets became active again but took on different parameters. To begin with, the CMBS market reactivated itself, although rates jumped by 30 to 50 basis points. At the same time, loan-to-value was reduced to 70 to 75 percent. Floor rates of 7 1/4 to 7-1/2 became the norm. Institutional players, the insurance companies and pension funds, while never really out of the market, began aggressively to seek out new lending opportunities. The spreads quoted also increased but only by 25 to 40 basis points and loan-to-value was reduced to 60 to 65 percent. Floor interest rates ranged from 6-3/4 to 7-1/4 percent.

One segment of the market that did contract considerably was the banking sector, particularly as it related to new construction financing. Most banks continue to have a "wait and see" attitude and it would not be unusual if that outlook remains the same until the beginning of the New Year.

While the events of September have had an effect on the real estate finance market, they have been far from negative. Granted, rates may be a little higher and underwriting standards a little tighter. I fully expect, however, a positive trend to continue. Rates remain low and lenders will continue to have money to lend. While it is possible that we could see a slow first quarter in 2002, economic indicators suggest a rather steep rebound beginning during the second quarter.

Lenders will continue o favor residential, office, and industrial properties as investments, but the outlook for retail is not as optimistic Hotels are likely to continue to suffer, especially those in New York, until tourists feel safe enough to travel ere.

In short, the financing market for 2001 began strongly. As time proceeded along with the rest of the economy, it began to see a slowdown, particularly during mid-year. Transactions were being finalized, but on a more conservative basis. The events of Sept. 11 caused a major hiccup, but certainly did not put us out of business. Since then, the market has returned and the outlook going forward is positive.