Assessing the state of the financing market

Real Estate Weekly, Sept 1, 1999 by Sanford Herrick

Last year's upheaval in the capital markets set the stage for today's more cautious but still optimistic real estate financing conditions. In the summer of 1998, the underlying real estate markets were extraordinarily healthy, with good rent levels supporting asset value, strong leasing markets without concessions, active rentals and sales, and, on the residential side, low interest rates. It was many years since such robust characteristics had been in place for such a long time.

Then, in August and September, the capital markets fell apart, prompting fears that the downturn would also be reflected in the real estate markets, with lower demands lot housing and office space and fewer service providers needing quarters. It appeared that a storm was on the way.

Relatively quickly, however, some level of reason returned to the capital markets. Long-term capital steadied itself; Japan didn't fall off the map: oil prices didn't plummet; Russia didn't go under; and people on Wall Street kept their jobs. But the entire process made people generally more cautious.

With plenty of capital to finance real estate on both the debt and equity sides today, you don't get the feeling that people are taking the last deck chair on the Titanic.

Along with investors' circumspection goes the assumption that the market is not going up. Asset prices are high - probably as high as they should be - and they reflect full reproduction costs, including developer's profits, in all markets.

In most markets, Class A office levels have stabilized, and in Class B markets, the rents expanding, for some very good reasons. The Class B markets are typically older areas - locations where rents have spiked.

For example, in New York City's "Silicon Alley," tenants don't automatically select newer buildings; they prefer Class B buildings that are rewired and renovated to their unique specifications.

The real estate market, then, is not out of balance: it is the capital markets that were spooked by their own circumstances and perceptions.

At SWH, it is important for us to understand this, because what we live on - to a large degree - is our own optimism about the health of the markets and the demonstrated commitment of our own borrowers. In assessing a prospective deal, we don't merely look for a client with a strong site, strong tenant and the means to carry our rates and terms, we insist on a borrower who believes strongly in his or her own project and can make it work.

For example, this summer in Hoboken, NJ, SWH funded the acquisition and renovation of four 19th Century multi-family residential buildings for over $2 million. The 100-year-old structures are now being re-worked into 16 luxury apartments with more than 15,000 square feet of living space. With Hoboken's continuing influx of young gentry, the upgraded homes are expected to quickly find a market.

Our client in that deal is a young man who has successfully completed four other projects in Hoboken, and owned and operated his own construction business there. Our borrower understands his city's unique and thriving real estate market, and has demonstrated a consistent ability to capitalize on it. He came to our offices with enthusiasm, confidence and a coherent plan, and he walked out with our commitment.

In the real estate marketplace in general, however, we know where the top is, and there are simply fewer pure-profit and value-added opportunities than were available in the early 1990's. Accordingly, we are now more selective, as is every other competent lender in the marketplace.

In South Brunswick, NJ, for example, SWH recently loaned $1.85 million to the owner of a 7.65-acre parcel that will be sold as the future site of an assisted living facility, perhaps today's most crucial form of housing. The purchaser has a New Jersey Health Department Certificate of Need for the assisted living facility, and our client is an affiliate of the purchaser.

Even with stricter standards for lending prompted by market flux, solid opportunities are constantly being created by industrious and visionary entrepreneurs. As long as those opportunities continue, SWH intends to share them, as we do the hopes and dedication of our borrowers.

SWH Funding Corp. provides high-yield commercial mortgage loans when conventional financing is not an option. The firm finances short-term bridge loans to qualified borrowers for acquisitions, refinancings, turnaround/work-out situations, foreclosures and bankruptcies for virtually all property types. SWH Funding structures, funds and closes loans from $2 million to $100 million throughout the United States.

With more than 75 years of combined experience in the real estate and lending businesses, the firm's professionals possess the knowledge and expertise to quickly determine the "real value" of proposed and existing commercial properties, and to critically evaluate the long-term value of each property. Originated through a nationwide network of brokers and bankers, many of these loans are complicated, problematic and require prompt funding.