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CRE Lending Trend Lines

With all of the media discussion and corporate conversation of when to expect the next recession, it’s natural to wonder if and when a correction in real estate values will come—and with it less capital for commercial real estate lending.

For now, though, commercial real estate finance in Orange County looks healthy, vibrant and competitive, due to thoughtful urban planning, uniformity of development, relative newness of a large part of the county and a skilled labor force.

Here are some trends to keep an eye on.

Cap Rates

A direct result of an attractive environment for commercial real estate investing is higher prices—which correlates directly to lower capitalization rates.

National lenders use internal underwriting standards or—as for commercial mortgage backed securities lenders—rating agencies. Under these strictures amid higher prices it’s currently challenging to provide the traditional 70% to 75% loan-to-value or loan-to-purchase price funding. Lower cap rates generate loans more in the 60% to 65% range.

Nationally, there’s about $3.3 trillion of institutionally provided debt on commercial property: 40% from banks and thrifts; 30% from life insurance companies and CMBS lenders; 20% from Freddie Mac and Fannie Mae agencies; and about 10% from other lenders.

OC has ample local, regional and national lenders and we work with all of these entities, each of which have their own investment strategies, producing varied competitive offerings compared with other sources of capital.

Low Rates

The most common decision we see borrowers in Orange County make is the choice between lower rates or higher leverage.

The market dictates you have one or the other.

Portfolio delinquency rates of lenders mirror the underwriting standards and risk profile strategy: life insurance companies show less than 0.05% delinquency and banks are just under 0.5%, while CMBS lenders’ delinquency rates top 3%.

Dramatically lower delinquencies for life insurance lenders are in line with their conservative approach and the concomitant lower cost of capital; a CMBS lender typically provides more highly leveraged deals than other sectors.

Debt Funds

OC has recently seen the emergence of debt funds.

Mortgage Bankers Association 2006 data shows 39 debt funds investing $12.5 billion in commercial real estate. Last year, there were 98 debt funds investing $67 billion.

These are less regulated, and have been active in providing higher loan-to-value lending, as well as capital for value-added or transitional properties with terms typically from one to three years. Funds have also provided non-recourse construction loans.

MetroGroup Realty Finance has recently made bridge loans from two different debt funds on industrial properties in Denver, Las Vegas, San Antonio and Moorpark, and in June, we’ll close a construction loan for a Hollywood apartment complex with the first modular construction, market-rate property in Los Angeles. Stacking prefabricated, highly improved modules is a newer construction focus for multifamily projects.

Editor’s Note: Patrick Ward is founder and president of Newport Beach’s MetroGroup Realty Finance, which has sourced more than $3 billion in commercial mortgage financing.

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