If you thought getting a home loan was hard these days, trying getting financing to buy a big commercial real estate property.
“The lending environment (today) is currently nonexistent,” said William “Bill” Halford, chief executive of Irvine-based real estate investor and developer Bixby Land Co.
“We went through a phase with limited amounts of lending, but now it’s just gone into hibernation,” Halford said.
In a sign of the times, Bixby, which has bought more than 3 million square feet of office and industrial space since 2006, this month paid $24 million in cash for an industrial building in Stockton.
Halford said Bixby might decide to get a loan to finance some of the distribution facility’s purchase price in the future, but only if the debt market improves, he said.
“There’s very little debt available, and the debt (that is available) is being priced at unattractive terms,” Halford said. “We’re all waiting for the market to show signs of stabilizing.”
Nationally, there’s been a $225 billion drop in the amount of debt available for commercial real estate investments, according to Tom Sherlock, senior managing director for Newport Beach-based real estate investor and advisory firm Buchanan Street Partners, which arranges financing for developers and invests equity in projects for itself.
Most of that drop is due to the lack of lending from under-fire Wall Street financial institutions, as well as the slowdown in the issuance of commercial mortgage-backed securities.
Those two funding sources were responsible for close to half of the industry’s debt in recent years. Now, “that’s been shut down,” Sherlock said.
Insurance companies, which normally have a 5% market share in terms of debt financing, had been picking up some of the slack during the past year, Sherlock said. But now they also are backing away from financing deals, he said.
Another source of debt,commercial banks,were eager lenders a year ago, but also are on the sidelines these days, preserving cash for their own operations.
Slow Year
The end result from the lack of the funding is a very slow 2008. Commercial real estate transactions are down more than 70% for the year, according to Sherlock. The industry’s seen about $11 billion worth of debt issued for transactions so far this year, he said.
The number of 2008 transactions now is on par with what was seen in 2003 and 2004, be-fore the explosion of big portfolio sales, driven by high loan-to-value transactions, Sherlock said.
“There’s been a dramatic de-leveraging of the industry. Everyone is dealing with the turmoil in the markets,” said Sherlock.
For loans that are being made to strong borrowers, terms are looking much different than they were a year ago.
In early 2007, it was easy to arrange highly leveraged financing deals and for borrowers to put in only 5% or so of their own equity. Now, deals that include nearly 50% equity investments are still hard to arrange, commercial real estate watchers said.
Interest rates for commercial real estate loans are up 100 to 250 basis points in the last 90 days alone, Sherlock said. Recourse debt,where the borrower can be personally liable if they default on a loan,also is typical now.
Despite the tough market, a few big Orange County deals are getting done.
A 1031 exchange arranged by Anaheim-based Milan Capital Management Inc. used financing from an insurance company to buy the Orange Financial Center, a three-building office campus off the Garden Grove (22) Freeway. Arden Realty Inc. was the seller. The 312,000-square-foot complex was valued at more than $50 million.
Likewise, Boston-based pension fund investor TA Associates Realty, which has a Newport Beach office, bought the majority of the 600,000-square-foot Centerpointe La Palma office complex for more than $100 million this month, as well as a $56 million industrial portfolio in Los Angeles County in September.
The tough market has kept many prospective sellers from putting their properties on the market. In some cases, sellers have been willing to help provide upfront financing and carry the loans themselves to get deals completed, said Stephen Heri, first vice president for the Anaheim office of CB Richard Ellis Group Inc.
