Demand may loosen U.S. commercial property lending

By Al Yoon

NEW YORK, June 15 (BestGrowthStock) – U.S. commercial real estate
lenders are starting to loosen standards on loans hoping to win
deals, setting up a potential clash in the market still
besieged by falling values and property revenue, an insurance
executive said on Tuesday.

The intense competition between insurance companies and
investment banks to make loans may soon lead to a decline in
loan quality, Mark Davis, a senior managing director at
Allstate Investments LLC, told Reuters after a panel sponsored
by the Commercial Real Estate Finance Council.

“I don’t think underwriting has eroded significantly so
far. So I think the quality of loans that has gotten done is
still good. But I’m concerned when I see the trend that people
are being very, very competitive for loans,” Davis said.

One of the biggest U.S. lenders at the conference suggested
his group is now going through a “rationalization” of whether
to take more underwriting risk. If the market is bottoming,
easing underwriting guidelines on properties with slightly more
debt can make sense, the lender said.

Loans in a JPMorgan Chase & Co (JPM.N: ) commercial
mortgage-backed security (CMBS) last week were seen as somewhat
more aggressive than the few previous CMBS issued since late
2009, according to analysts. CMBS are investments secured by
loans on office, retail and apartment buildings.

The two views mark a key debate about the commercial
market, where defaults are expected to exceed 10 percent due to
tight financing and as rental income needed to pay debts
remains soft.

The sector’s health is important for the overall economic
recovery, and has been backstopped by an emergency federal
lending program.

In April 2010, the delinquent unpaid balance for CMBS
increased by $3.6 billion to $54.65 billion, according to
Realpoint, a research and ratings firm. Overall, the delinquent
unpaid balance is up almost 219 percent from a year ago and is
now more than 24 times the low point of $2.21 billion in March
2007, it said.

Despite the delinquencies, some believe the worst is over,
and cite the presence of billions of dollars in investor cash
desperately seeking high-yielding assets.

Investors hoping the recession would bring a flood of
assets at distressed prices have been disappointed, and left to
look for other places for low-yielding cash.

Loans on many properties with excessive debt and weak cash
flow have been extended as investors hope that improved real
estate and capital markets will bring a less costly
resolution.

Holding back some investors are billions of dollars in
older, troubled, commercial loans, Davis said. Given the
magnitude of losses by institutions over the past two years as
well as weak fundamentals, the money flowing to the market is
“shocking,” he said.

“Most institutions are still holding a significant amount
of legacy assets that have to be dealt with in one way or
another. So when you add up all those factors, that’s why I’m
always surprised at how quickly the money has come back to the
market,” he said.

One explanation for the investment demand is the greater
number of current players versus the period after the
commercial property trough in the mid-1990s, he said.

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(Editing by Jeffrey Benkoe)

Demand may loosen U.S. commercial property lending