In the Tranches: Credit Standards, New Entrants and Opportunities

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What does the next year hold for commercial real estate lending? Experts from major institutions taking part in the opening panel of Commercial Observer’s Inaugural Spring Financing Commercial Real Estate Forum were a bit divided on the state of the market.

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Commercial real estate lenders discussed market opportunities and potential challenges—namely newer, less established players entering the market— earlier this week.

When asked by moderator Bill Fishel, a senior managing director and L.A. office co-head at HFF, about changes in credit standards from the same time last year, several said they were holding strong.

“To the credit of those lenders, the underwriting standards have varied greatly from the last cycle, 2005, 2006, 2007,” Seth Grossman, a senior managing director at Meridian Capital Group, said.

“This time around, you’re not seeing a ton of that. You’re still seeing strict underwriting in the fixed-rate business.”

However, where there is some slippage, he said, was through the entry of new smaller sized players in the space where underwriting is being pushed.

Charlie Rose, a managing director at Invesco Real Estate, said he has seen refinancings being done on appraised values.  

“Deals are getting done at 70 to 75 percent loan-to-value, but the valuation is inflated so it’s actually 80 percent. Those real LTVs are a concerning trend,” Rose said. “We’ve also seen a movement toward more [covenant]-light type deals, so longer untested terms, and just lighter cash management.”

Alan Flatt, a managing director at Wells Fargo Bank, said instead of what they did in cycles past, his organization and banks in general are staying lower risk and providing their A-notes or warehouse lines to other firms, which has become a big part of his organization’s strategy. By doing so in today’s current lower leverage environment, he said, “that risk is bifurcated, which is probably healthier for everyone.”

“What we’ve done with other cycles, where we did go off the leverage curve, it ended badly for us, so no thanks,” he said.

Another change from past markets, that has “amazed” Flatt is how the current cycle continues to evolve in what he classified as “mini” or “counter” cycles where investors are jumping into perceived higher-risk sectors, like retail.

“I’ve seen some really good retail opportunities lately. We’ve seen some good hotel opportunities lately which is late cycle. We’re making a bridge loan to a fund that has limited service hotels and the fund has three to five years left on the fund life and we went in and provided a loan there,” he said. “There are still good opportunities in the market and it’s been interesting…You can say it’s late in the cycle or there’s a trade war, but still, individually, there are opportunities.”