REPORT FROM THE U.S.— On his way from Washington, D.C., to Hilton Head, South Carolina, during the recent holiday season, Bill Kroll passed a commercial real-estate development that boasted a “grand opening” sign out front.
Hanging just below the “grand opening” sign was another sign: “for rent.”
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Bill Kroll
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“It must’ve been open a month,” quipped Kroll, an executive VP with the American Bankers Association and a former senior VP at Maryland National Bank.
The signs on the development spoke volumes about the state of commercial lending today, bankers and real-estate experts said. The economic downturn has caused banks to look past the riskier loans in their portfolios and instead focus on safer deals.
“The story I’m hearing repeated is it’s only the cream of the crop deals being funded,” said Jack Corgel, the Robert C. Baker Chair of Real Estate at Cornell University in Ithaca, New York. “There are rumblings of a turnaround in (commercial mortgage-backed securities) debt, but it won’t be anything like it was a few years ago.”
Conservative hotel lending
As far as hotels are concerned, there is debt available, but it’s not cheap, said Daniel H. Lesser, senior managing director-industry leader at CB Richard Ellis in New York.
“I’d say there’s no shortage of high-priced, low-leverage debt with recourse attached,” he said. “Anything better than that is a challenge.”
Don’t be too quick to blame the bankers for cutting off the flow of loans, Kroll said.
“What once was appraised at (US)$10 million is now (US)$5 million, and you’re forced to write down the value of the loan, and they haven’t missed a payment,” he said. “And you’re thinking, ‘Well, that was a good deal.’ The appraised value is just killing them.”
Average daily rate in the U.S. reflects the hotel sector’s troubles. ADR during November 2009 was down 8.3 percent to US$93.60, according to the latest data from Smith Travel Research.
“The road warrior has not been on the road,” Lesser said. “Corporate travel has to come back.”
The October bankruptcy of CapMark Financial Group, which made loans to the hotel industry, is another indicator of the strain the hotel sector is under today. The company has not indicated what portion of its US$10.7 billion loan portfolio as of 30 June 2009 was hotel debt, but Mark Woodworth, president of Atlanta-based PKF Hospitality Research, identified the firm as a “major player” in the hotel space.
CapMark has begun shedding some of its divisions, and on 21 December said it plans to sell its Japanese loan servicing unit to investment firm Elliott Management for US$38 million, according to media reports.
Martin Bienenstock, an attorney at Dewey & LeBoeuf in New York who is overseeing the bankruptcy, said the company is planning to emerge from bankruptcy during the next “few months.”
“We’re not necessarily selling everything,” he said. A CapMark spokesman declined comment, citing confidentiality agreements with creditors.
The future
Is there hope for a lending turnaround in 2010?
“Not in the early part,” Corgel said. “In the second half of 2010, you could see some thawing.”
An increase in interest rates would help loosen the capital markets, he added.
“Banks would have to dig a little deeper to find loans that provide a bigger spread,” Corgel said.
Regardless of what happens going forward, lending practices are likely to change from the free-wheeling days of just a couple of years ago, Kroll said.
“I think there’re some lessons to be learned here that will be held,” he said. “I do believe the days of prudent lending, prudent business planning, and well-thought-out lending packages are going to be very important going forward.”
