Banks May Reassess Commercial Property Loans in 2011

According to U.S. commercial real estate experts speaking recently at New York University’s conference on capital markets, changes may be afoot in the commercial lending community.  The practice of extending maturing loans and pretending they are current when they cannot be refinanced may end next year. “Extend and pretend” has been in place for almost two years, since credit markets crashed.

Over $1 trillion of U.S. commercial real estate loans may run into trouble being refinanced, as lenders may grow less willing to extend maturities and fresh credit is still hard to find, as reported by Reuters. This spells opportunity for cash buyers on the sidelines.

In the past year, banks have been strengthening their balance sheets and at the same time there is a slow turn in some markets and in commercial real estate in general. Commercial real estate prices were up 30% in October 2010 over their lowest point in May 2009, says Green Street Advisors Commercial Property Price Index.

“This is where restructuring starts,” said Richard Saltzman, president of Colony Capital, LLC.  Meaning, equity investors are likely to find opportunities and step in, whether in outright purchases of property or whether in mezzanine financing or an ownership stake. “There’s a great deal of deleveraging that has to take place that hasn’t started yet,” added Kelvin Davis, senior partner at TPG Capital.

A senior director and co-head of real estate for Blackstone Real Estate Advisors (a division of Blackstone Group), Jonathan Gray, said deals will pick up in 2011 because markets are slowing improving. But he and other experts added that they did not expect distressed properties to flood the markets. There will be off market deals, joint venture transaction, restructuring with added equity and such.

In fact, growing confidence of investors on the sidelines and some growing “green shoots” in certain markets is helping the situation. A recent survey from Marcus & Millichap indicated that investors are becoming more enthusiastic about leaving the sidelines and investing in commercial properties. 70% indicated that now is the time to buy. Respondents to the survey had an average of $37.4 million invested in real estate.

Recent drops in interest rates are helping to stabilize some valuations; some economic stabilization and retail sales are adding to the optimism. Of course, slow job growth is one of the stumbling blocks. 33% of the respondents to the survey believe slow job growth is a reflection of the uncertainty stemming from issues of taxation and financial regulation.

Hessam Nadji, managing director of research and advisory services at Marcus & Millichap, believes as there is more clarity about the direction of the economy, sales activity and investor sentiment will increase substantially.  He thinks this could happen by mid-2011.