Commercial loan brokers and commercial real estate lenders converged this week in Las Vegas for the California Mortgage Bankers Association's Western States Commercial Real Estate Finance Conference. The Western States Conference is always the big Kahuna of trade shows in commercial real estate finance. I have some interesting news for you from that conference.
My first observation was that the show was quite small, at least compared to 2005. Fewer than 20 commercial banks and commercial lenders had exhibit booths. In 2005, there were 150 to 200 commercial lenders exhibiting. Clearly the number of hungry commercial real estate lenders is tiny compared to pre-crash times.
Nevertheless, I learned some things. First of all, the money center banks (Wells Fargo, Bank of America, JP Morgan Chase) are crushing the life companies and conduits. One speaker from HFF (formerly Holiday, Fenoglio, Fowler, the largerst independent commercial mortgage company in the country) described how his office was writing a 7-year permanent loan that was less than 3% interest for the first two years. The rate floated with some annual rate increase caps thereafter.
There is no way that CMBS lenders and life companies can compete against such low, floating rate loans. In fact, there was a lot of discussion about how the large, money center banks were buying up all of the independent commercial mortgage companies. Could an independent commercial real estate lender even surivive in the face of competition from the money center banks? As one panelist pointed out, "The commercial banks are essentially getting their deposits for free!"
I was amazed to hear that loan-to-deposit ratio of most commercial banks nationwide is just 52%! In 2005 this same loan-to-deposit ratio was close to 90%. Clearly the banks have an immense capacity to fund commercial loans.
That being said, the darth of banks exhibiting at the show was an unmistakable signal that, while the banks have the capacity to fund an immense number of commercial loans, they simply lack the courage and confidence to do so.
Even though few commercial banks seemed hungry for commercial loans, there appeared to be TONS of money from structured finance lenders - mezzanine lenders, preferred equity lenders, and equity providers.
One formerly traditional life insurance company has stopped making conventional permanent loans. Now all this life company wants to do is high-yield mezzanine, preferred equity, and JV equity deals. It's insane. Their crystal ball must be VERY bullish on commercial real estate. (At Blackburne & Sons, we are equally bullish on commercial real estate.)
An enormous volume of commercial real estate loans are multifamily loans being originated modernly for "the Agencies" (Fannie Mae and Freddie Mac) and FHA. Note to self: Get more Agency lenders added onto C-Loans!
As a commercial loan hard money lender, I was greatly disturbed to learn that the first sub-prime commercial loan ABS offering is currently being assembled. Already this commercial sub-prime lender has booked $200 million in commercial loans at rates of less than 7%. (Think of a lender like the old BayView Financial, but this time the lender has to carefully document their sub-prime loans.)
This lender is not a CMBS lender. Instead they are an ABS lender. ABS stands for Asset-Backed Securities. ABS securitizations typically involve a multitude of different collateral, like scratch-and-dent residential loans, car loans, credit card loans, and sub-prime commercial loans. Bonds issured by ABS securitizations typically offer much higher rates than CMBS offerings, in some cases as much as 150 bps. (1.5%) higher yields.
This new commercial loan sub-prime lender could really kill lenders like my own, Blackburne & Sons. It's very disappointing because we just had our best year ever. I don't welcome the competition. The good news is that they have agreed to join C-Loans.com. You will see them listed on our commercial mortgage portal shortly.