Chasing the Money

It will surprise nobody to hear that in 2009 bank lending had its sharpest decline since the Great Depression. I am all too aware of this fact each day at work as I go about placing my client's loans. Mulcahy Capital continues to successfully close on funding as we leverage off our many years of excellent lender relationships throughout the US.

Regardless of our great track record, we have nonetheless had to redouble our efforts in getting each transaction closed. To continue closing on loans we have reached out to our vast network of reliable and trusted lenders and have been able to seek out and work with the lenders still open for business.

Read on below to find out the latest on who is lending in the US. I also discuss how some assets still trade today near their peak values from 2007 due to pent up demand from private funds wanting to put their money to work....but this could soon change with the looming CMBS maturities.

Massive Decline in Lending

2009 saw the sharpest decline in bank lending since 1942. The fall off in lending is a result of banks shoring up their balance sheets, providing greater reserves for future loan losses, and a hesitation to get back into the market prior to a sustained recovery. This combined with a decline in borrower demand compounds the lending situation we find today.

Other bad news out of the FDIC reports that there are now 702 US banks on their watch list as being in danger of failing, a 16 year high. In addition 5% of banks' loans are now at least 90 days past due.

One might think that the larger US banks hitting the headlines for the repayment of TARP funding maybe the banks to lead a recovery in new lending however the evidence tells a different story. The largest 10% of US banks, measured by asset size, actually declined consumer lending by 4.7%. The banks in the bottom 50% by asset size increased their consumer lending by 3%. In 2009 US banks as a whole declined their total lending by 7.5%.

There are some banks around the US that have increased their lending by as much as 30%. Credit unions have also been noteworthy in their willingness to lend. Many credit unions have literally been lifelines to businesses. However there is a statutory cap on business loans which a credit union is authorized to make currently set at 12.25% of their total assets.

Mulcahy Capital works with the largest national players to the smallest community banks and credit unions. We can attest to the willingness of the smaller banks to continue lending to our clients at this time.

Commercial Sales Rise from the Floor

December showed a 75% jump in commercial real estate sales over November. This would normally be a headline grabbing statistic if taken out of context however given that sales had plummeted to anemic levels the statistic does not warrant front page news. What good news this statistic could point to is the long awaited bottom to the commercial cycle.

I do believe we are approaching a bottom, if not actually already out of the bottom, in terms of commercial transaction volume. However I do not subscribe to the view that we have seen the bottom in commercial values. There is evidence of some assets trading at near market highs, but these are the exception and a symptom of pent up demand from idle committed cash waiting it out on the sidelines.

The assets I note having recently traded at near market high valuations were trophy assets with either impeccable income statements or located in the most desirable of locations. One such property with an impeccable income statement located in the Longwood Medical District of Boston recently went under contract for $97 million, which was less that a 6.5% Cap Rate. This was a 200,000 square foot retail & office building fully leased out to credit tenants.

Another example of idle cash chasing premium product was the sale of the Helmsley Carlton House on Madison Avenue, New York, for $170 million. The buyer, Angelo Gordon & Co., had raised $2 billion by 2007 for real estate acquisitions but had only spent 25% of this by 2009. The price achieved is estimated to be only 15% less than what would have been realized in a sale at the peak of the market in 2007. Up to 200 investor groups expressed interest in the property with 12 groups making final bids.

Until banks begin addressing their problem commercial loans and the CMBS (Commercial Mortgage Backed Securities) loans first start to mature in the second half of 2010, we will continue to see pent up demand for the best trophy properties when they come to market. Once we are hit with the deluge of troubled bank & CMBS loans I expect to see the commercial transaction volumes to increase markedly while at the same time I expect any properties less than that of a trophy status to have their value eroded from their 2007 peak valuations.