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CRE Finance World, Winter 2013

CRE Finance Roundtable: Outlook for 2013 employees, deferral of compensation, of call-backs of compensation. cash flow lending, the market demand is such that it can accommodate There’s just an increasing environment of regulation, both formal a whole industry of emergent players to meet this need. Financing regulation and also informal regulation brought upon by closer for assets that requires more real estate related underwriting, with scrutiny on the loans that we are making, on the practices and a renewed focus on LTC versus debt service coverage, will become things of that nature. the purview of private capital and will fuel the entrepreneurial real estate developer. Moreover, the ability to provide flexibility, in terms Brian P. Lancaster: of the execution of the business plan, covenants or prepayment, Bruce, in an earlier conversation you mentioned that banks are will be something increasingly valued in an uncertain environment. increasingly migrating to providing financing to projects based on existing cash flow. Do you see the banks competing with CMBS, There will also be niches within the capital structure or market, Life Cos, or the GSEs? What is the impact of the regulatory either for assets that are less conventional or in secondary locations, environment on banks, and the impact of the low interest which will go underserved and create opportunity for investors. environment on banks? The challenge will be for those funds to truly build out the Bruce Cohen: infrastructure necessary to originate and manage these credits, as they are very different than equity investments. The conventional financing landscape had the life insurance companies, conduits and Government Sponsored Entities generally Brian P. Lancaster: providing debt on a long term fixed rate basis, matching the long term nature of their funding sources, while short term financing If you would each give us now your 2013 outlook. How will the came from the banks and finance companies, with their reliance coming year play out? What are the potential risks that might on shorter term deposits or the commercial paper markets. This change your perspective? positioned the banks as the source of capital for properties either under development or otherwise going through some form of Sam Chandan: transition. Once the business plan for these properties was executed With a focus on credit risk measurement, my big concern is the and the cash flows had stabilized, the property would then be sold or long-term performance of today’s new loans in an environment of refinanced, typically then becoming subject to long term financing. higher interest rates and much tighter monetary conditions. With an explicit commitment to low rates, the potential problems are With regulators and other constituencies now convinced that cash back-ended and are being heavily discounted. That is worrisome. flow is the only thing lenders can underwrite, it’s much harder Apart from that, I expect lending conditions will improve over the to find sources of short term, flexible financing for transitional next year for a wider range of assets. Stability in bond markets properties. More particularly, this puts the banks competing against is crucial for CMBS issuance. Barring a significant policy shock, the conduits and life companies, leading to tighter pricing and conduit lending will improve as global market conditions normalize looser covenants, while assets with lower debt yields struggling further. Smaller regional banks are also reengaging. Although the to find financing. In a market in which developers make their living banking system’s exposure to commercial real estate declined in creating value and when many properties have gone capital the most recent quarter, a majority of individual banks increased starved while values dropped below the outstanding debt, it begs their net lending. That is a first during this recovery. It points to a the question as to where the debt comes from to support the better alignment of credit availability and well-qualified borrowers industry need. than we have seen thus far. Brian P. Lancaster: David Nass: Bruce, I’ve known you a long time now. You must have some My outlook is positive. I think that we will see an increase in issuance thoughts. Private equity or debt funds? I think I saw somewhere, in 2013 following a healthy increase in 2012. We will likely see PERE maybe, that there are some 200 debt funds raising some- more esoteric types of securitizations, both by structure and property thing on the order of $120+ billion. type. We will continue to see conservative structures and reasonable leverage but, at the same time, a healthy increase in volume as Bruce Cohen: there is plenty of product to refinance. And, the continued pick-up Naturally, only a small portion of those funds will actually be in acquisition financing will be another variable driving overall capitalized. That being said, given the migration of banks towards volume levels. CRE Finance World Winter 2013 16


CRE Finance World, Winter 2013
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