CHICAGO, OCT 27, 2009 — Replenishing their balance sheets is the top priority for a vast majority of bankers from across the United States as they evaluate the health of their commercial real estate portfolios, according to Jones Lang LaSalle’s 2010 Bank Sentiment Survey. The survey was completed by 50 nationwide bankers—including a mix of local, regional and national commercial banks—at this week’s American Bankers Association’s Annual Convention in Chicago.

 

Nearly 75 percent of nationwide bankers said liquidity easily trumps loss reserve issues—with only 26 percent of direct lenders, syndicators and mortgage banking subsidiaries prioritizing the avoidance of write-downs on their portfolios. 

 

“While the issue of preventing future losses has garnered much attention as of late—it appears at least for now—that commercial real estate lenders would much rather avoid being hamstrung by the lack of funds than avoid write-downs.  Bankers are clearly trying to liquify their commercial real estate portfolios and enhance their ability to redeploy those funds more profitably in the future,” said Mike Mounts, managing director of Jones Lang LaSalle’s Real Estate Investment Banking team.

 

A continued lack of confidence in the commercial real estate market and a massive wave of impending maturities have stymied efforts by banks to increase lending within this crucial sector of the economy.  However, lenders could soon be providing a sliver of hope to those within the commercial real estate industry.  Nearly 75 percent of those surveyed expect their commercial real estate loan production to increase in 2010 versus 2009.  The vast majority of respondents (85 percent) predict their lending for properties, notes and new construction will increase by as much as 30 percent in 2010.  Still, much of the capital reserved for commercial real estate allocations may be withheld to service existing rollover debt.

 

Eighty-one percent of bankers indicated that up to 40 percent of their commercial real estate allocations for this year would be used to refinance upcoming maturities.  Another 13 percent expect their allocations to service existing rollover debt will make up 60 to 80 percent of their real estate lending.

 

Banks also expect to be tied up in extensions as more than half of respondents (55 percent) say they are offering borrowers one- to six-month extensions on their maturing commercial real estate loans.  Another 28 percent have gone even farther and are offering forbearances of up to six to 12 months.  However, when it comes to those extensions, bankers appear to be drilling down and enforcing stricter requirements.  A full 45 percent of lenders say requiring borrowers to pay down the principal is the biggest factor in loan extensions.

 

The drumbeat of ‘delay and pray’ and ‘extend and pretend’ still sounds loudly.  But we expect the newest phrase may well be ‘act now or regret later’ as bankers are beginning to seek new ways to maximize proceeds on faltering commercial real estate loans now,” said Dave Hendrickson, managing director of Jones Lang LaSalle’s Real Estate Investment Banking practice. 

 

“Bankers are telling us that they have limited human capital, time and monetary capital to continue carrying these unproductive loan balances. They’re looking for an innovative exit strategy,” added Dan Culler, Chief Operating Officer of REDC, Jones Lang LaSalle’s joint venture partner.

 

That new strategy may be a commercial note auction, as bankers’ interest in clearing their books quickly with an efficient auction sale is growing. The use of auctions to enhance liquidity appears to be gaining in popularity as nearly half (48 percent) of all respondents said they do plan to utilize that market to facilitate commercial real estate property or note sales in 2010.  Top on the auction list to dispose is the sale of commercial property with 39 percent.  First liens come in second with 28 percent, with non-performing notes following with 17 percent of respondents saying they will use auctions to dispose of them.

 

“Banks are in the early stages of digesting commercial real estate exposure and we expect the need for note sales to manifest itself in additional activity in 2010,” added Mounts. “Those that utilize auctions in the coming months can limit their losses and beat the coming wave of maturities.”

 

The Jones Lang LaSalle survey also indicated that, as lenders slowly begin to increase their new conventional commercial real estate loan output, terms are tougher than they have been in the past.  According to 41 percent of respondents, the LTV rate they are quoting on new loans is hovering around 60 to 70 percent.  Another 29 percent say they’re requiring LTV rates of 70 percent or more.  Interest rates are much the same as 80 percent of respondents are seeking interest rates of 5-7 percent. And when it comes to recourse, most lenders (89 percent) say they’re requiring either full or partial recourse on their loans.

 

“Borrowers that are credit-worthy and have a long term chance of success will rise to the top of the heap as the banking industry re-evaluates its priorities.  These tougher terms and small incremental extensions are an indication that lenders will be keeping borrowers on a very short leash over the next three to four years,” added Mounts.

 

Jones Lang LaSalle Capital Markets is composed of a broad range of real estate investment debt and equity specialists, and corporate finance experts, working on all property types and in all the major national markets on behalf of major institutional and local investors and developers, as well as corporations.  The firm's Capital Markets professionals are highly skilled at pinpointing and tailoring the right capital solutions for each of these client's needs.  The Development and Asset Strategy team specializes in the sale of non-income-producing properties in their various forms from surplus buildings to raw land to entitled parcels and partially completed subdivisions.  The Investment Sales teams assist investors in developing and executing asset recapitalization strategies for office, industrial, retail, multifamily, healthcare and seniors housing product. The firm’s Real Estate Investment Banking experts raise debt and joint venture equity for investors and developers, and provide derivatives structuring and loan sale advisory services.  The Corporate Capital Markets professionals help corporations develop and execute strategies that bridge their occupancy, capital deployment and financial reporting objectives for their facility portfolios.  The firm's Value Recovery Services assist clients affected by the current financial crisis by creating value while managing risks through evaluating operational and occupancy needs, assisting with challenged assets and liabilities on their balance sheets, providing receivership services, asset management, raising capital through sales-leasebacks and providing leasing and recapitalization strategies for distressed assets. In the past two years, the firm’s Capital Markets team handled $117 billion of transaction volume.

 

 

Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2008 global revenue of $2.7 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.4 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with more than $36 billion of assets under management. For further information, please visit our Web site, www.joneslanglasalle.com.

 

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