Commercial Loans & Mortgage News - October 9, 2001
CMBS Uncertainty & Insurance
The dust is far from settled, but we're beginning to get a sense of the various positions being taken by the capital markets after the September 11th World Trade Center attack. As you may recall from the last newsletter, we correctly predicted the response from various capital sources. Most lenders (life companies and conduits) are, in fact, back to quoting and issuing loan commitments, but there's still a high level of uncertainty among the bond investors who ultimately end up buying the pools of securitized loans (commercial mortgage backed securities, or CMBS) in the secondary mortgage market. Bond investors are the driving force behind pricing interest rates. Although the cost of capital for banks has been significantly reduced yet again (the lowest level in 39 years), we're seeing nearly every lender implement interest rate floors in order to maintain yields that they believe will remain attractive to the bond investors - without them (the floors), lenders are likely to go out to the secondary market with low yield loans that no one wants to buy. The common misconception is that if the Fed lowers its rates, then everyone else should follow...well, liquidity is key for CMBS, and fear of illiquid pools will ultimately preclude mortgage rates from dropping too far.
Another topic that is having an immediate impact to, not only your bottom line, but also overall commercial asset appreciation is insurance! We recently spoke with Melanie Ransford of Doll & Associates, a Los Angeles-based insurance broker, who shared some very valuable insight relative to September 11th's World Trade Center attack. The insurance industry is likely to pay approximately $41 billion - this figure well-exceeding the costs related to Hurricane Andrew - which was formerly the "high-water mark" (no pun intended) for total loss in any single catastrophic event. "The impact of the WTC attack will be felt industry-wide, resulting in 30% - 40% increases to property insurance." She also cautioned that when shopping for coverage, you need to be looking at A.M. Best's ratings of 7 or above - with 15 being the highest rating. A.M. Best's is the insurance industry's standard rating agency. The multi-family sector will likely get hit the hardest, but mostly because it was due for an increase anyway. We've already heard of increases of as much as 200% - 300% in some cases. Commercial properties will be impacted to a lesser degree, but increases still loom nonetheless. Ms. Ransford also commented that highly rated carriers aren't likely to go away, but several less financially sound carriers will certainly fold. So be prepared for fewer players, more conservative policies and higher costs. This will translate directly to your NOI - which will affect, not only your cash flow, but your value and the view lenders take on the asset's ability to service its debt.
We're not usually inclined to spread doom and gloom, but these are very real factors in the current real estate cycle that need to examined. Our belief is that we're all in this together, and we'll do our best to keep everyone informed so that prudent decisions are based upon hard data. Finally, the good news is that even with interest rate floors in place, the cost of capital is still extremely low.
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Chief Executive Officer Peter Slaugh founded Steelhead in 1999. In the relatively short period since its inception, Slaugh has built Steelhead into a leading resource for debt and equity placement nationwide. Slaugh is primarily engaged in growing the company and its lender relationships, as well as working on financings.
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With an extensive lender network, Steelhead Capital has built its reputation on structuring commercial loans requiring both debt and equity placement. Fluctuations in the capital markets present significant challenges for investors and we are pleased to provide financing as well as guide and advise clients through the process. Whether you are looking for apartment financing, commercial financing, mezzanine financing, or creative "out of the box" real estate loan alternatives, we can help.
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