Fitch Predicts Rough Waters
SOURCE: Wall Street Journal
In a report on July 11, Fitch Ratings said the fervid lending conditions from 2005 until early this year allowed landlords and real-estate developers to load up on interest-only loans and loans with high loan-to-value ratios that were underwritten with expectations for rent increases that appear "unrealistic."
While commercial rents are rising at the fastest levels in many years -- especially in some of the strongest commercial markets, including New York and Washington -- Fitch said owners have "overly optimistic expectations of future rental rates, sales growth and market growth."
The warning comes as investors have become more cautious about financing these deals. In the last three months, lenders have pulled back somewhat, tightened covenants and required borrowers to put up more cash. Meanwhile, interest rates have risen, making it harder to use borrowed money to amplify returns.
As investing in commercial real estate has surged this decade and sales prices have skyrocketed, lenders competed aggressively to win market share. Some loans used so-called negative leverage -- when a buyer's debt payment is more than the income the property produces.
In the past, banks underwrote loans based on current cash flow -- typically the rents landlords receive from tenants. As the market heated up and banks competed against each other to produce loans, some began underwriting loans based on expected future income levels.
Even though lenders have turned skittish in recent months and have started to require more equity in transactions, the higher risk loans that were written previously are now working their way into pools of loans packaged into commercial mortgage-back securities -- thus, raising the likelihood of higher defaults for the rest of 2007, said Fitch.
Here at Steelhead Capital, our new Investment Advisory Services are designed to help you make sense of the market changes and plan for your very best long term strategy in the commercial real estate market.
In a report on July 11, Fitch Ratings said the fervid lending conditions from 2005 until early this year allowed landlords and real-estate developers to load up on interest-only loans and loans with high loan-to-value ratios that were underwritten with expectations for rent increases that appear "unrealistic."
While commercial rents are rising at the fastest levels in many years -- especially in some of the strongest commercial markets, including New York and Washington -- Fitch said owners have "overly optimistic expectations of future rental rates, sales growth and market growth."
The warning comes as investors have become more cautious about financing these deals. In the last three months, lenders have pulled back somewhat, tightened covenants and required borrowers to put up more cash. Meanwhile, interest rates have risen, making it harder to use borrowed money to amplify returns.
As investing in commercial real estate has surged this decade and sales prices have skyrocketed, lenders competed aggressively to win market share. Some loans used so-called negative leverage -- when a buyer's debt payment is more than the income the property produces.
In the past, banks underwrote loans based on current cash flow -- typically the rents landlords receive from tenants. As the market heated up and banks competed against each other to produce loans, some began underwriting loans based on expected future income levels.
Even though lenders have turned skittish in recent months and have started to require more equity in transactions, the higher risk loans that were written previously are now working their way into pools of loans packaged into commercial mortgage-back securities -- thus, raising the likelihood of higher defaults for the rest of 2007, said Fitch.
Here at Steelhead Capital, our new Investment Advisory Services are designed to help you make sense of the market changes and plan for your very best long term strategy in the commercial real estate market.
