Recent trends in real estate financing include interest-only loans, borrowers with a penchant for one-stop shopping and investing in multifamily properties. Hot lending environments include D.C., South Florida and Southern California. To get the latest on these trends, REBusinessOnline.com spoke with several national lenders: Jay Donaldson of Arbor Commercial Mortgage in Uniondale, New York; Thomas Sherlock, executive vice president of Buchanan Street Partners in Newport Beach, California; Jeff Patton, managing director of Collateral Mortgage Capital in Birmingham, Alabama; Dan Smith, senior vice president of Stamford, Connecticut-based GE Commercial Finance Real Estate’s North America Debt Group; Leslie Lundin, senior vice president of Inland Mortgage Capital Corporation in Oak Brook, Illinois; Marty Lanigan, president and CEO of Short Hills, New Jersey-based Mezz Cap; Nicholas Buss, senior vice president of PNC Real Estate Finance in Pittsburgh; Byron Steenerson, president of Seattle-based EF&A Funding; and Andrew S. Fawer, managing director with New York-based CIBC World Markets Corp.

1) What are the latest trends in real estate financing?

• Lundin: One-stop shopping. With so much fragmentation in the structured debt and equity markets, borrowers are getting confused. The players offering a one-stop capital stack will win the business.
• Fawer: An ever-increasing need for one-stop shopping. Clients need permanent fixed-rate financing but they also need flexible lenders to achieve maximum value.
• Lanigan: New products in the mezzanine sector seem to be one of the newer trends. I think people are trying to become more innovative in the higher leverage components of the capital stack.
• Steenerson: Continued low interest rates along with lackluster performance in other asset classes have provided a significant catalyst for a growing number of multifamily real estate purchases. Throughout the country, investors are looking for ways to obtain higher yields than those offered by stocks and bonds. With many markets stabilizing after several years of struggling rental markets, multifamily real estate is able to provide fairly high yields to investors despite the low capitalization rates, relative to historical averages.

• Steenerson: Interest-only loans — which allow borrowers to capture added cash flow for the first 1 or 2 years of the loan term before the loan begins to amortize — are popular. They are quite attractive for purchasers wanting to focus on capital-intensive expenditures to enhance property. Numerous borrowers are requesting interest-only loans to allow them the opportunity to make improvements to a property immediately after purchase without being as concerned about the negative effects those capital-intensive improvements have on their net cash flow.
• Donaldson: CMBS lending is very hot right now. However, agency lending always has a strong demand in the marketplace. Interest-only terms continue to increase with the appetite for longer interest-only periods on more and more transactions.
• Sherlock: Condo conversion and development/construction loans are in extremely high demand. Rapidly rising housing prices, especially in the West, Southeast and Northeast, have resulted in many entry-level homebuyers shifting into the condo market for affordability reasons.
• Patton: It seems that almost every multifamily loan we are considering has some period of interest-only structured into the transaction. We are even seeing full-term interest-only on fully leveraged assets. Full-term interest-only loans have historically been reserved for assets with more conservative leverage, which illustrates how competitive the market is for multifamily debt.
• Fawer: Permanent financing involving either acquisition financing due to the prolific acquisition activity in the market or refinancing due to low rates.
• Lundin: The market is going crazy for mezzanine. It’s the fast way to high leverage and it’s far less expensive than equity.

• Donaldson: Both coasts continue to outperform the overall U.S. market. Various areas in the South, with low costs of living and few barriers to entry, continue to grapple with absorbing new development.
• Sherlock: The entire western United States is in demand by capital providers. Market strength in Southern California has spread and capital is actively seeking product in Las Vegas, Phoenix, Seattle and Portland. Secondary markets in the West, like Tucson and Albuquerque, are experiencing a strong capital inflow.
• Patton: There are three primary markets that are particularly hot right now — South Florida, D.C. and Southern California. While capitalization rates have fallen dramatically in virtually every major metropolitan area, investments in these areas have been in even more demand.
• Buss: The leading regions currently are D.C., Southern California, South Florida and New York/New Jersey/Connecticut. Other areas to keep an eye on include Phoenix, Las Vegas, Dallas/Fort Worth, Orlando and Tampa. Areas that continue to struggle include the Midwest Rustbelt and former high-flying tech centers.
• Fawer: Florida, California and the Mid-Atlantic are seeing continued growth and activity across the product spectrum. The Midwest is a bit flat but has many spots offering value.
• Smith: Loan activity has been especially heated in Southern California and along the East Coast. We’ve also been doing more business in Texas than in past years.

• Sherlock: Fed pressure on short-term rates will slow during the coming months, but the stress of rising commodity prices, a growing budget deficit, and the U.S. dollar will cause long-term rates to finally move up. Even though the yield curve will adjust from its current flat state, long-term rates will still be attractive relative to investor return expectations so acquisition financing volume should remain high.
• Smith:I concur with the general consensus that moderate rate increases are likely over the next 6 to 12 months. If this is the case, the marginally higher rates should have little or no impact on real estate acquisition financing, which currently has a low level of volatility.
• Lundin: There is so much foreign money floating around, an increase in interest rates could have a much lesser effect than an increase in the strength of the dollar. The 1031 buyers will still accept reduced yields to save on taxes. The loser will be the buyer whose yield is reliant upon interest rates.
• Buss: The conundrum currently facing the industry is rising short-term rates coupled with stubbornly flat long-term rates. It is unlikely that this will continue through the last half of 2005 and into 2006. At some point — likely sooner rather than later — long-term rates will have to move higher. The implication for acquisition financing is that it will make debt more expensive. However, with the industry remaining capital-heavy, competition will ensure that loan spreads will remain under pressure. As a result, all-in rates for borrowers will likely rise at a pace less than the increase in interest rates. Bottom line, unless rates spike for some unexpected reason, buyers and investors will find plenty of capital available to finance acquisitions, and available at still attractive rates.
• Patton: If rates stay below 6 percent for the next 12 to 24 months, the industry is going to see a tremendous amount of business. This will be driven by continued acquisition financing, as capitalization rates should stay low, and a flood of refinancing. Many investors have commented that a significant percentage of their portfolios begin to roll over in the next 24 months, and low interest rates would obviously benefit investors and property owners.
Lanigan: As rates eventually increase, you are likely to see some greater credit pressures come to bear on new transactions. Debt service coverage constraints will become more meaningful, cap rates will eventually follow suit and rise, and balloon risk will become a more elevated concern. The combination of these factors will likely increase sensitivity to amortization concessions, and start to limit interest-only periods on loans. It also will likely increase the demand for mezzanine financing, as all these factors pressure the amount of proceeds that can be sized into a senior loan.

• Sherlock: The acceptance of real estate as its own asset class by institutional investors has dramatically influenced the supply of capital in the real estate industry. The maturation of the CMBS market and the real estate industry as a whole seems to have resulted in greater efficiencies in the marketplace and will hopefully have a positive impact on the volatility of future market cycles.
• Smith: Without question, capital markets’ insatiable global quest for high-performing investments has had a tremendously positive impact on our industry’s investors and lenders. Global lenders continue to perceive real estate as a relatively stable asset class with a long history of consistent returns, few delinquencies and little volatility. As a result, we should expect that each day more and more investors will enter commercial real estate.
• Fawer: Prices have become very aggressive over the past year. While acquisition activity may stabilize, we will see a continuation of refinancings as loans mature at a high rate in the immediate future.