Commercial real estate property lenders are back in the market, but their attention is selective and their demands are great. While interest is high in lending money, so is fear about getting it back. That, according to four debt-market experts who spoke Nov. 18 in San Francisco.
Cheap money is flowing for quality industrial projects, apartments, housing construction and offices. Driven by healthy competition, loan terms feature palatable leverage and low fixed interest rates, even on non-recourse debt, the lenders said. In some cases, conditions are not that removed from those of the boom.
But those happy tales should not delude. Such circumstances hold sway only in gold-plated markets, like Palo Alto, Mountain View, Los Altos, Sunnyvale and, of course, San Francisco. “There is a lot of property we cannot finance right now. It is hard to get debt for a Sacramento office building,” said Dennis Williams, managing director for NorthMarq Capital in San Francisco.
Steve Duffy, panel moderator and managing director of investment banker Moss Adams Capital, said, “It is a very sensitive capital market.”
The scope of territory he is most eager to pursue is tight, said Charles McGann, who manages the Walnut Creek office of Union Bank of California N.A. and specializes in commercial real estate lending. His wants are only ground-zero, Bay Area infill, tightly woven into the urban fabric. These projects were the most immune to trouble during the bust.
The bank, a recourse lender, made a conscious decision at the beginning of 2010 to begin lending again to high-quality private real estate developers and operators, McGann said. But clenching deals has been tough. “The reality is that there are fewer developers compared to five years ago,” McGann said. He also remains alert to risk.
Despite lender uncertainty, yields are compressing, and the search for returns is already driving the train, again putting capital markets ahead of property fundamentals, which are recovering, but not uniformly or as fast, the panelists said. The Silicon Valley office availability rate sat at nearly 26 percent at the end of the third quarter, for instance, according to numbers from Colliers International also released Nov. 18. Research and development buildings, far more prevalent than offices in the valley, were a less startling 17 percent available, Colliers said.
“There is a wall of capital worldwide,” said Ronnie Gul, a vice president for Mesa West Capital, a non-recourse balance-sheet commercial real estate lender that manages pension-fund money. Mesa West recently raised $600 million for a new fund, Gul said.
“We are going to be in a low-yield environment for a long time. It is kind of unnerving the yield people are willing to accept for the risk they are willing to take,” Gul said.
Some might say that of Gul, who leads his company’s originations in Northern California. Mesa West has just acquired the $130 million note against the long-vacant Sunnyvale Moffett Towers. The lender is enthusiastic despite the 951,000 square-foot property’s 13 percent occupancy rate, Gul said. The three towers were completed in 2008 and are part of an entitled 1.6 million square-foot development. Gul declined to say how much the note had been discounted, if at all.
“We would rather be in empty real estate that is high quality versus a full building that is lesser quality where leases are getting ready to roll,” Gul said.
Overall, San Francisco and the Bay Area are capturing their share of available debt, based on the Moffett Towers transaction and others relayed during the session, which was sponsored by the Urban Land Institute and hosted by Holme Roberts & Owen law firm.
Ramsey Daya, a principal with San Francisco’s Regency Capital Partners, said his company had just completed a $55 million construction loan on a San Francisco apartment project for the Martin Building Co. The 196-unit development at 2235 3rd St. not far from Mission Bay has an estimated construction cost of $69 million. “We got a money-center bank to lend with a sub 4.5 percent price, which is amazing,” he said. The bank earned Community Reinvestment Act credits and historic tax credits, he said.
It is the second multifamily construction loan in San Francisco the company has completed this year, according to its Web site. Regency arranged a $32.5 million loan against a 94-unit apartment development at 178 Townsend, not far from AT&T Park. Construction was to begin in September. Regency has closed on about $200 million of debt and equity in 2010, Daya said, with $65 million of it construction debt.
At the same time, Union Bank has financed the construction of an infill single-family housing development on the Mountain View-Los Altos city line, McGann said. Homes are projected to sell in the $1.7 million range; lots are 8,000 square feet. “The data at the end of the day proved that there is strong demand in Mountain View for single-family homes mostly thanks to the Googles of the world,” he said.
Google Inc. is headquartered in Mountain View within biking distance of the location.