Andrew Little: Riding the wave of the commercial real estate market

Andrew R. Little

The Imagine Dragons’ smash hit “Radioactive,” from their debut album Night Visions, is about rising above anxiety and depression, which is exactly what participants in the commercial real estate market are doing.

In fact, the lyrics “all systems go” aptly describe commercial real estate today, and it can be attributed to the availability of money and how cheap it is.

Uncertainty in financial markets generally makes investors purchase treasuries, which causes their yield to fall. So in a twisted way, the bungling of the budget in our nation’s capital and the government shutdown has caused rates to stop their meteoric rise.

According to the John B. Levy & Co. National Mortgage Survey, rates for five- and 10-year loans are now in the 3.65 percent to 4.75 percent range, respectively. Money is still cheap. Recent Federal Reserve Flow of Funds Accounts data support the argument that money is more available.

The data show lending during the second quarter on commercial and multifamily real estate increased by approximately $24.5 billion. The largest increases occurred at commercial banks, where they added $16.4 billion to their books. The government-sponsored enterprises (Fannie Mae and Freddie Mac) added $5.6 billion, and life insurance companies added approximately $4 billion.

Conspicuously absent from the list are commercial mortgage-backed securities lenders. As a whole, they reduced their holdings by approximately $1 billion when comparing the second quarter of 2013 to the first quarter.

The statistical data, however, are very misleading.

CMBS lenders are more active in 2013 than they have been since 2007 and are on pace to put out more than $80 billion in new loans this year. In fact, according to data compiled by Commercial Mortgage Alert, CMBS loan volume through the first nine months of 2013 is almost two times greater than the pace during the same period in 2012.

The problem is CMBS loans that were originated in the prior 10 years are starting to get repaid at a faster pace than new loans can be added. This is not a bad trend for CMBS because it means the market is getting better, and borrowers are able to refinance their maturing loans or pay them off early. The reason borrowers do that is to take advantage of opportunities.

Recent data from Tripp Analytics support the fact that the market is improving. Approximately $53 billion in CMBS loans are in special servicing, which is where troubled loans go when they are in default or about to go into default.

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As a percentage of total CMBS loans outstanding, those in special servicing represent a little more than 10 percent. That seems like a big percentage of loans to be troubled, and it is, but the positive news is that this percentage has been dropping steadily over the past few months and is expected to fall below 10 percent next month for the first time since the downturn.

Despite an improving market, CMBS loans continue to run into trouble, and a $13.7 million loan secured by the Parachute Apartments at 300 Decatur St. in downtown Richmond’s Manchester area recently went into default and will likely be foreclosed upon by the special servicer. The borrower is an entity affiliated with Billy G. Jefferson Jr. His company, River City Real Estate, was also the largest tenant. Jefferson was indicted on two felony charges last month related to the alleged mishandling of historic tax credits.

Andrew Little is an investment banker with John B. Levy & Co. He can be reached at

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