WORLD PROPERTY CHANNEL ®

John Levy

Six months ago, the secondary loan market of commercial mortgage-backed securities was lifeless.  Today it is back on the front burner as lenders once again are starting to sign off on new mezzanine loans.

That's the new market assessment by John B. Levy, one of the leading commercial real estate loan experts in the U.S.  His Richmond, VA-based real estate investment banking firm, John B. Levy & Co., has structured over $3.5 billion in financing for developers and owners of commercial and multi-family projects since it was founded in 1995.

Now, despite the dire warnings of growing commercial real estate loan defaults in 2010 and 2011, Levy says lenders at the larger financial houses, are back at their desks, signing off on new paper.

But lenders at many smaller institutions remain on the sidelines.

"Despite the growing confidence that comes from a rising Dow and upbeat loan market, smaller retail and community banks continue to be pruned," says Levy. "Those institutions with an asset base between $100 million and $10 billion that fall in the bottom 5 to 10 percent of their competitive set are at the greatest risk."

But borrowers fortunate enough to receive new funding, are getting the loans at a rate lower than they were six months ago.

"As the TALF program comes off the lending menu, the market is seeing an uptick in the number of borrowers who have decided to access mezzanine debt," says Levy.

"Today, rates for mezzanine debt fall in a range between 10 and 13 percent, a collapse from the 15 to 20 percent range of six months ago. These lower rates give borrowers additional leverage.

"Investors need either more equity, which they are now able to raise, or they need mezzanine debt because their existing borrowings cannot be replaced by a new first mortgage."

 According to "Mastering the Recipe," the latest podcast produced by John B. Levy & Company (available online at www.jblevyco.com), commercial real estate lenders continue to search for the right mix of leverage level and loan pricing as they try to bring a tepid secondary market to a simmer.

"After groping around in the dark for the right combination of ingredients, commercial lenders just might have found the right recipe for exciting the current market," says Levy

"And this is happening as the federal government - through the TALF program - seems to be backing away from helping private enterprise, both for the commercial and the single-family markets," Levy adds. "Interestingly, only one of the three CMBS deals completed last year came through TALF, and this program expires shortly."
 
Levy adds, "The surge in the Dow certainly isn't hurting matters. A year ago, we were at around 6,500, and the banking system was on the verge of collapse. Today, the Dow is approaching 11,000."

He notes, "The banking system is starting to be profitable again, and people are paying off their TARP loans. It's understandable that people look at the Dow and feel confidence. And in the financial markets, confidence expresses itself in a willingness among lenders to make new loans."

Loan markets are definitely up, says Levy. "People are entertaining new investments in the form of loans, preferred equity, mezzanine debt - for all types of property. We're even finding an active market for shopping centers...and that's after all the talk around the Christmas season that retail was dead."

Still, he cautions, "This doesn't mean we're running at thoroughbred pace, however. We're more like the tortoise. But when you consider that we weren't running at all six months ago, tortoise pace is good."
.
Levy  is the originator and author of the Barron's/John B. Levy & Company National Mortgage Survey, which Barron's published for 23 years, and co-creator of The Giliberto-Levy Commercial Mortgage Performance Index (sm), the first and pre-eminent index to measure and analyze the performance of investments in the commercial mortgage industry.

Additionally, he is a former member of the Board of Directors of Anthracite Capital Inc. (NYSE: AHR), a New York Stock Exchange REIT managed by BlackRock, Inc. and a former director of Value Property Trust.

Levy has discussed market trends nationwide with major real estate associations and key industry groups, including the Mortgage Bankers Association and the Urban Land Institute. He has also appeared on Bloomberg and CNBC. Most recently, Levy appeared as a guest commentator on FoxBusiness.com and FoxNews.com.

---