COVER STORY, FEBRUARY 2011

TEXAS LENDING OUTLOOK 2011
Leonard R. Smith

Smith

Last year at this time, we predicted that Texas was expected to emerge as a leader in the economic turnaround with what was projected as slow and steady growth beginning in 2010, and that is indeed what we saw throughout the commercial real estate markets. Although it was sluggish, there was an increase in business activity and again, Texas was faring better than the majority of U.S. markets. In fact, Colliers PFK Hospitality Research predicts that the Texas markets will see a marked resurgence in employment numbers in 2011 – well ahead of the rest of the country.

In regard to the commercial real estate lending, Texas again fared well with a moderate amount of positive activity in 2010; however regulations remained stringent. Some of the barriers to a full recovery in 2010 have been the strategy coined “extend and pretend,” a high-level of maturing debt and subdued levels of origination.

Commonly referred to as “extend and pretend,” this strategy enables the banks to delay write-offs and avoid taking over properties while allowing owners to renegotiate loan terms to provide them the ability to continue payments and avoid foreclosure. However, this strategy is often viewed as merely delaying the inevitable while at the same time creating a false floor in the market, making it difficult to assess when the bottom has been reached. Fortunately for Texans, we’re likely to see a decrease in the “extend and pretend” strategy as regulators force banks to reduce their real estate exposure and private equity investment increases.

Despite the increase in non-bank lenders, a high-level of maturing debt remains a significant issue. According to Foresight Analytics, an estimated $1.4 trillion in commercial real estate debt is set to come due between 2010 and 2014 across the country, with a majority of that figure set to mature between 2012 and 2013. In other words, the pace of defaults and delinquencies is unlikely to subside next year; however we do expect it to level off throughout the Texas markets. Foresight Analytics also suggests that much of the leniency seen by lenders has been limited to class “A” quality assets. This is again another fortunate point for Texans as our markets have less rollover and lease-up exposure than the rest of the country, making our assets significantly more reliable.

While bank lending has been subdued and is expected to remain so in the short term, there are many new capital sources to pick up some of the slack – including CMBS. The CMBS market which hit an origination peak of close to $250 billion in 2006 and 2007 disappeared entirely from late 2007 through early 2010. The market has now reawakened and could hit $50 billion in 2011. Resurgence of CMBS is a positive development for commercial real estate lending for high-quality, stabilized assets. As Texas outpaces the majority of U.S. markets in the recovery, this is a positive sign for our market.

So what can we expect for 2011? We can expect larger regional banks and newer community banks to increase lending, while most banks sit on the sidelines. CMBS and private real estate lending funds will pick up the slack, and credit unions will continue to make a foray into commercial lending. Furthermore, companies with more than $250 million in revenue and stable books will have an easier time obtaining financing from banks; while companies with revenues less than $100 million will do better with CMBS and private lenders.

And for Texans? We have the good fortune of living in a region with multiple stable and developing markets – Houston, Austin, San Antonio, Dallas – and in a region that continually demands commercial properties that provide good value. Assets that bring cash flows, including office, healthcare and multi-family, have already begun to experience increased demand and hospitality properties will join that list in the coming year. Additionally, many opportunities exist for buyers to invest in commercial properties at the equity and mezzanine levels and debt capital is readily available for projects that can prove long-term value. As we forge ahead of the country though the recovery process, Texans will see increasing growth in real estate and lending activity in 2011 and can expect to hit prosperous levels in 2012.

— Leonard R. Smith is senior vice president with Aries Capital in Houston. Aries Capital, www.ariescapital.com, is a national full service commercial mortgage and real estate investment banking firm with offices in Chicago, Houston, and Phoenix.  Since 1991, Aries and its affiliates have arranged and/or directly funded over $3 billion in commercial, multifamily, hotel debt and equity. The firm has also been a leader in non-recourse CMBS loans since 1993.

©2011 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.