Money is trying to flow to Commercial Real Estate again!

Each Fall Newmark’s correspondent lenders receive their production goals for their next year. How does next year look different to the past two?

• In 2009 it was: “No money to lend. Sell loans. Encourage payoffs. We want to shrink.” 
• In 2010 it was: “Here is a pittance. Put the feelers out there. Make a few loans. Take no risk.” 
• In 2011 it sounds to me like: “Get the money out the door. Here is a big allocation. But, again, take no risk. “ 

All our lenders are back in the market. Newmark's sweet spot tends to be loans in the $3 to $40 million range, though we have lenders able to lend up to a quarter of a billion dollars and others down to half a million.

Lending targets for all lenders are up compared to the last two years; click here to see the approximate production goals and loan strike-zone for the most active lenders represented by Newmark in our Northern California office. And I hear from our lenders that their 2011 targets on production are generally seen as minimums. The commercial loan departments are being told by their Chief Investment Officers, CIOs: “If they can double production over these goals without undue risk – please do it.”

Why the change? Life Insurance companies invest in fixed income assets in two areas, bonds and commercial mortgages. Basically, the returns from the bond market right now stink. This August IBM issued 3-year bonds with an interest rate of 1%! In September Microsoft sold 5-year bonds at 1.625%! So mortgages that are in the 4% range for 5-years fixed and 5% range for 10-year fixed seems pretty good to CIO’s hungry for yield.

As to the CIO’s order to take no risk? That will change slowly. There is too much money chasing too few risk-free deals. We are already starting to add risk-mitigation structures to mortgage transactions in ways we were not allowed to do 12 months ago. Compared to what went through for the last three years, 2011 will be a good year for commercial real estate – I think we should soon be able to call the bottom on commercial real estate values. When rates are low and money flows, values lift. Like the character in Pixar’s “UP!” our disposition may improve with a little upward momentum.