Both Red Sox and Borrowers Win

With interest rates ticking up--and down--about 300 real estate industry pros joined us for Bisnow's 3rd annual Boston Capital Markets Summit yesterday to hear the lowdown on future rate movements, underwriting criteria, financing alternatives, and favored asset classes and markets. (It was a good distraction from yesterday's pre-game jitters.)

Moderator Seyfarth Shaw partner Andrew Pearlstein (left, with Prudential Mortgage Capital's Melissa Farrell, CCRE Senior Managing Director Peter Scola, and Bank of America SVP John Wolff) says capital markets are open, and all types of lenders--banks, life companies, CMBS, and others--are eager to do deals with the right sponsors. Developers also want to pull the trigger on construction. (Idle bricks are the devil's plaything.) Andrew pointed to the Fallon Co, which yesterday had a ceremonial groundbreaking for luxury waterfront condos.

There's pressure on underwriting criteria because of the abundant capital out there and a "crowd" mentality, Melissa says. When one lender starts extending interest-only loans, everyone considers following suit. For lenders, multifamily is still the darling (the Marcia Brady of asset classes). Since Fannie and Freddie pulled back in mid-year, Prudential increased its participation in that sector. Year to date, more than 30% of its business has been in rental apartment buildings, an anomaly, followed by industrial and retail. But the properties tend to be in major markets, while leverage is a modest 60% to 65% LTV. Prudential is aiming to do $9B this year in real estate deals, she says.

Commercial real estate has been offering the best arbitrage: borrow 75% of value with a non-recourse loan at sub-4%, says Peter whose company likes every asset class. For sellers, it's happy days; buyers, on the other hand, are betting on rent growth. CCRE also likes every market and is probably the largest lender in Williston, ND, an "emerging tertiary market," Peter jokes. Underwriting is more sound than during the run-up to the recession. Future interest rate movement will depend on strong, consistent growth in jobs, wages, and hours worked--trends not yet evident, he says. Today, the environment is attractive, so go for it, he says. (We like our markets like we like our fruit: ripe.)

BofA gets into multifamily mostly via construction loans and is also focusing on office, retail and industrial, John says. Given record low cap rates, buyers will need fundamental rent growth to achieve their returns, especially if interest rates keep rising. But in the Boston office market, we are starting to see some. BofA is concentrated in the major markets, but will go wherever its clients go. In the past three to six months--as the yield curve has steepened-- banks are finding it harder to compete with Life cos and CMBS for longer term deals of seven to 10 years. In a year, when the Feds implement higher capital requirements for banks, borrowers should expect banks to require higher spreads.

Acknowledging the huge amount of capital chasing commercial real estate, Stewart National Title Services VP Terrance Miklas opened the event by quipping that investors want core assets with no risk and high yield. (And for those who know him well, he answered a burning question: No, his new suit was not rented... he acutally bought it for this breakfast event.) National Title, an event sponsor, covers the bases when it comes to titles/closings, underwriting, UCC coverage, tax-deferred exchanges, and more. Among its clients: AEW, Cornerstone Realty, and BlackRock.

Being well-dressed can count for a lot, especially yesterday, when sponsor Ryan's John O'Connor wore the perfect tie: red and rose with the Red Sox logo bottom left. As for real estate, he sees a rising market in which increasing values may also mean higher taxes, an issue for which Ryan can offer help. He agrees that multifamily assets lead the pack, with office and industrial only slightly behind. Hotel occupancy (and RevPAR) is so high that when John travels, it's difficult to book a room.

Sponsor EBI Consulting SVP Nolan Previte says that the firm assists in about 15,000 transactions a year nationwide, providing environmental and engineering due diligence and consulting services. In the Boston region, it's worked on National Development's purchase of New England Executive Office Park; has monitored Bank of America's construction loan to Gutierrez Co for the new Keurig Coffee facility in Burlington; and is handling civil engineering of the massive Quincy center redevelopment project. Stay tuned for more event coverage next week.