Twenty-years from now, when commercial real estate lenders reflect on today's financing climate, they will likely describe it as a golden era punctuated by a never-ending supply of cheap debt and high transaction volume. The 10-year Treasury yield, which has been hovering between 4% and 4.5% for much of 2004 and early 2005, remains incredibly low on a historical basis.
In such a hyperactive market it's only natural for mortgage bankers to expect loan origination volume to climb annually, and for borrowers to assume that cheap debt will always be available on demand. The worst-case scenario is that the market will overheat, underwriting will deteriorate and loan workouts will be just around the corner.
The current lending wave begs the question: Is this borrower craze a permanent condition, or will the party end? History shows us that the commercial lending market ebbs and flows. In the fall of 1980, for example, mortgage bankers gathered in San Francisco for the 67th annual Mortgage Bankers Association convention to discuss survival of the fittest.
A sluggish economy combined with a 10-year Treasury yield that averaged 11.43% in 1980 led to talk of gloom and doom about the future of the mortgage banker. As one insurance executive told NREI at that year's convention, “Half the mortgage bankers here are trying to sell their companies to the other half.” Business was lean in those days. In order to survive, mortgage bankers were forced to either consolidate, diversify their operations or perish. Things got worse before they got better. The 10-year Treasury yield rose to 15.8% in September of 1981. That's a stark contrast to today's lending climate, where the picture couldn't be any rosier for mortgage bankers.
While no one expects the 10-year Treasury yield to approach such an astronomical level anytime soon, if ever again, the conventional wisdom is that the long-term rates will rise in 2005 as the economy improves and job growth accelerates. How high will rates climb, and how will this affect borrowers' use of floating-rate debt? To obtain the answers to those questions, NREI conducted its first-ever borrower trends survey to be released at this month's MBA convention in San Diego and included in our February issue. More than 400 borrowers participated in NREI's exclusive survey.
Some of the results caught me by surprise and will serve as good fodder for discussion. For example, the results debunk the theory that borrowers place a great deal of importance on having a strong relationship with their loan officer. Our survey shows that respondents most value a borrowing process that can be carried out with relative ease. Low interest rates and speed of execution on the part of the lender also rank high in importance. Having a personal relationship with a lender ranks relatively low on the list of importance.
Also, I was surprised that with such a vast array of lending sources available to borrowers today, the more things change the more they stay the same. The majority of respondents (83%) borrowed from a commercial bank or savings institution over the past 12 months. The results are a strong indication that developers turn to commercial banks for construction financing in a big way. Given the overwhelming demand for their services, commercial banks should offer a suite of lending products to leverage their position of strength, if they're not already doing so. Those are just a few of the highlights. You'll find the full report immediately following page 40.
It is our intent to conduct this survey annually. If you have any feedback or suggestions about the survey, feel free to e-mail me at [email protected]iabusiness.com.