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From the MBA CREF Conference: Lenders Enjoying the "Perfect Calm"

Improved fundamentals, a cache of capital and continued innovation in capital markets have converged this year to create a "perfect calm" for commercial real estate financiers.

The Mortgage Bankers Association expects 2006 to set a new record for loan originations—despite predictions that a slowing housing market would hurt commercial real estate.

“There are a number of fronts parked over the commercial/multifamily world that are leading us to some pretty calm seas,” says Jamie Woodwell, MBA’s senior director of commercial and multifamily research. The researcher made the remarks during a media luncheon.

Indeed, the buzz among panelists attending this week's MBA CREF 2007 conference in San Diego, revolved around the idea that things would have to take a turn for the worse, at some point, but most were hard-pressed to say when that might be. Even when the dip occurs, the consensus is that the industry will rebound quickly.

Nationally, property fundamentals are encouraging for the near term with new construction held largely in check, says Woodwell. However, one potential threat to today’s “perfect calm” is the refinancing of properties. “These mortgages that are made now, when they come due, most have a balloon payment associated with them,” explains Woodwell. “To the degree that there are market conditions vastly different from today, there will be an issue with the refinancing of some of those [properties]. That’s a factor that’s being taken into the underwriting and pricing of these loans.”

The latest MBA figures show an extremely healthy lodging industry has become a lending magnet. Total loan originations for hotels rose 20 percent in the fourth quarter of 2006 compared with the same period a year earlier. Loan originations for office properties climbed 8 percent, followed by industrial (3 percent) and multifamily (2 percent). But loan originations for health care and retail properties dropped 7 percent and 5 percent, respectively.

The slowdown in retail, lenders say, is due to the fact that other industries are experiencing stronger growth in fundamentals within their property sectors. Although, lenders see less upside in retail, they still aren't backing off.

Fremont Investment and Loan, for example, is hoping to originate $2 billion in loans on retail property out of its $7 billion total in 2007. Historically, retail has accounted for 20 percent of its loans. But, the firm feels it is underweighted in the retail sector, according to Scott Manlin, vice president and regional manager for the lender.

Similarly, GE Real Estate wants to have 20 percent of its originations in 2007 in the retail sector, primarily on open-air centers and lifestyle centers.

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