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Debt Financing Demand Shows CRE Appeal

Tucker, Michael
SAN DIEGO--Real estate debt financing remains an attractive risk-return option for many lenders in spite of economic volatility, reported Jones Lang LaSalle, Chicago.

“We saw the commercial mortgage-backed securities market make a formidable return to $48 billion in issuance last year, and that additional liquidity led to improved pricing and terms for borrowers,” said Mike Melody, co-head and executive managing director of Jones Lang LaSalle’s Real Estate Investment Banking business, speaking here at the Mortgage Bankers Association’s Commercial Real Estate Finance/Multifamily Housing Convention & Expo. “This has drawn a tremendous amount of liquidity in both debt and equity into the commercial real estate funding arena from a broad spectrum of lenders.”
But that availability has led to more competition for core product, Melody said, which opens up attractive opportunities for borrowers. Jones Lang LaSalle reported seeing a variety of aggressive debt structures.

"Fixed rate products are seeking debt yields between 8 and 10 percent-plus or debt-service coverage ratios between 1.15x to 1.35x," Melody said. "All-in coupon rate targets fall between 3.00 percent to 4.50 percent, fixed or floating, often without rate floors. [A] sustained bond market rally in the second half of 2012 has helped drive down funding costs, enabling CMBS lenders to reduce rates charged to borrowers. [And] the life company insurers aggressively compete with CMBS for fixed-rate loans."

With a continuum of low interest rates and government debt yields, Jones Lang LaSalle expects the broad availability and aggressive cost of capital to support a 15 to 20 percent growth in core real estate investment volume year-over-year in the United States.

“The relatively low indices have created an attractive lending environment as all-in loan pricing remains attractive compared with alternative investments,” said Tom Melody, co-head and executive managing director of Jones Lang LaSalle’s Real Estate Investment Banking business. “We’re more bullish on capital availability this year than we have been in the last five years. Lenders all have greater allocations and equity capital is as available, or more available, than we’ve ever seen it before."

The Association of Foreign Investors in Real Estate, Washington, D.C., reported the U.S. real estate market offers a “stronger investment opportunity” for foreign real estate investors’ money than any time in the last 10 years. New York, San Francisco, Washington and Houston make up four of the report’s top five most popular cities for global investment dollars, with London rounding out the list.

"Despite some near-term macroeconomic headwinds, investment in United States real estate remains one of the few safe havens relative to other developed markets,” Tom Melody said.