Wednesday, February 29, 2012

Commercial Real Estate: Back in the Saddle?

Cheaper Rates, Vigorous CMBS Activity Send Positive Signal about the Commercial Real Estate Market in 2012, According to John B. Levy & Company

After a Tale of Two Cities year in commercial real estate that gave lenders and borrowers alike the best of times and the worst of times, the outlook for 2012 is both positive and encouraging. According to “Commercial Real Estate: Back in the Saddle?” – the latest podcast produced by John B. Levy & Company (available online at – early indicators suggest that CMBS is back with a force.
“After the European debt crisis and US government bonds gave us a rocky ride in 2011,” says John Levy, founder of John B. Levy & Company, “commercial real estate is back in the saddle for 2012. The conduit business gives us a perfect indication of what we can expect. First of all, rates are cheaper. Ten-year fixed-rate money is 5 percent or less, which is 100 basis points better than what it was this past fall. In addition, second- and third-tier cities are now in the mix. Deal-making has moved from cities like Washington, New York, and Chicago to a broader array of markets . . . Albuquerque and Amarillo, Nashville and Richmond.”
"While CMBS is expected to make a strong statement in 2012, preferred equity and mezzanine debt will continue to bring additional leverage to transactions," according to Levy. In fall 2011, as well as earlier in the year, mezzanine debt and preferred equity fell in the 13 to 15 percent range, if not higher. Those prices are currently in the single digits, the result of low interest rates on US Treasurys. In no uncertain terms, current Federal Reserve policy is playing a significant role in the pricing of preferred equity and mezzanine debt.
“Perhaps nowhere is it more clear that the Bernanke fiscal policy is working than in the preferred equity, mezzanine debt arena,” says Levy. “Look at the 5-year Treasury note. It’s 1 percent. So if you secure mezz debt at 9 percent over five years – which sounds cheap by historical standards – you’ll still get a return that’s 800 basis points over Treasurys. By keeping interest rates extremely low for at least three years, Fed policy penalizes investors for parking their money, and it forces them to invest in the market. The result? Higher leverage is cheaper.”
While the multifamily housing market has performed well over the past several years, Levy believes that trend may be nearing its end. Several factors account for the success of that sector and, as such, hint at its easing. First, the market for single family homes has been abysmal, so people rented rather than bought. Second, multifamily housing has been the beneficiary of extremely cheap government-sponsored mortgages.
“Multifamily housing has been the darling of commercial real estate, and it owes a huge debt of gratitude to a single-family market that has been in the tank for years,” says Levy. “But what has really driven the success of multifamily is cheap money from Fannie Mae, Freddie Mac, and FHA. That’s my money, your money, government money. It’s puzzling as to why the government provides mortgages for less than what the private market charges.”
Firm Background
John B. Levy & Company, Inc. is a real estate investment-banking firm headquartered in Richmond, Virginia. Since John Levy founded the company in 1995, the firm has structured over $3.5 billion in financing for developers and owners of commercial and multi-family projects nationwide, often investing its own proprietary funds into transactions with its clients.
Mr. Levy is an expert on commercial real estate financing and the effects of interest rates on commercial real estate markets. He is the originator and author of the Barron’s/John B. Levy & Company National Mortgage Survey, which Barron’s published for 23 years, and co-creator of The Giliberto-Levy Commercial Mortgage Performance Index (sm), the first and pre-eminent index to measure and analyze the performance of investments in the commercial mortgage industry. Additionally, he is a former member of the Board of Directors of Anthracite Capital Inc., a New York Stock Exchange REIT managed by BlackRock, Inc. and a former director of Value Property Trust.
A seasoned speaker, Mr. Levy has presented nationwide to major real estate associations and key industry groups, including the Mortgage Bankers Association and the Urban Land Institute. He has also appeared on Bloomberg and CNBC. Mr. Levy also appears regularly as a guest commentator on FoxBusiness.
For more information about John B. Levy & Company, please visit our website at or call Julia Grant at 804-644-2000, extension 258. You can also follow us on Twitter at and become a fan on Facebook.