In July, Alan Doyle and Andrew Larew, veterans of Rhode Island real estate mortgage banking, started Larew, Doyle & Associates, a “boutique” firm. Doyle took a few minutes recently to talk with Providence Business News about the state of Rhode Island lending.
PBN: Has this year been drastically different for commercial lending?
DOYLE: Like many industries weathering the effects of the present recession, the commercial real estate finance industry will clearly be off its pace from last year’s record originations. The securitized-debt industry (CMBS), which accounted for $230.2 billion in loan originations in 2007, is off by a whopping 90 percent alone. Much of this is caused by a lack of investor confidence in rating agency risk/pricing assignments, a byproduct of the subprime debacle. While some of this year’s unmet borrower demand was satisfied by insurance company and regional bank lenders, the noticeable absence of the CMBS industry was simply just too pronounced to be absorbed by the non-securitized lending community.
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PBN: Have you seen commercial lenders changing their standards because of the fallout that the residential real estate market has experienced this year?
DOYLE: Yes and it’s very much a domino effect. The subprime debacle in part resulted from an absence of investor confidence in real estate backed marketable securities – CMBS on the commercial side and Fannie Mae on the residential side. This caused even the largest Wall Street CMBS lenders to experience significant resistance and in some cases outright rejection in their attempt to sell some of their pooled CMBS offerings in late 2007 and early 2008. With little if any investor appetite for new CMBS offerings, the CMBS industry basically turned off their “loan originating machine,” thereby eliminating a dominant competitor in the real estate lending marketplace. The absence of this dominant player created opportunities for the non-securitized lenders, such as insurance companies and the banking community, which filled their loan coffers with higher-priced and more conservatively underwritten debt.
PBN: How long until the market starts back upward?
DOYLE: With a considerable amount of investor liquidity sitting on the sidelines and more transparency and credibility being slowly injected into these credit rating agencies as a result of increased oversight, my best guess is that the CMBS industry will gradually re-enter the lending marketplace over the next 12 to 24 months. This additional competition will slowly cause loan spreads to compress and expand lender risk thresholds. That being said, I don’t think and hope never again to see some of the “wild west” loan structures which were offered during the past few years – such as 10-year, interest-only, “full” 75-percent-loan-to-value loans.
PBN: Has the slowdown affected Rhode Island?
DOYLE: Sometimes, being small isn’t so bad. Rhode Island’s inventory of commercial real estate and annual space absorption is but a mere fraction of greater Boston’s. For this very reason there has historically been a real hesitancy to develop or finance 100-percent speculative product – which has preserved Rhode Island’s comparatively high overall occupancy levels in most product types, with one exception. That one exception is of course residential condominium construction and conversion which has absorbed the full brunt of the present economic recession. The recovery in this sector will coincide with a sustained improvement in the national and regional economy which will only occur once housing prices begin to stabilize, which will unfortunately continue to linger for a while longer.
With Rhode Island’s unemployment rate presently at 7.7 percent and projected by many esteemed Rhode Island economists to further increase through the balance of 2008, just about every sector will feel some level of its adverse effects. Because this recession is characterized as a “consumer driven” recession it will understandably have a greater impact on the retail sector. While retail has long been one of Rhode Island’s highest performers, it has and will continue to bear the brunt of the current recession. By May of this year, Home Depot reported a 66-percent decline in earnings over last year; Target announced a 7.5-percent decline in sales; and retailers such as Sharper Image, Bombay Co., Lillian Vernon and Linens & Things had already sought bankruptcy protection. Additionally, investment sales of investment-grade retail have reportedly been off by as much as 40 percent this year alone. A combination of continued unpredictable retailer health and the present conservative loan underwriting environment will continue to impact this sector of the industry in the short term.
PBN: So where is the good news?
DOYLE: Well, as compared to the last recession, which was more “institutional driven” – remember all those bank closings – the overall health of the lending community is currently exceedingly strong as noted by little if any non-performing loans. Even the CMBS industry, which was the primary culprit for some of these overly aggressive pricing and loan structures, reports an extremely low level of non-performing loans, estimated at just 0.5 percent. Therefore, while it took some time for financial institutions to get back into the lending mode during the last recession, there has been no similar disruption in access to mortgage capital, its just that lenders presently underwrite their loans on a more conservative basis, requiring higher levels of investor equity and capitalizing on reduced loan competition with wider spreads.
Going forward, the inevitable – albeit gradual – re-emergence of the CMBS industry will only serve to improve the present loan pricing environment and encourage more aggressive lender underwriting.
With offices in Providence, Westport, Conn., and Syracuse, N.Y., Larew, Doyle & Associates, a mid-sized real estate mortgage banking firm, provides debt and equity capital. Its founders, who opened the firm during July, have during the last six years arranged more than $1.1 billion in commercial real estate debt and equity financing. For additional information, visit www.larewdoyle.com.
