Secondary Market Opportunities


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Article by Daniel T. Cooper, see pages 3, 11-12.

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Secondary Market Opportunities

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  2. 2. Welcome to Real Estate Perspectives 3305 Northland Drive, Suite 301 Austin, TX 78731 Phone: (512) 459-7100 Fax: (512) 451-4008 w Ross M. Cummings General Partner hen I joined Cummings-Baccus it was obvious to me PH: 512-459-7100 Ext 101 that they were a dynamic real estate investment Daniel T. Cooper company. Cummings Baccus has a tremendous track M. Buckner Baccus Partner & Editor General Partner record over the past ten plus years, acquiring over four million square feet of commercial real estate. PH: 512-459-7100 Ext 102 Jay Legg Much of the company's success has come with little fanfare. That's been by design. It has Partner always been the practice of the founding principals, Ross Cummings and M. Buckner Baccus, to let their actions speak louder than their words. PH: 512-459-7100 Ext 103 Daniel T. Cooper In its quiet yet extremely effective way, Cummings-Baccus has established a powerful Partner presence in the commercial real estate arena, especially in the Southwest United States. PH: 512-459-7100 Ext 104 We focus on larger deals with unconventional components — deals that institutional buyers perceive as too risky and private investors find too large. Our success is the result Linda Henderson Office Administrator of a strong philosophy complemented by excellent execution. PH: 512-459-7100 Ext 100 Over the past year, I have been working on finding new ways to tell the Cummings- Andrew Chasteen Baccus story — from our Web site at to press releases and Systems Administrator now this publication. PH: 512-459-7100 Ext 106 Our success is fueled as well by affiliations with top-notch talent and industry-leading companies. Many of these companies are featured throughout this magazine. Should you need any of the services they provide — whether equity, title, legal, brokerage or insurance services — these companies come highly recommended. The future looks ever brighter for Cummings-Baccus. We are poised to acquire more than $250 million in real estate, and we look forward to a great year. It's a story everyone at Cummings-Baccus is proud to share with you. Sincerely, Daniel T. Cooper About the cover… Unisource Energy Tower: 232,000 sf, class “A” office in the CBD of Tucson Arizona. In this Edition… Big Opportunities do Come Vision of Value . . . . . . . . . . . . 4 in Smaller Markets . . . . . . 23 Electricity Deregulation Commercial Lenders and Commercial Real are Still Playing, But the Real Estate Perspectives is published by QuestCorp 9 Estate in Texas . . . . . . . . . . . . Rules are Changing . . . . . . 29 Publishing Group, Inc., 17822 Davenport Rd, Ste B, Oil Industry Graces Dallas, TX 75252. Phone 972.447.0910 or 888.860.2442, Fax 972.447.0911. QuestCorp specializes in publishing cor- porate magazines for businesses. Many of Artist's Works . . . 16 3
  3. 3. CUMMINGS-BACCUS VISION of VALUE Propels Cummings-Baccus Into Its Second Decade C hange is never easy for any business. But remaining true to a firm's founding values can be even harder. While the last Cummings-Baccus Interests, the real estate investment decade delivered plenty of change at company's entrepreneurial spirit and dedication to value are as solid as ever. Ten years ago, Cummings-Baccus' creators could only dream of the commanding size, purchasing power, geographic focus and wide access to capital the company enjoys today. Since those early days, Cummings-Baccus Baccus. quot;We have the luxury of operating within a broad range of market opportunities.quot; A recent acquisition in Midland, Texas, sharpens the distinction between Cummings-Baccus and other competitors. In most cases, acquiring 600,000 square feet of office space would only be an institutional play. But the smaller Midland market is unlikely to meet the requirements of many institutional investors. Cummings-Baccus, however, combined its financial power and investment freedom, to add 600,000 square feet of class A Midland office property to its portfolio. Co-founder Ross Cummings Cummings-Baccus may have another edge in uncertain financial times: the energy industry. The industry tends to do well during a troubled economy, and Cummings-Baccus has a high number of energy-related tenants in markets from Houston to Tulsa. That gives property revenues a soothing shot of stability. has acquired 45 commercial real estate properties with more than 4 million square feet of space in 29 markets. A free range and entrepreneurial energy would Despite the successful transformation, mean little without capital. Cummings-Baccus' yesterday's management would still be right at smart sense and sterling investment record home with today's consistent investment philosophy: Find, acquire and create value. have kept capital flowing and growing. Since its inception in 1992, Cummings- A free range and entrepreneurial energy When the economy does come roaring back, Baccus has focused on buying and operating would mean little without capital. Cummings- Cummings-Baccus is ready to ride it to even office buildings across the Southwest. The Baccus' smart sense and sterling investment greater heights. Management wants to do four formula may seem familiar to anyone who record have kept capital flowing and growing. times as much business in the next five years knows publicly-traded real estate investment quot;We have very strong long-term capital as Cummings-Baccus delivered in its first trusts (REITs) or large institutional investors. relationships that give us the ability to move decade. To make that happen, the real estate But a unique twist to the old equation sets quickly and take on market risk,quot; Cummings investment firm is targeting five major Cummings-Baccus apart: The privately held says. Cummings-Baccus has equity Southwest markets, with particular emphasis real estate investment firm combines the relationships that stretch back to the on the office sector. The vigorous campaign buying power of an institutional player with company's beginning. will put Cummings-Baccus in even more the flexibility of an agile entrepreneur. competition with the REITs, particularly for With the economy cooling, another capital class A and class B office properties. Cummings-Baccus has the financial capacity source, the debt market is retrenching. to handle properties requiring institutional Lenders with newly conservative approaches Despite all the promised change, one constant size, with most of its investments ranging may be steering clear of particular market will likely remain. quot;Whether we're buying a from $5 million to $50 million. What sets it sectors or sizes to protect themselves. vacant retail center in Austin or a class A apart from institutional competitors, is a sharp office building in Tucson,quot; Cummings eye for overlooked value and a willingness to But tighter debt markets won't necessarily concludes, quot;our philosophy will always be to embrace investments that don't quite fit slow Cummings-Baccus. quot;We're at our best buy value.quot; x institutional investors' more restrictive molds. when there's a lack of liquidity,quot; Cummings explains. quot;We're buying when nobody else quot;We don't have a box,quot; says Ross M. may be.quot; Cummings, General Partner at Cummings- 4
  4. 4. Electricity Deregulation and Commercial Real Estate in Texas Pat Ennis, Priority Power Management I ntroduction consist of three segments. The first will be an unregulated or competitive generation companies. It is recommended that when accessing the benefits of this type aggregation, Beginning January 1, 2002 segment that may sometimes be referred to the building owner understands that the competitive forces will be introduced as the GenCo. Next, a regulated segment aggregator will be joining similar loads into the Texas retail electricity will exist to handle the transmission and together and not loads that have differing market. Then Governor George Bush distribution of the electric power. The time-power profiles or requirements. The most signed Texas Senate Bill 7 (SB7) into nickname for this portion of the new model is important benefit of this type of aggregation law launching a competitive market the WiresCo. The last segment of the new is allowing power customers to go the in June 1999. SB7 begins a process of model is the unregulated Retail Electric negotiating table with much larger loads than unbundling or separating the utilities’ Provider or REP. While each segment could functions into three distinct areas - they would have had if they had gone it alone. be an entirely new, independent entity, many Wal-Mart has been able to demand the best generation, transmission and distribution will be subsidiaries or affiliates under a and REPs (Retail Electric Providers). SB7 prices from its vendors because they purchase corporate umbrella. in large quantities using their buying leverage. will bring profound changes in the way This will hold true when buying power. The we purchase power for commercial and Load Aggregation larger you are, the better prices, terms, residential uses. Deregulation will bring Building owners with numerous accounts choice. This choice brings added responsibility, conditions and levels of customer service you with loads less than 1000 kW will need to which lies flatly on the shoulders of the will command from the REP’s. assess and possibly access the benefits of owners of real estate. aggregation. Two types of aggregation are possible. The first type of aggregation is to New Industry Structure bring together all the power loads within a The utility company model that has existed up specific company and present these individual to this point has been a vertically integrated loads to a REP as one load. These can be loads one. That is one company was responsible for from numerous utilities. the generation, transmission, distribution and retail sales of the electricity used by its The second form of aggregation is for building customers. Under SB7 rules, this model will owners to join a purchasing cooperative or be “de-integrated”. The new model will combine their loads with loads from other 9
  5. 5. between 40%-60% 4) accounts with load factors greater than 60% and 5) accounts that have IDRs (Interval Data Recorders). Regardless of how a customer actually uses power, the customer will be “deemed” to have used power in the forced profile pattern they have been assigned to. Improving your load shape or load factor through various techniques will not necessarily translate into immediate power cost reductions. The change in profile assignment must be submitted by the TDSP and then the account profile must be updated by ERCOT-ISO. Demand Side Management During the 1980’s and 1990’s many utility companies spent millions of dollars on various Demand Side Management (DSM) Programs, with less than stellar results. These mandated programs used regulatory push to encourage the consumer to use energy wisely. Wise use consisted of consumers using less energy or shifting their usage to off-peak periods. Now with rising oil and gas prices and market pull (i.e. deregulation) interest in conservation and energy management is back. Pulled by choice of supplier, time-of-use pricing and real time price volatility, customers will work to develop power cost reduction strategies. Conclusion Electric industry restructuring promises both opportunities and challenges. Those building owners and companies that develop the best strategies and The Pioneer; 102,295 sf, class “B” CBS, Tucson Arizona anticipate market trends and changes will be the big winners. x Load Profiling/Load Factor Pat Ennis of Priority Power may be reached at or 915-620-9100. When pricing power REPs focus on two issues – load factor and load profile. Load factor is the relationship between the size of the electric power demand and the number of hours that load operates. Power is measured using kilowatts (kW) or demand and kilowatt-hours (kWh) or energy. Demand is a function of how much power is required by a customer at one time, or how fast the customer was using power (i.e. speedometer). Energy, or kWh, is a function of how much power was used over a specified period of time or billing period (i.e. odometer). A quot;goodquot; load factor indicates that the customer used power steadily without great swings between maximum and minimum demand. A quot;badquot; load factor is indicative of significant swings in demand. Load profiling is a representation of a customer's energy usage, showing the demand variation on an hourly or sub-hourly basis. For example, a typical office building has a “top hat” or bell shape profile during the summer months. The office load, which is weather and time sensitive, increases steadily throughout the day reaching a peak in the late afternoon then decreasing to a minimum in the late night and early morning hours. The ERCOT retail market requires a fifteen (15) minute settlement interval, yet the vast majority of customers do not have the metering necessary to measure their consumption at this level. Because the actual load shape for customer without special metering is unknown a guess has to be made in order to settle the bill. That guess is the “deemed” load shape or “force fit profile”, established by ERCOT-ISO (Independent System Operator). Based on the load factor of the particular account, the TDSP shall be responsible for assigning each electric account with standard kW and watt-hour metering for a “force-fit generic profile”. The profile assignment is based on the accounts past 12-month usage data (load factor) that is “deemed” to represent a customer’s usage pattern. There are basically five assignments: 1) non-demand metered accounts 2) accounts with a load factor less than 40% 3) accounts with load factors 10
  6. 6. 3305 Northland Drive, Suite 301 Austin, Texas 78731 Tel (512) 459-7100 Fax (512) 451-4008
  7. 7. Oil Industry Graces Many of Artist's Works By Georgia Temple Entertainment Editor S ymbols of American enterprise refreshments. The building was purchased appeal to artist Richard Jennings. and remodeled by Cummings-Baccus A commercial architect, who Interests, an Austin-based partnership spent 25 years designing high- organized in 1992 to invest in commercial real rise office buildings and eight of estate. The artist was commissioned by the those years teaching in the new owners to create a piece of art for the School of Architecture at Rice building that would be unveiled at an opening University, has spent most of his reception. life painting. The subject that most often graces his canvas is quot;We decided we wanted to have some artwork one close to the hearts of many West Texans - that was representative of Midland, and I the oil industry. started looking around,quot; said Dan Cooper, partner of acquisitions and dispositions (who quot;I've always been fascinated by it - the more importantly perhaps in this case has a quot;1 think a lot of people are going to be really geometry of the rigs, the equipment, the minor in art). quot;It just so happens that one of excited by the way he's glorified the oil and engineering of it,quot; Jennings said in a my partners, Ross Cummings, has a painting gas industry,quot; said Cooper. quot;His works are telephone interview from his home and studio by Richard Jennings. And it's of a pump jack. vibrant, colorful, full of life.quot; in Austin. quot;I guess some artists are attracted to And he said, 'What about Richard Jennings?' A native of Roswell, N.M., Jennings first flowers, but to me it's always been some of learned to paint from his mother. quot;My mother the industrial things we build in the world. quot;I went over and met Richard and saw that he had an arsenal of paintings- maybe 300 was an oil painter,quot; Jennings said. 'The way Unlike some people, I don't find them to be a my mother taught me to paint was on white blight on the landscape. I think they are more different pieces that have the subject matter of the Permian Basin. He's been painting china plates. The drill would be, we (Jennings evidence of a lot of enterprise.quot; and his older sister) would paint landscapes derricks and pump jacks and tanks for years. I Jennings comes to Midland on Thursday for a instinctively knew that he was the right on china plates, and then she'd critique it, and 3:30 to 6 p.m. open house celebration for person for the job.quot; we'd wipe it off, and paint it again. I must Fasken Center that includes live music and have been 8, 9 and 10 years old.quot; They also The idea of a piece commissioned for the painted on white china platters, which Center expanded into a showing of work by Jennings , said, were quot;for the larger works.quot; © Midland Reporter-Telegram Reprinted with the artist. Thus, the opening reception will He laughed and added, quot;I was painting plates permission from Midland Reporter Telegram feature a gallery exhibition of 40-50 pieces of before it was fashionable. Wish I’d kept some Sunday, October 14, 2001 Section F 1&3 art by Jennings. of them.quot; 16
  8. 8. Jennings spent some of his growing-up “His studio was an hour drive from where I may think that a lot of things man does is time drawing. quot;Apparently, I liked to draw a grew up. He was sort of a local hero. I used to environmental disaster waiting to happen. It's lot,quot; said Jennings, who studied architecture go to the museum just about every weekend always interesting to me to go see a working at Texas Tech and holds a bachelor and and look at his paintings that were on rig, and after the well comes in and is masters degree from the University of display.quot; pumping, the same mesquite and sage are Houston and the University of Dallas. growing there. You can hardly tell there was a Not all of Jennings' work features the oil field, rig there. It's a very complex operation that's quot;Of course, in New Mexico, there wasn't but the subject is a special passion of his. done very efficiently.quot; x much to do,quot; he remarked drily. quot;The whole Permian Basin exploration Richard Jennings may be reached at 512-327-1650 Exposure to artist Peter Hurd also had a was a terrific enterprise,quot; said Jennings, or lasting effect on Jennings who as an adult noting he finds the quot;nitty gritty work of studied watercolor painting with Frank Webb the oil businessquot; of particular interest. quot;A and Tony van Hasselt. lot of people went out and risked everything they had for the chance to make good, “Peter Hurd fascinated me,” Jennings said. to make something of themselves in my day “He knew my father, so I met him when I was and I've always admired that.” fairly young, and he was someone I admired greatly. quot;I think a lot of people, artists in particular, 17
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  10. 10. BIG By Daniel T. Cooper Opportunities do Do Come in Smaller Markets A lender I was speaking with recently had an interesting response to an inquiry about investing in a secondary market. quot;I cannot lend there because my hands are tied,quot; he confessed to me, quot;but I will personally invest with you, because it sounds like a great deal.quot; Pure Resources Building; 182,062 sf, class “A” CBD, Midland, Texas That lender's response is one that comes up again and again in commercial real estate investment. When the question of investing in secondary or tertiary markets is posed, the answer for many real estate investment trusts (REITs), large private investors and lenders is often a firm quot;no.quot; Why doesn’t everybody take advantage of the big opportunities in smaller markets? The answer is simple: They can’t — thanks to thinking that keeps many investors locked within a self-imposed box. Those boxes can limit investors in several ways. For example, they may decide that real estate investments must be in cities with large metropolitan areas. Larger players are often 23
  11. 11. We've all heard the old adage, “Location, location, location.” But the last time I checked, the true purpose of real estate investment hasn't changed: quot;Return, return, return.” searching for safety in numbers, whether in the 24-hour city or in cities that hit the top-10 lists for highest rents and absorption rates. Most, if not all, funds stay within those boxes. Consequently, they have redlined almost all secondary markets. Thinking Beyond the Redlines I believe much of what is presented in the media and in economic forecasts is yesterday’s news. You're almost guaranteed to find yourself behind the investment curve if you listen to popular media. Instead, you must do your own research and evaluate every deal on its own merits. Those include location, employment growth, demographic trends and condition; but most importantly, they include net operating income. There are always trade-offs in any deal, and weighing an investment in a smaller market against one in a big market is no exception. By their very nature, secondary cities usually lack diversification and a large workforce. Consequently, they do not grow as quickly as cities such as Los Angeles, Boston, New York or San Francisco. But smart investors must also read between the lines. One of the primary reasons Wells Fargo Building; 205,000 sf, Lubbock Texas institutional buyers don't invest in smaller markets isn't a lack of potential — it's economies of scale. It's often not efficient for them to hold less than a few million square feet in a marketplace, so by default they pass over potentially great returns. Tertiary markets, too, have benefits that the Big 20 don't have. A commonly overlooked aspect of the smaller market is the lack of new construction. Many of these cities are stable and have slower growth, which translates into a market with a leaning toward demand. Quite frequently, you will see a few trophy properties in a market with little or no competition; although the demand does not justify development, it does allow for incremental rent increases. The key ingredient to seizing these opportunities is capital, namely debt. Much like the REITs, the large lenders will not lend money in these smaller markets. As a result, many of the capable players who depend on Wall Street money remove themselves from the investment game. This situation opens a big opportunity for us and for other buyers who have the freedom to work with local and regional banks. Although there is a move by larger manufacturing and distribution firms to settle in more efficient hubs, there are many mid-sized companies that are seeking more affordable environments with lower costs of living and less expensive workforces. For those companies, a well-positioned smaller city can be a winning choice. Secondary markets offer a lower price per square foot, controlled growth and a lack of competition. When combined, those factors translate into higher returns. We've all heard the old adage, “Location, location, location.” But the last time I checked, the true purpose of real estate investment hasn't changed: quot;Return, return, return.” Look outside the self-imposed boxes, and you'll see secondary markets are a great way to achieve that purpose. x 24
  12. 12. Commercial by Chad Harwood LENDERS are Still Playing, But the Rules are Changing I n the financial arena, 2001 started turbulently. The Dow Jones industrial average and NASDAQ plummeted, dot-coms vanished as quickly as they once appeared, and layoff and unemployment percentages rose to heights unseen in years. Yet despite the general bad news, commercial real estate financing faces good news: Treasuries and spreads are down, and an ample supply of capital exists in the debt market. Financing opportunities are plentiful for commercial real estate owners in search of capital. However, the commercial real estate finance market will continue to experience significant changes going forward, and several key trends will affect the industry in the near future. For example, consolidation among lenders significantly increased in 2000 and will continue to increase this year. The result has left fewer players on the field; however, most remaining lenders are firmly committed to the commercial real estate market. And, consolidated lenders frequently can offer wider product lines to their customer bases and create economies of scale, which ideally will reduce the costs passed through to borrowers. Another key trend in this fluctuating economy is that underwriting criteria have become stricter, yet the rate environment has shifted to the borrowers' favor in the past few months. Rates for long-term financing are near an all- time low. At the end of May 1999, the yield on 10-year Treasuries - the primary index used for pricing long-term commercial loans -was approximately 5.7 percent compared with a yield of nearly 6.4 percent at the end of May 2000, an increase of 78 basis points. By the end of first-quarter 2001, the yield on 10-year Treasuries had declined about 135 basis points to around 5 percent, resulting in a lower cost for debt that will increase the net cash flow to property owners. Lenders continue to focus on bread-and-butter income-producing property types such as multifamily and office. As lending requirements become stricter, less stable property types, such as hospitality and unanchored retail, will experience more limited financing options. Most permanent lenders are still under-writing 80 percent loan-to-value ratios on solid property types, but more risky property types have considerably lower LTV constraints, which range from 60 percent to 70 percent. Additionally, dominant lenders will focus on the national market rather than specific regions. Borrowers increasingly will have opportunities to select lenders with the ability to follow borrowers from region to region. While this has long been the practice of Wall Street conduits, government-sponsored entities, and life insurance companies, many commercial banks are still forced to deny capital to borrowers in markets outside of their geographic lending areas, putting them at a disadvantage to the large national players. The Players Despite uncertainty and volatility in the capital markets, most industry lenders Twin Tower, Faskem Center, remain steadfast in their commitment to commercial real estate. Five main 421,546 sf, class “A”, types of lenders serve the industry: commercial banks and savings Midland, Texas associations, life insurance companies, pension funds, Wall Street commercial © CCIM Institute Reprinted with permission from Commercial Investment Real Estate, Vol XX, No. 4, pp 34-36 29
  13. 13. mortgage-backed securities issuers, and commercial real estate finance during the bond investments.quot; government sponsored entities. remainder of 2001. Still, the CMBS arena is not without its Commercial Banks Pension Funds concerns. quot;Disciplined originations are now and Savings Associations Many funds are increasing their mortgage the name of the game,quot; Grabell says. quot;CMBS Commercial banks held $610 billion in investing, but they are participating mainly on investors are more selective, which is forcing outstanding loans, or 39.3 percent of the the equity side. Pension funds control less than originators to be selective in the loans that are institutional debt market, as of September 3 percent of commercial real estate debt in the originated. If real estate weakens, the 2000, compared with $518.5 billion in fourth- United States. The pension funds' primary debt borrower's credit becomes more of an issue. quarter 1999, according to the Lend Lease Real activity will be in CMBS as they become more However, there are certainly no signs of a mass Estate Investments Emerging Trends 2000 mainstream, fixed-income investments. exodus from the CMBS market.quot; report. Savings associations held $139.8 billion in mortgage assets, or 9 percent of the While pension funds are expected to be With declining overall interest rates, demand institutional debt market. Combined, these two somewhat active in the debt market, most for adjustable-rate mortgages has subsided institutional categories hold nearly half of all borrowers will have more access to other debt from the first two quarters of 2000. For now, outstanding U .S. commercial real estate debt. providers such as the conduits. GMBS issuers should continue to be the most competitive on permanent, fixed-rate debt. In late March, the Federal Reserve Board Wall Street CMBS Issuers released a supplemental survey on bank Wall Street conduits held about 14 percent of Government-Sponsored Entities lending practices. The survey polled 54 large total outstanding commercial real estate debt as The Federal National Mortgage Association, domestic commercial banks and 22 U.S. of mid-September 2000. However, CMBS known as Fannie Mae, the Federal Home based branches of foreign banks. The results issuance has strengthened so far in 2001. Mortgage Corp., or Freddie Mac, and the indicate that half of the domestic banks Through mid-April, issuances were up 33 Federal Housing Administration often are reported slightly stricter lending standards to percent to $13.6 billion from $12.1 billion in considered to be the premier lending sources commercial loan applicants. Further, no banks first quarter 2000. for quality multifamily properties. reported that they had eased lending standards during the first two months of 2001. Better than 50 percent of the domestic banks indicated Supply and demand should continue to keep that a less favorable economic outlook was an property segments in most markets in check, and a important factor in tightening lending terms. severe downturn or massive overbuilding is unlikely. If the banks' actions earlier this year are any indication, commercial real estate borrowers CMBS issuance volume totaled $60.9 billion Rates generally are higher than those of GMBS can expect banks to continue to tighten their in 2000 compared with $67.9 billion in 1999 and commercial banks for long-term loans. and $78.3 billion in 1998. As a result of Fannie Mae and Freddie Mac both offer LTVs underwriting criteria and loan terms if the up to 80 percent with terms as far out as 30 economy continues to stall. declining originations, no single conduit has years. enough product to bring to market, and many However, prospects for financial institutions in conduits will continue to pool loans. Thus, if Fannie Mae's delegated underwriting and general remain strong, according to Lary B. CMBS demand outpaces the supply that servicing (DUS) program has been a successful Cowart, Chair of Real Estate Studies at investment banks can bring to the market, origination program. However, only 25 lenders Morehead State University in Morehead, Ky. investors arguably would drive spreads down, in the nation are approved DUS lenders. Fannie quot;With the decline in interest rates, new resulting in lower overall rates. Mae is the largest investor in the multifamily originations at the financial institutions will sector with more than $55 billion in definitely be generated, but because of A number of CMBS offerings in the market investments compared with Freddie Mac's $25 prepayment penalties, it will not come at the were scheduled to close by the end of second- billion. Both programs have a national expense of the banks' existing portfolios,quot; he quarter 2001. Depending on how the issuance presence, offer competitive terms, and always explains. is received, borrowers can expect lenders to are in the market, meaning they do not exit at adjust their underwriting criteria accordingly. the first sign of trouble. The downside is that Life Insurance Companies For instance, should the issuances be well these government-sponsored programs are Despite maintaining an important market received by the market, borrowers will see an strictly for multifamily properties. position, 13.7 percent of total debt, life easing of spreads, while the opposite could companies are trending toward less real estate hold true as well. Looking Ahead ownership but continue to be active mortgage Most lenders view the balance of 2001 investors. They still focus primarily on higher- Peter Graben, senior vice president of Mill with cautious optimism. The Fed's multiple end properties, and commercial real estate Valley, Ca1if.-based conduit Bridger reduction in interest rates has spurred borrowers can expect life companies to remain Commercial Funding, remains bullish on the new interest in refinancing. Underwriting in the market with rates at their current levels. CMBS market. quot;The rate environment has fundamentals remain relatively strong, and the been very favorable for the past three or four influence of the public market intends to keep Life companies will continue to be more months, and CMBS spreads remain stable as it that way. conservative than other types of traditional wellquot; Graben comments. quot;Spreads are lenders, often maxing out at a 75 percent LTV; widening slightly because of the amount of Supply and demand should continue to keep however, life company players still may offer product coming to market, but there is clearly property segments in most markets in check, better rates than the conduits. Borrowers can still an appetite for the CMBS product because and a severe downturn or massive overbuilding expect to see life companies very active with it is a very attractive alternative to traditional is unlikely. 30
  14. 14. The capital markets are watching over lenders' shoulders; therefore, most lenders are driven to make prudent real estate loans that will be well received in the public markets. With few exceptions, borrowers likely can expect underwriting criteria to become more rigid if the economy continues to slow. The future of commercial real estate financing for the remainder of 2001 is positive. quot;The volatility of the stock market should increase the flow of funds, on both the debt and equity side, to the more stable real estate sector,quot; Cowart says. quot;The recent decline in interest rates has lowered the required rate of return on the debt side, but probably will not result in a decline in overall cap rates.” quot;Consequently, yields to the equity side of the equation should increase to balance the math. Of course, this additional equity yield is not a windfall; it is simply just compensation for the additional risk that real estate equity is now facing with the prospects of a slower economy. For now, real estate appears to be the safer harbor.quot; Lending within the commercial real estate industry is changing. While the real estate market remains relatively strong, sound deals are harder to come by for many lenders. As a result, lenders are fighting over the same transactions, which benefits the borrower. Both long-term and short-term money is cheap by historical standards, and borrowers can still cash in on good financing deals today. x The Resource Center (7026 Old Katy Road) TRANSWESTERN Four Sugar Grove (4800 Sugar Grove) Woodlake Park (2500 Tanglewilde) is pleased to support Cummings Baccus Interests 550 Westcott 720 N. Post Oak Road 5757 Woodway and Real Estate Perspectives in recognition of our successful Past & Present Portfolio in Houston totalling in excess of 850,000 Square feet 713.270.7700 Your Real Estate Partner of Choice The Lafayette Building (701 N. Post Oak Road) 31
  15. 15. Navigating Clients Financial Needs Savoy at The Resource Unisource Palmer Ranch Center Energy Tower Sarasota, FL Houston, TX Touscon,AZ Tuscon, AZ 324 Units 280,000 SF - Office 230,000 SF - Office $18,000,000 $15,100,000 $20,655,000 Pasadena Office Fasken Center Pebble Walk Portfolio Midland, TX Apartments Pasadena, CA 600,000 SF - Office Houston, TX 264,795 SF $16,640,000 228 Units $19,950,000 $5,100,000 Fairlake HDC Basset Direct Plaza Facility Store Houston, TX Houston, TX Henderson, NV 86,000 SF - Retail 240,000 SF - Industrial 26,250 SF - Retail $1,800,000 $9,645,000 $3,300,000 L. J. Melody & Company A CB Richard Ellis Company 5847 San Felipe • Suite 4400 • Houston, Texas 77057 Bernard Branca (713) 787-1962 Wally Reid (713) 787-1984 3305 Northland Drive, Suite 301 Austin, TX 78731