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Commercial market prospects. (Cover Report: Industry Trends).

Article Excerpt
We look at six regional markets and explore what's hot, what's not and prospects for loan volume in 2003. Some markets are hot--like Southern California--yet many others are likely to be soft or only modestly up in 2003. The wild card is the economy--and, of course, if terrorism insurance legislation isn't passed, all bets are off.

CRYSTAL BALL-GAZERS SEE A RELATIVELY UNCHANGED OUTLOOK for commercial real estate lending and investment in 2003 compared with 2002.

* However, commercial activity is being affected by a number of economic negatives. These range from a very slow recovery to lower demand for space and rising vacancies to the serious shortage of terrorism insurance for commercial real estate.

* Even in the midst of this bad news, most industry sources interviewed expect commercial lending and investment activity to hold their own or improve moderately in 2003. Some of this is fueled by renewed interest in real estate on the part of investors burned by the stock market.

* Referring to the accounting scandals, Chicago-based Real Estate Research Corporation (RERC) in its summer 2002 Real Estate Report cites "an atmosphere of deceit" and says commercial real estate both wins and loses in such an environment.

Commercial real estate benefits from the stock market's credibility problem, but on the demand side companies involved in the scandals are dumping office and industrial space throughout the United States--pushing up vacancies.

The real silver lining is that stock market woes have translated into new interest in real estate. The availability of capital is at an all-time high, and investors are realizing that the greatest appeal of real estate today comes from its extremely favorable risk-adjusted returns.

Slower 2002 activity

The Washington, D.C.--based American Council of Life Insurers (ACLI) states in its Commercial Mortgage Commitments First Quarter 2002 report that commercial mortgage lending by the life insurance industry for that quarter fell $389.5 million, or 6.4 percent, versus fourth-quarter 2001, mainly due to lackluster activity in January 2002.

The ACLI points out that despite the lower numbers posted in the first quarter of the year, 2002 is projected to be solid but probably not as strong as 2001, which produced an unadjusted $26.9 billion in total mortgage commitments.

One market observer who has a somewhat positive outlook for 2003 is Joseph Franzetti, a director at New York--based SalomonSmithBarney, investment bankers. He expects 2003 commercial loan volume to be up slightly over 2002 nationwide, but concurs that 2002 is expected to be a slower year than 2001 for commercial activity. Loan volume for 2002 will be down 25 percent from 2001, he estimates.

Franzetti notes that terrorism insurance has either been too expensive or not available, but expects that issue to be resolved when a conference committee acts on a legislative package intended to serve as a backstop to private funding in 2003, and he looks for economic recovery to be under way by then. He says lenders' margins have been compressed and continue to shrink due to competition. That could cause some fallout in the industry, Franzetti says.

On the investment side, investors have encountered some losses in commercial mortgage portfolios as the recovery drags its heels, but commercial mortgage-backed securities (CMBS) have performed well, Franzetti says. "Investors are inclined to stick with the CMBS product based on its performance. They're looking for hard assets," he notes.

To obtain a firsthand view of the 2003 outlook for commercial lending and investment, Mortgage Banking conducted a series of interviews in six regions around the country: Northeast, Metropolitan Washington, D.C., Southeast, Midwest, Southwest (Dallas/Fort Worth) and Southern California. Following is what emerged about the outlook for those regions.

NORTHEAST

The Northeast regional market is described as capital-rich and deal-starved by James Murphy, chairman and chief executive officer of Boston-based New England Realty Resources Inc., and chairman of the Mortgage Bankers Association of America (MBA).

"The challenge is to find product to keep the lending community happy. That will be an uphill battle, because nothing on the horizon will change. It's a case of more capita] available and lack of alternative investments," says Murphy.

Murphy foresees Northeast commercial loan volume in 2003 approximately level with 2002. He says there was a slow start in 2002, but a pickup in the market later in the year indicates to him that volume likely will be about 20 percent higher than 2001 by year-end 2002.

George Fantini, chairman of Boston-based Fantini & Gorga i-Cap, mortgage bankers, explains that there are two primary types of lending money on the market: permanent loans and development loans for to-be-built properties. "From the borrower's point of view, this is a great time to borrow because competition among lenders for fully occupied properties has never been more intense," he says.

On the development side, Fantini says, "There's not much financing, [and] what there is being done [is] mainly by banks. Their underwriting requirements are very rigid and they're unwilling to take any risks beyond what they consider reasonable." Fantini declines to speculate about 2003 or...