Spooked by higher interest rates and troubles in the subprime residential mortgage market, commercial real estate investors and lenders are rethinking some deals that would have sailed through just six months ago.
"There has definitely been a readjustment," said Marc Schnitzer, chief executive of Centerline Capital Group, a subsidiary of Centerline Holding Co.
"The investors who are buying a lot of the CDOs (collateralized debt obligations), investors that are buying a lot of the CMBS (commercial mortgage-backed securities), have started to push back on some of the more aggressive deal terms," he said this week at the Reuters Global Real Estate Summit in New York.
The meteoric rise of real estate prices over the past few years allowed investors to finance, in some cases, more than 90 percent of their acquisitions using borrowed money, such as mortgages, mezzanine debt and bridge loans.
Much of that debt was then used by investment banks and others to back securities sold to pension funds, university endowments and other institutional investors. The money raised was then recycled back to make more loans.
Such loans would fund purchases of individual properties and large real estate portfolios, such as Blackstone Group LP's $23 billion acquisition in February of Equity Office.
The issue of risk, and investors who assume it by purchasing the loans and securities, came under scrutiny in the winter as residential mortgage defaults spiked.
While commercial real estate has not seen the sort of rise in foreclosures the residential market has, lenders and CMBS investors have demanded either to be paid more for risk or that issuers get rid of some of the riskier loans they are selling.
In one deal in April that Schnitzer termed "notorious," issuers of a CMBS -- GE Commercial Mortgage Trust 2007-C1 -- reconstituted it after investors balked at some of the loans. The deal, initially announced at $4.23 billion, closed at $3.95 billion.
"Some loans had to be taken out," Schnitzer said. "Investors tapped on the brakes and pushed back, saying we need higher returns. Makers of CMBS are less certain of how to price things these days."
Colin Dyer, CEO of leading real estate services firm Jones Lang LaSalle Inc. , said the market shift gave potential bidders a chance "to pause or to find the math doesn't work any more, and so in some cases we've seen just a reduction in the number of bidders interested in parcels or individual assets."
However, real estate prices remain healthy, experts said, with rents strong and the supply of new buildings for the most part restrained in the United States.
"We continue to believe in the fundamentals of U.S. real estate -- increasing rents and increasing occupancy," said Joseph Parsons, president of GE Real Estate North American Equity.
GE Real Estate, a unit of General Electric Co. has about $60 billion invested in global real estate either through debt or ownership. In North America, it has $14 billion of equity invested and $17.5 billion in real estate lending.
"This irresistible force, which is the amount of money trying to get into real estate, is still present," Jones Lang's Dyer said. "For every $1 that gets done there are $5 trying to do the deal."
What is expected to change are some of the players. As the debt-heavy buyers leave the market or become less active, those, such as pension funds and foreign buyers who do not use as much debt, are expected to pick up the slack.
"Those groups have been pleased with the fact that there is less competition for assets," Dyer said. "They're able to get an easier run at assets."
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