The End of Free Money: Credit Crunch Slams Commercial Real Estate Market

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The falling yield on the 10-year Treasury since late spring 2007 has created a full-blown credit crunch for commercial real estate developers. Yet despite the volatility that comes in a market where coverages are up, spreads are at record levels, and the 10-year interest-only loan is gone, developers can still access the money they need to maximize new deals.

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and the reality is that we're not going back to the pricing and structure we enjoyed in late spring, early summer 2007. That was an aberration. So if you're a developer and you're waiting for the good old days of free money before striking a deal, plan on waiting a long time! Risk has been repriced, and it has moved just one way: higher.

The falling yield on the 10-year Treasury since late spring 2007 has created a full-blown credit crunch for commercial real estate developers. Yet despite the volatility that comes in a market where coverages are up, spreads are at record levels, and the 10-year interest-only loan is gone, developers can still access the money they need to maximize new deals.

In a two-part podcast entitled "The End of Free Money," Richmond-based John B. Levy & Company explains the dynamics and history behind today's credit crunch and market volatility. Targeting borrowers who long for the early days of 2007 when money was cheap, the podcast aims to help developers keep projects on track by suggesting they secure financing from new sources. This analysis sets up the discussion initiated in the company's most recent podcast, a presentation broadcast in early January entitled "Deer in the Headlights: Commercial Real Estate Markets at a Standstill."

"The market has changed," says John Levy, principal of John B. Levy & Company, "and the reality is that we're not going back to the pricing and structure we enjoyed in late spring, early summer 2007. That was an aberration. So if you're a developer and you're waiting for the good old days of free money before striking a deal, plan on waiting a long time! Risk has been repriced, and it has moved just one way: higher."

In the minds of most analysts, what developers are seeing today is a much needed correction in the financial markets. And while it might not be any consolation to developers, this correction affects not only commercial real estate, but everything from corporate finance to long-term residential mortgages.

"The correlation between today and events in 1998 with Long Term Capital Management is uncanny," says Levy, "and it's also revealing. Anyone who thinks that all we have to do is wait six months and this will be over might want to think again. We reviewed a series of articles we wrote at that time on how the LTCM crisis affected the market, and we discovered that spreads widened out amazingly in the fixed-rate market, but Treasurys fell." Levy continues, "So six months after the LTCM debacle, rates had actually risen."

So where does the "new normal" of today's market leave developers who want to move forward with financing their deals? The credit crunch and volatility currently affecting the commercial real estate industry create the perfect opportunity for developers to explore and expand relationships with life insurance companies and other institutional investors. Their money is priced much more aggressively and efficiently than the Wall Street conduit market.

"What developers will find when using these new sources of financing is that their deals may take more time than when we were in the go-go days of free money," says Levy. "That means more time to negotiate documents and more time to close the deal." Levy continues, "If you're primarily a debt borrower, you'll find that you get less leverage. As a result, you may well need mezzanine debt, joint venture debt, or preferred equity. So while having to work with all these various partners and lenders might make your transaction take longer, you still have access to the resources you need to finance your deal."

Firm Background
John B. Levy & Company, Inc., is a real estate investment-banking firm headquartered in Richmond, Virginia. 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 the originator and author of the Barron's/John B. Levy & Company National Mortgage Survey, which Barron's published for 23 years. This monthly survey tracks more than 30 of the country's largest institutional investors, as well as buyers and sellers of commercial mortgage-backed securities,. He is also 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. Mr. Levy is also a member of the Board of Directors of Anthracite Capital Inc. (NYSE: AHR), a New York Stock Exchange REIT managed by BlackRock, Inc.

For more information about John B. Levy & Company, please visit the firm's website at http://www.jblevyco.com or call Andrew Little at 804-644-2000, extension 260.

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