Commercial Developers
Find New Loan Sources

As Wall Street banks tighten their purse strings on commercial real-estate financing, other lenders are ready to step in.

Non-U.S. banks, insurance companies and smaller real-estate shops are poised for robust business from anxious developers finding it difficult to drum up money in the market for commercial-mortgage-backed securities.

Developers say they are being asked to put up about 25% of the financing, a substantial increase from the 10% to 15% permitted before credit conditions tightened. The stricter standards mark a departure from the loans offered from mid-2006 to mid-2007, when Wall Street banks were underwriting interest-free loans and debt based on future revenue, not current cash flow.

Issuance of commercial-mortgage-backed securities world-wide was on a record pace until September, when the market sustained a severe slowdown. Only $6.2 billion of the securities were issued in October, compared with $34.4 billion in August, according to Commercial Mortgage Alert, a trade publication.

"In light of the problems with the securitized markets," balance-sheet lenders have greater opportunity to compete, says Matthew Galligan, managing director of the U.S. property-finance division of Bank of Ireland PLC. "And that is what we are doing," he says.

The bank set up the property business in July, its first in the U.S., concentrating on the Boston-to-Washington corridor. Mr. Galligan estimated the unit would generate $1 billion in business next year. So far, the bank has completed one deal and is committed to two others.

Another opportunistic lender is CIT Commercial Real Estate, a division of CIT Group Inc., which says it is attracting new customers unable to get financing from traditional Wall Street sources. Tim Zietara, a CIT managing director, says most calls from borrowers are from those seemingly willing to pay a premium for knowing they have a lender that can close a transaction, and aren't just taking the lowest quote.

"Borrowers are really searching for a certainty of execution. That seems to be first and foremost for direct deals that we originate," Mr. Zietara says. He says the firm is also seizing opportunities from balance-sheet lending.

CIT is considered a middle-market lender. Mr. Zietara said the firm is bullish on the multifamily and office sectors, but he declined to specify the volume of deals the firm is handling.

Commercial real estate has held up relatively well amid the crisis in the U.S. residential-property market, yet a report from Moody's Investors Service last week indicated the industry is starting to feel the squeeze of the credit crunch. It said the value of commercial property declined 1.2% in September from August.

But few industry experts think a correction will be as painful or pervasive as witnessed in residential real estate. A combination of limited supply, favorable interest rates and the absence of speculative development is expected to cushion the blow. A lot of untapped money is also seen waiting on the sidelines until dust from the residential situation settles.

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