It's the economy stupid!

The title of this month’s Leverage Viewpoint comes from James Carville’s campaign slogan used during Bill Clinton’s successful 1992 Presidential Campaign. In the early nineties, America was celebrating the end of the cold war and the perceived success of the war in the Persian Gulf. Bush’s foreign triumphs had made him a favorite to be re-elected. Clinton’s awareness of the domestic economy which had been turbulent since the end of the eighties and his call to fix it, eventually won him what was perceived to be an un-winnable election. As another Clinton makes a run for the White House while another Bush exits, could the economy be the number one issue again? From my perspective, it certainly seems so.The fed, in their proactive monetary policy recently cut rates again. Still, most private investors are finding financing a problem and liquidity continues to be limited. Rate cuts have been offset by lender increases of spreads over the 10 yr swap rate. For example, most lenders are quoting approximately 350 basis points (bps) over the 10 yr swap (4.10% on 3/25). Prior to the credit crunch, investment grade properties could achieve financing at a spread as low as 50 bps over the swap rate. While a re-pricing of risk was necessary, the lack of lending activity is an overreaction of fear. From our viewpoint, Commercial Real Estate fundamentals and risk are relatively unchanged over last year. Commercial Real Estate risk needed re-pricing resulting in value adjustments, but despite risk re-pricing, the inherent risk essentially remains the same. In fact, with sale prices about ten percent lower than this time last year, rental rates holding firm, insurance rates decreasing between 10-15%, and land constraints limiting supply; today should be a great time to lend on Commercial real estate (excluding condo development). Lenders have the ability to achieve stronger spreads and returns for product that holds essentially the same risk as it did last year. In other words, the risk-reward scale appears to be level.

So why aren’t lenders banging on your door? I believe that it is primarily fear and a lack of understanding of the market. Of course, some local banks are in no position to lend but those that can are overly cautious. I believe that this is an excellent time for lenders to scoop up an uncontested share of South Florida’s loans. To determine why lenders seem so skittish, we surveyed 166 of South Florida’s top lenders and here are quotes from a selected few:

· Regional banks with no exposure to sub prime or Wall Street should reconsider their use of the credit crunch as a reason to retreat from the market. They should seek higher quality deals and make loans while they have an advantage over life companies and conduits. Otherwise, they may look back and realize they missed a golden opportunity to showcase the advantages of a relationship lender.

Michael Balan
US Capital Advisors

· Clients are being turned down by banks due to over-conservative credit in these times

Steve Apodaca
First Heritage Capital

· The key is being in tune with who is competitive & when, as it changes from week to week in this market. This is the advantage of using a broker over going direct to a bank.

Maggie Vineyard
Venture West Funding

· Things are extremely volatile and tight currently due to the exit of most conduit lenders. Life companies and regional banks have the most attractive financing in today’s market, but are being pressured by the additional demand they are seeing as a result of Wall Streets exodus.

William T. Kaler Jr. Thomas D. Wood & Co.

Market Trends

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