GE Capital Boosts Lending as CMBS Market WaveringHui-yong Yu
GE Capital Real Estate, among the world’s biggest property investors before getting burned in the financial crisis, is increasing lending this year as deals accelerate and the cost of borrowing jumps in the commercial mortgage-backed securities market.
The unit of General Electric Co. plans to make about $7 billion of new loans on North American real estate, up 40 percent from last year, said Alec Burger, North America president of GE Capital Real Estate, based in Norwalk, Connecticut. U.S. commercial transactions jumped 35 percent in the first quarter to $72.8 billion, according to Real Capital Analytics Inc., a New York-based property research firm.
“Liquidity has come back into the commercial real estate space with a vengeance,” Burger said in a June 13 telephone interview, before a rise in Treasury yields. “That’s both on the equity and the debt side. We’re getting back to healthy, normalized amounts of deal flow.”
Lenders like GE Capital that use their own money and generally hold onto the loans they make could take business from Wall Street banks as spreads widen in the market for CMBS, said Tom Craig, a partner and co-founder of Bluewater Realty Capital in Seattle, which arranges debt financing for commercial real estate.
Lenders are charging more on loans that will be packaged into bonds as investors pull away from the securities amid concern about rising rates. That makes it more expensive for borrowers looking for 65 percent or more of a property’s value in the CMBS market, the loan-to-value ratio, or LTV.
“Since CMBS spreads have totally blown out, your options have narrowed if you need the higher LTV,” Craig said. “If you need to get out of an existing loan with a refinancing or you’re going to buy a property and you need 75 percent loan to value, you may have to go to a balance sheet lender” like GE Capital.
Life insurance companies also will benefit, said Dan Fasulo, managing director at Real Capital. “For life companies and balance-sheet lenders, this has the ability to help them compete again almost overnight,” he said.
GE’s commercial real estate unit had assets of $96 billion in the second quarter of 2008, before the global financial crisis and the collapse of property values. The division had about $43 billion in assets as of the first quarter.
Before the credit crisis, GE expanded its equity investments in commercial real estate after years of running a mostly debt-based portfolio. The company returned its focus to making real estate loans in 2010 as banks halted lending during the credit crisis and CMBS securitizations temporarily stopped. GE Capital originated about $1 billion of commercial property loans that year, followed by about $3 billion in 2011, Burger said.
Almost all the loans GE Capital Real Estate makes are senior secured first mortgages, with 70 percent to 75 percent loan-to-value ratios, Burger said. It typically loans three- to five-years in term, giving borrowers flexibility to sell or revamp properties over the next few years. GE Capital is working predominantly with borrowers buying and selling large groups of assets as opposed to single buildings, Burger said.
Treasury yields have jumped since Federal Reserve Chairman Ben Bernanke said last week the central bank may taper bond purchases as the economy improves. The 10-year Treasury yield has risen about 36 basis points since June 19 to 2.54 percent.
Investors are demanding 1.2 percentage points more than the benchmark swap rate to buy new CMBS tied to shopping malls, skyscrapers, hotels and apartment buildings, according to data compiled by Bloomberg. That’s up from 72 basis points in February, the narrowest spread since sales revived in 2009, the data show.
Loan rates for borrowers have climbed about 100 basis points, or 1 percentage point, over the past two months, JPMorgan Chase & Co. analysts led by New York-based analyst Ed Reardon wrote in a June 21 report.
GE Capital earlier this month loaned Blackstone Group LP $581 million in floating-rate debt to refinance a 16-property hotel portfolio, including assets in Florida that the private equity firm is selling. The loan gives Blackstone flexibility to sell assets without incurring the prepayment penalties normally imposed by fixed-rate debt.
Some property owners are securing fixed-rate loans in the belief that rates won’t come back down, said Brian Stoffers, chief operating officer and president of CBRE Capital Markets overseeing debt and equity finance at the unit of CBRE Group Inc., the largest commercial broker.
“I’d say more than half are moving now to lock in and less than half are saying perhaps things will settle back down,” Stoffers said. “It’s a very tricky game to play. My view is that we’re going to get into an environment of higher rates.”
The composition of GE Capital Real Estate’s loan book reflects a period of historically low interest rates. About 51 percent of GE Capital Real Estate’s loans are floating-rate, with 49 percent fixed, according to the company.
“If you’ve got a very long-term horizon, you’re probably going to lock in a CMBS fixed-rate loan for a long period of time,” Burger said. “If you have a plan where there’s more of a value-creation side or a plan where you’re ultimately selling down assets over a three- to five-year window, my sense is that’s going to lend itself more to a floating-rate transaction.”
Rising interest rates may disrupt some deals in progress as “a buyer who thought the price of debt was X turns around and it’s Y,” said Fasulo of Real Capital. “Short term there will be a shakeout but the market is plenty healthy. This will be a short-term phenomenon.”
GE Capital’s Burger agreed that the property market, and demand for capital to make acquisitions, is strong.
“While there’s been a modest increase in interest rates recently, we’re not seeing any material impact in the investment market,” Burger said. “When unemployment is still 7.6 percent, I don’t think people feel there is significant inflationary pressure.”
Whereas the 10-year Treasury is the basis for many fixed-rate loans, floating-rate loans are priced off the London interbank offered rate, or Libor, which hasn’t moved much relative to Treasury yields after the Fed remarks on June 19. Three-month dollar Libor rose to 0.28 percent from 0.27 percent the day before Bernanke spoke.
“We expect a lag in the current shift,” said Sam Chandan, president and chief economist of Chandan Economics, a New York-based provider of data and analysis on the commercial real estate market.
GE Capital’s real estate debt portfolio is currently at about $22 billion, Burger said. Even with the expected $7 billion of originations this year, the total portfolio won’t swell because of the subtraction due to debt maturities and collections, Burger said.
The company loaned Blackstone about $800 million in a senior mortgage in October 2011 to help finance the private equity firm’s $1.1 billion purchase of 79 suburban U.S. office buildings from Duke Realty Corp.
“Coming out of the downturn, that was kind of a watershed transaction for us,” Burger said. Many of GE’s competitors in commercial real estate lending were consumed by the financial crisis, including Lehman Brothers Holdings Inc. and Wachovia Corp., which was acquired by Wells Fargo & Co. “Where there’s a need for a larger transaction, that plays to our strengths. Structuring flexibility plays to our strengths. The world is very liquid for very vanilla-looking 60 percent loan-to-value transactions. There’s slightly less competition for the higher structured, slightly higher LTV deals.”