THE SCIENCE OF REAL ESTATE View from the Field – Who Was Lending in 2011?

My firm, Partner Engineering and Science, provides due diligence for commercial real estate lending and I believe that our firm works on approximately 4% to 5% of commercial real estate transactions in the country.*   The result is that we have a pretty unique window into who is lending on commercial real estate.    I track our firm’s data rather carefully and combine our data with transaction data provided by our largest vender EDRᵻ to provide the market a somewhat quantitative analysis of activity. 

The overall volume of Phase 1 Environmental Site Assessments–and by extension commercial real estate transactions–has been steadily increasing month after month since its low point in October of 2009.    Our firm’s Phase 1 ESA volume in the 3rd Quarter of 2011 has increased 28% over the 3rd quarter of 2010 and volume has increased industry wide by 7% quarter over quarter.   The connection between Phase 1 ESAs and CRE transactions is not absolute as much of the volume of Phase 1 ESAs has come from pre-foreclosure work.  Nevertheless, lenders spending money to work out their non-performing loans is still a good barometer of positive activity for commercial real estate.

Summary of 2011 CRE Lending

From 20,000 feet here is a summary of CRE Lending by Source:

Commercial Banks  —  Flat/declining

SBA Lenders  —  Robust

Government (Fannie/Freddie) —  Steady

Credit Unions  —  Growing

Life Insurance Companies  —  Robust

CMBS Securitizations  —  Stalled


Our steadiest client type has been multifamily lenders throughout the recession.   According to the Mortgage Bankers Association, the top five multifamily lenders are: Wells Fargo Bank NA; CBRE Capital Markets Inc.; Berkadia Commercial Mortgage LLC; PNC Real Estate; and Prudential Mortgage Capital Co.  Most of this debt is agency debt: Fannie Mae, Freddie Mac, and HUD debt.

Commercial Banks:

According to EDR Insight’s Market Intelligence Report, banks that have been reported to be associated with increased commercial property lending in recent quarters include: BB&T, Capital One, Citizens, First Niagara Bank, Hancock Bank of Louisiana, IronStone Bank, JP Morgan Chase, Manufacturers and Traders Trust Co., NAFH National Bank, Opus Bank, Union Bank and Wells Fargo.   The Market Intelligence data is somewhat anecdotal, but I am sure interesting to the mortgage brokers of the world.

SBA Lenders:

SBA Lending has been a growth market for us throughout the recession and was strong again in 2011.  According to EDR’s Marketing Intelligence report, SBA set a record high for 7(a) and 504 lending, with over 53,000 7(a) loans and nearly 8,000 504 loans.  JPMorgan Chase was the top SBA lender, and others have pledged to increase their small business lending including Bank of America, Citigroup and Wells Fargo.  Without additional stimulus however, SBA lending in 2012 is likely to be flat compared to 2011.

Cash Buyers:

We have also seen a lot of activity from REITs and real estate advisors who buy with cash and do not need to go to the market for debt–or perhaps they finance assets on a portfolio level instead of a single asset level.     Institutional all-cash-buyers are unique clients as they are interested in very detailed due diligence and do not have to worry about a second stakeholder in the process.


CMBS started the year strong, but has slowed significantly.  CMBS Lenders are a major client type for my firm and we have seen our CMBS business shrink significantly from the 1st and 2nd quarters of 2011.  Nevertheless, 2011 as a whole was a lot better than 2010 for one of our country’s strongest finance engines.

Excerpt from Market Intelligence Report:

CMBS Issuance: 2010 vs. 2011

2010                                       2011 (Current through Nov. 7)

$12.7 billion                                      $27.4 billion

16 deals                                                23 deals

$6.4 billion in Freddie Mac        $11.3 billion in Freddie Mac

6 deals                                                  10 deals

Source: Trepp

Life Companies

Life Companies made a comeback to the CRE lending market in 2011, underwriting $16 billion in just the second quarter according to Market Intelligence, and are expected to stay active in 2012.  We have certainly seen an increase in volume from these clients.

Construction Lenders:

My firm provides Document Cost Reviews at the beginning of construction projects and so our construction group is a reasonable barometer of construction activity.   We saw our construction group revenue drop by 70% from 2008 to 2010.  We saw investment grade construction lender’s activity dry up as much as 90%; while we saw SBA lenders pull back much less.   At this point I can only offer anecdotal data, but in the back half of 2011 we saw our construction services revenue increase significantly – some signs of life.

Conservative Lenders:

We have certainly seen lenders become more conservative in how they approach environmental risk and engineering issues.   Over 60% of environmental professionals surveyed by EDR agree that lenders have tightened their environmental due diligence standards.

Biggest Deals of 2011

For us the biggest deals of 2011 were not real estate transactions, but rather distressed sales of commercial paper.   One big project this year was a 175-site portfolio of distressed paper being sold by a troubled bank to one of our nation’s largest banks (I generally don’t mention my client’s names).   This multibillion dollar deal was underwritten like a new loan with full Property Condition Reports and newPhase 1 Environmental Site Assessments.   I think the prevailing thought is that it is best to repeat due diligence when buying assets from a failing institution that may have had lesser due diligence standards.

Bank Failures:

Bank failures have slowed significantly in 2011.   Twenty-six banks failed in the third quarter of 2011.   This was a slight increase from the second quarter, but that is well below the 41 that failed in the third quarter of 2010.  Bank failures are a generally seen as a bad sign, but bank failures do create a lot of transaction work for firms like ours, appraisers, brokers, etc….   I think there is some value to the industry in working through all our problems sooner rather than later.

CRE Volume in 2012

Readers do not need me, a civil engineer, to play economist, there are plenty of terrific writers in the Globe Street community to give far more qualified predictions; however, I believe 2012 will be a great year in Commercial Real Estate Finance!  Why? Because according to EDR’s Market Intelligence Report an estimated $400 billion in CRE debt roles this year–$57 billion in CMBS paper alone, according to S&P.    Something has to happen: sale, refinance, or foreclosure.   For me the due diligence provider, I know that there will be some sort of transaction requiring my services.

* According to EDR Scorekeeper Partner has performed 4.15, 3.86, and 4.35% of Phase 1 ESAs in the United States for the Q1, Q2, and Q3 respectively.

ᵻ  EDR Scorekeeper data is primarily extracted from property record orders received by EDR for environmental due diligence projects, typically associated with CRE transactions.  Other EDR data is collected through surveys and through sister company Trepp.

 Source:  GlobeSt

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