Commercial real estate quickly becoming a battle of bulls vs bears

Commercial real estate juggernaut Jones Lang LaSalle [stock JLL][/stock] is clearly turning bullish on the recovery in the commercial mortgage-backed securities market in 2011. Despite calls that CRE is eluding recovery overall, JLL is expecting CMBS issuance to hit up to $50 billion in 2011. After three consecutive months of increases, commercial real estate prices fell 0.9% in December, according to Moody’s Investors Service. However, the results of the latest JLL Lender’s Production Expectations Survey reports that market players are beginning to see bottom. But these two markets are not one and the same. According to the survey, an increasing amount of debt and equity capital is headed for direct placement in the commercial real estate sector this year. CMBS represents the conduit financing necessary to produce the required loans to keep the properties liquid. Traditionally, the CMBS market performance lags the residential mortgage-backed securities market by six months or so. However, with housing finance in the United States greatly limited and extremely compromised, CMBS is making a move on its own. In the JLL survey, 26% of respondents expect their loan production to exceed $4 billion in 2011 — a number that is more than double the number of lenders surveyed who reported that level in 2010 at 12%. An additional 23% say their loan production will ramp up to between $2 billion and $4 billion in 2011. The number of respondents who believe that they’d put out less than $1 billion in 2011 dropped by 5% down to 24.2%, compared with 50% last year. So where does that put this survey in regards to the rest of the economy? Well, the uptick in CMBS issuance is a nice way of saying the big banks are still able to finance themselves in the big commercial real estate markets. This money will unlikely trickle down to the thousands of community banks in America’s heartland that are greatly exposed to CRE loans that are going bust as more and more mom and pop shops go belly up nationwide. But it’s nice to see the credit enhancement on these deals are closer to the stricter levels seen early in the millennium, as compared to 2006 and 2007 levels. Nonetheless, some are seeing the latest news as a mini-bubble of activity. Sources HousingWire speaks to on a regular basis all point to CRE investment pockets largely based in coastal regions. In short, market players can be bullish, if it is a luxury they can afford themselves. The JLL survey was given to 75 of the nation’s largest lenders through a face-to-face questionnaire, including a mix of insurance companies, commercial mortgage-backed securities dealers, private equity lenders, commercial banks and government agencies. It was conducted during last week’s Mortgage Bankers Association’s Commercial Real Estate Finance/Multifamily Housing Convention and Expo in San Diego, California. “The mood at the MBA conference this year was that lenders were ‘back in the black,’ with an abundance of capital targeting commercial real estate lending in 2011. A new frenzy is returning to the debt and equity markets as broad sources of capital are now moving aggressively back into the sector,” said Tom Fish, co-head of Jones Lang LaSalle’s Real Estate Investment Banking. Survey participants say growing conduit issuance will continue in 2012. “We’ve heard from at least 26 new conduit players that are entering the market with plans to place upwards of $30 billion to $70 billion of CMBS transactions in 2011,” added Fish. “Liquidity in this part of the market is a crucial step forward, given CMBS players will target a broader range of asset classes and help restore health in the broader commercial real estate lending environment.” In the recent white paper on the government sponsored enterprises from the Treasury Department, one place where emphasis was placed was on supporting the renter’s market. The market takes this to push for investments in the multifamily commercial real estate space, which record strong interest in the JLL survey. This however, may not be enough to make the market attractive nationwide. “We’ll see a number of construction, life companies and mezzanine lenders that will originate on multifamily development this year, but that will be limited to the core properties in key demand markets,” added Mike Melody, also a co-head of Jones Lang LaSalle Real Estate Investment Banking. Write to Jacob Gaffney. Follow him on Twitter @JacobGaffney.