"You should expect to put more equity into your deals, you should expect to pay a higher price and you should expect to see recourse again," says Robert Stone, senior vice president of Dallas-based Guaranty Bank. "All real estate deals need a reason, and all real estate deals need to have a story."
Stone's bank is a construction lender, and it expects to do some "hand-holding," though not many work-outs or restructurings, as the recession lengthens.
The downturn in the economy is a fact of life that must be accepted by those in the real estate business, says GE Capital managing director Frank Marro. "Sellers were in denial that we were in a downturn," says Marro, admitting his firm was among them. "Over the next 12 months, people have to admit we're in an economic downturn. But we're excited about that."
Marro adds supply is not out of balance as it was in previous downturns, interest rates are much lower, lenders have gotten smarter and there is better access to capital markets. "We made a lot of money buying and lending in the last economic downturn," he says.
iStar Financial, Inc. has been making its money on refinances this year, says executive vice president Diane Olmstead, after the San Francisco-based finance company capitalized on acquisitions in 2000. She anticipates changes in CMBS deals, including tighter underwriting standards and insurance requirements. While hotels provide a lending opportunity, Olmstead adds they may be required to have one year's worth of debt service in reserve.
"Every deal can be done. The only question is the amount of capital," Olmstead says. "Owners of real estate will be disappointed by (loan-to-value ratios)."
Kenneth Hargreaves, executive managing director of Springfield, MA-based David L. Babson & Co., Inc., sees 2002 as a borrower's market. "In general, people who need to borrow money with well-thought projects will find funding," Hargreaves says.
That may even include hotels, Hargreaves says. However, he echoes sentiments that underwriting will get tougher. "We're taking a harder look at cash flows," Hargreaves notes, adding office building owners are being asked to produce copies of their last five lease deals. "Let's not kid ourselves. Rents are not going up."
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