By Richard M. Gatto
Executive vice president
The Alter Group
Getting the Facts Straight
Understanding industry dynamics is essential to navigating volatility
commercial mortgage brokers have
to deal with mixed signals in today’s
marketplace. Despite apparent recovery in the nation’s macroeconomic indicators, lending remains tight as banks
cannot shake off the over-cautious approach adopted in the aftermath of the
There also are a myriad of interrelated
market dynamics — from struggling financial institutions to global economic
uncertainty — that have continued to
curb lender appetite and further complicate a much-needed recovery in the
commercial real estate market.
It is not all bad news, however. The
commercial real estate industry has
seen some positive indicators this past
year. For example, the nation’s total of-
fice absorption was 34. 6 million square
feet in 2011 — nearly three times the
occupancy gained the year before, ac-
cording to Jones Lang LaSalle. With
large blocks of space taken off the mar-
ket, a gradual recovery in commercial
real estate’s overall rents and vacancy
rates seems to be in sight — even
though construction starts and prop-
erty development are at record lows.
are highly unpopular — yet of vital importance. The main point of concern,
according to the business journal of
McKinsey & Company, McKinsey Quarterly, is that the U.S. banking system
will need substantial capital in retained
earnings or new equity to meet the new
capital-adequacy standards — assuming the current asset level and mix.
Banks may see their returns fall by
two-thirds unless they take steps to
limit the fallout from tougher regula-
tion. In some businesses, a portion
of the high regulatory costs may be
Starts are projected to remain flat
this year as existing space is absorbed.
This lack of new construction has wor-
ried tenants that they won’t be able to
locate the space they need, especially
large contiguous blocks in Class-A cen-
tral business districts (CBDs) and sub-
urban buildings in prime locations.
Financial institutions, including banks,
are still struggling. The interbank interest
rate (Libor) is one benchmark that can
indicate the current lending uneasiness.
The U.S. Libor rate was 1.05 percent this
past March, up from 0.77 percent a year
earlier and the highest level since July of
2009. Essentially, banks aren’t letting
their guard down yet.
In addition, changing regulations are
adding to the uncertainty in the market.
Basel III and Dodd-Frank regulations
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“By some accounts,
banks may need
$500 billion in
new equity to meet
of Basel III and
passed successfully on to consumers,
McKinsey Quarterly reports. By some
accounts, banks may need $500 billion
in new equity to meet the requirements
of Basel III and Dodd-Frank.
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Commercial mortgage-backed securities (CMBS) aggregate issuance hit
$32.7 billion this past year, 7 percent
short of analysts’ expectations as a result of uncertainty in global markets,
according to Standard & Poor’s.
The volume, however, is an impressive comeback after only $12 billion
was issued in 2009 and 2010 combined. The commercial mortgage market clearly needs this sector to recover
because it remains the fastest in terms
of timing and offers loan-to-value ratios
(LTVs) in the 70 percent to 75 percent
range, unlike the life companies.
The nation’s corporations are hoarding
cash that is estimated at a cool $2 trillion. Although the economic crisis is
now behind us, cash-rich corporations
are not putting their money back into
the economy. This reluctance to spend
excess cash translates into less investment in new plants and purchases
Corporations are using cash for stock
buybacks — suggesting that they’ve
run out of new ideas. Stock repurchase
produces higher per-share earnings
(virtually the same amount of net income divided by fewer shares). Unfortunately, buybacks have not fulfilled
their purpose of rewarding investors
over the past 10 years.
This lack of investment in research
and innovation is setting us up for
trouble down the road that can result in
slow economic growth.
Conversely, corporations that are able
to access cheap debt are a reason for optimism. Target Corp., for example, sold $1
billion of its debt at 1.13 percent in three-year bonds to support an ambitious
growth and store remodeling strategy.
Corporate dividends were about
$240.6 billion this past year — the largest since 2008, when firms had not yet
been hit by the full brunt of the financial crisis and paid a record $247.8 billion in dividends, according to Standard
& Poor’s. The rating agency projects
corporate dividends to hit a record of
$252 billion this year.
• • •
With these points in mind, it is clear
that the commercial mortgage market
still has a long way to go to see stabil-
ity — let alone a full-fledged recovery.
That said, commercial mortgage bro-
kers who understand the factors that
control this industry are taking the first
step on the path of success despite the
market’s ups and downs. •
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Growing Financial Partnerships
Commercial building construction
starts fell to historic lows in 2010. Office construction starts tallied 56 million square feet in 2010 — the lowest
level of activity since 1960, according
to McGraw-Hill Construction.
Hopes for recovery were dashed this
past year with construction starts plunging further. The value of construction in
2011 was $787.4 billion, a 4 percent drop
from the $803.6 billion in 2010, according to U.S. Census statistics. The decline
was primarily a result of tight credit and
reduced public spending.
Richard M. Gatto is executive vice president of
The Alter Group. Gatto spearheads the group’s
business development, corporate services,
leasing and build-to-suit activities. Additionally,
he supervises all client-contract negotiations
and financial structure underwriting for the
company’s portfolio properties. Gatto’s efforts
were instrumental in NAIOP’s selection of The
Alter Group as its 2010 National Developer of
the Year. Reach Gatto at (847) 568-5915.