What would you do if you won the lottery? My wife and I have speculated about this, and we’ve always been pretty much in agreement (travel, a big loft in a major city, more travel, etc.). We haven’t played this game lately, however, because now I want to buy a bank and specialize in CRE lending, which is a goal I can tell she is not enthusiastic about.
To be clear, now is not a good time to have been a CRE lender. From Jeff Bernstein post on Urban Digs, “Holes in the Dike”:
According to Globe Street, Realty Finance Corp. has sold an original $47 million loan on a Class A office building at 250 Montgomery Street in San Francisco for approximately $25MM. The building was reportedly only 55% occupied, so obviously debt service by the borrower, Lincoln Property Co., was an issue.
I do not want to be Realty Finance – I want to be the bank loaning to the buyer. Jeff continues:
What we have to do is look ahead at how the new owner of 250 Montgomery Street is likely to act. The new owner has not been disclosed in this case, but is said to have been another real estate private equity firm. This firm now has a great new basis cost in the building and lots of incentive to be aggressive in getting it leased up. This is the transmission mechanism whereby lower rents are enabled in a market due to distressed properties being turned over at a much lower prices. It just doesn't take a lot of this kind of activity in a soft market with high vacancy rates to crush rents.
The most secure loans are loans where the real estate has plenty of upside, and the only real estate with upside these days are deals which have a low basis compared to the rest of the market. Those are the loans I want to make.
There are other reasons for lenders who have not previously done CRE lending to jump in now:
- Spreads are really good. Borrowing at 1-2% and loaning at 6-7% is a nice business.
- The most important rule in CRE lending is to loan to people who have experience in the property type and their market. By definition, those people already have lending relationships. However, many of those relationships have been disrupted as lenders have pulled back, and the lenders that remain are generally not known for their customer service. Imagine half the NFL teams disbanded over the summer; there would be a lot of talented players looking for a new home. Now is a great time for a smart, customer-focused bank to pick up some great free agents.
- CRE lending is relationship oriented, and the relationship is between the borrower and the loan officer. Loan officers are in the same position as the borrowers described above; many are twiddling their thumbs because their employers have pulled back. Now is a great time to build a team of high producers who have established client networks. The same is true for other necessary talent (underwriters, processors, etc.).
Of course, I’m not likely to win the lottery, especially since I don’t play (you probably knew that if you follow this blog). My wife does play, but if she wins I’m pretty sure we will not be buying a bank. However, some people are going to take this opportunity to jump into CRE lending and do very well.
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