How Mezz Loans are Like Robocop
They're both back after a long hiatus. The flood of maturing CMBS loans over the next few years is bringing conduits and mezz lenders back with a vengeance.
George Clooney (wait, that’s Prudential Mortgage Capital managing director Paul Geyer speaking at last week's Bisnow Capital Markets Summit—even better!) says the rollovers present a huge opportunity for conduits. They can offer great rates, and once they start structuring loans over 10 years or doing floating rates, it’ll really open up the market. Paul, who loaned $800M in Houston in the last two years, has seen a complete 180 in Texas’ reputation—in 2002, Prudential told him not to worry about Texas much because it wasn’t a core market. (Good thing our chief export was rubber, and they were glue.)
AIG VP Michael Johnson (here with Q10 Kinghorn, Driver, Hough & Co’s Larry Peters, CBRE’s Hal Holliday, and Levey Group’s David Ebro) says conduits are popping up like daisies. There were 37 on Thursday morning, and he joked there’d be 40 by that afternoon. AIG financed $1B in this region last year, and Michael says he’s cautiously bullish on Houston. We’re seeing $500/SF Downtown office sales, $200/SF retail, and $200k per key multifamily. That's impressive, but what happens when our job growth slows? Beyond that, he says the nation's biggest threat is continued quantitative easing. When interest rates rose 50 bps in Q3, borrowers dropped off.
Goldman Sachs regional director Nick Losada said mezz lenders are also resurging. He’s glad because it makes for a more seamless market. He’s seeing cap rate compression down to single digits even in mezz lending. In 2014, he’ll focus on smaller mezz pieces. (He’d been doing $5M, but now maybe he’ll go down to $2M.) He’s not too concerned about the CMBS rollovers; he says if the market stays on this pace, they’ll work out naturally. Goldman’s doing 75% leverage routinely, but Nick says he’s up to 85% or 12-year terms for the right asset.
Flagship Capital Partners managing principal David Mincberg (second from the right in this panel pic) likes to finance unique transactions that others won’t, including distressed deals. (They just have to be income-producing.) He structures loan-to-cost and will underwrite 85% for the right deal and right sponsor. He says Flagship’s deals aren’t impacted much from rising interest rates because his borrowers are looking to renovate and double NOI, so non-recourse is more important than the rate.
First American VP David Crawford wasn’t afraid to ask the tough questions as our moderator, like whether or not the Texans should draft Johnny Manziel. Surprisingly, our panelists were all in agreement that he’s just too small. (As Michael said, it’ll be really exciting… until he gets hit.) For you Aggies really rooting for him to sport the blue and red, Paul suggested drafting him as a punt returner. David’s expecting his first grandchild in May.
We found our sponsor Commercial Resource Capital’s Bryce Cole, Chris Dannatt, Jason Dannatt, and Steve Hazen. The team just closed a $9.8M data center loan in Katy. It was a very hairy deal, and hard to get lenders comfy with the high price per SF. (It’s normal for a data center, but potential lenders hadn’t worked in the sector before, and traditional data center lenders didn’t like that it’s multi-tenant.) The team also just got a $22M Tomball multifamily debt and equity deal committed.
Bury just started designing the final expansion of Rooms to Go's showroom/distribution center in Katy. The firm did its expansion a few years ago and now it’s adding 250k SF more. Our sponsor is also doing an eight-acre redevelopment for PMRG in College Station, which Steve Eklund says is an exciting project.