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Podcast Transcript - Global Commercial Real Estate Trends

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DARBI: Hello. This is Darbi Worley, your host for Capital Synergies Talk Show for Commercial Real Estate Investors. Capital Synergies is brought to you by Steelhead Capital, Your Commercial Loan Advantage. So today, we are pleased to welcome to the show Mr. Pete Culliney, Director of Global Research for Real Capital Analytics. Pete, welcome to the show.

PETE: Thanks very much, Darbi. Pleasure to be here.

DARBI: All right. So we're actually sitting here in the Real Capital offices in the southern [ph] area of Manhattan. Okay. So, Pete, your focus is on global markets for commercial real estate. Most of our listeners are U.S. investors but we hear more and more questions about overseas opportunities. So first off, has the U.S. economy caused what some people are calling a "global slowdown" or are other markets still performing?

PETE: The answer is both to your question, Darbi. Players in the United States were looking to global markets before the slowdown really started to set in. Global investors for the last couple of years, or shall I say U.S. investors for the last couple of years, have been looking abroad, diversifying their investment strategies, looking for more up and coming markets, trying to insulate themselves from U.S. markets. We were on great upswing in the U.S. commercial real estate in the last, you know, seven years. We knew that it was going to come to some kind of an end. It's not coming to a dramatic end. It's coming to a really nice end for the commercial real estate industry. Volume is off very much but prices have not suffered dramatically in the United States. Someone more overseas but there's opportunity out there in a lot of different markets and there's also a lot of emerging markets throughout the world. And I think that's what U.S. investors are looking to get into.

DARBI: So if you were to gauge the flow of U.S. dollars entering global markets versus foreign capital investments and domestic deals, what does this look like today?

PETE: Overall, capital is flowing both ways, into the United States and out of the United States. We're finding that about 70 percent of overall capital spending takes place in the country of origin. So about 70 percent of buyers worldwide are buying in their local market and then that other 30 percent is flowing one way or the other. So overall that 30 percent of the deals coming in to the U.S. and into other markets globally are funds coming from other nations.

DARBI: Okay. Where do you see this bulk of capital going in the near and longer range future?

PETE: The amount of money that's flowing into China is phenomenal. China is the largest center of investment for money coming out of Hong Kong, which is acting as a pump of funds into China. It's also coming from Singapore, it's coming from Europe, it's coming from other parts of Asia, and it's coming from the United States. Most of this is flowing into land for development where the government is really seeing huge quantities of land to account for the growth of cities. There are 20 cities in China that are growing tremendously, second and third-tier cities, and it's a huge opportunity for commercial real estate. There's a huge demand for housing, for infrastructure, and for retail and other kinds of shopping and all of the kinds of real estate of living for the developing Chinese middleclass. It's a huge magnet for investors from all over the world, both local Asian investors and global investors.

DARBI: Okay. So often when economic pressures increase as they have done in the U.S. lately, it's easy to kind of lose sight of the global picture. Why do you think it's important for commercial real estate investors to remain aware of what's happening abroad?

PETE: Global markets help U.S. investors hedge against what's happening in the U.S. markets. When the U.S. markets are tightening or slowing down, there are other opportunities in developing markets elsewhere. Western and advanced markets are also slowing down considerably throughout Europe but in Eastern Europe there's still a very fair amount of growth; the same thing in Asia. The numbers are very close at this point. We thought early in the year that - and we definitely continue to think that this year is going to be the year that the Asian markets see a higher level of volume perhaps than U.S. or European markets. It'll be the first time that anyone's ever seen that happen. And it has a lot to do with the tightening in the advanced western markets. Deal flow is down 70 percent to 80 percent in a lot of U.S., Europe, Eastern Europe, Germany, U.K. There's money out there but without credit, there's no way to leverage the deals and make the numbers work for a lot of investors.

So they're wondering where else can they put their money. The high prices of advanced western markets aren't quite making it but the advanced returns that are available in developing markets, buying into development projects, working with local developers to fund new deals, or buying deals that are in progress, which they call a "forward sale," which is a very popular kind of transaction in Eastern Europe where there's no old stock to buy but a lot of brand-new stock, both in shopping, apartment living, and office properties coming into the marketplace and investors are buying these properties now, when they're half or three quarters completed and that's continuing to fund the development cycle in these markets by giving the developers the next level of capital to start their next project after these projects that are coming to completion in '08 and early '09.

DARBI: So let's look a little closer at some of these markets. There's been news that parts of Europe are seeing the same kind of hardships as we are here in the U.S. What's going on in Western Europe right now in terms of deal flow and property types?

PETE: The western advanced markets very similar to the U.S. markets, high reliance on the CMBS market to fund the debt that goes to making a lot of transactions over the last few years happen, comparing some statistics about CMBS issuings in U.S. and in Europe. We're seeing about 40 percent of U.S. and European deal volume. Western European deal volume is represented in the CMBS flow. So it's a tremendous amount of the market volume that was taking place over the last couple of years was being supported by that part of the debt market. With the evaporation of the CMBS market last August, September, a large significant part of the financing of these transactions have slowed down.

So we've just seen a tremendous withering of volume in U.S. and the major Western European marketplaces, London and in Germany, throughout the U.K. Prices are down in the U.K. more than in some other markets. Prices are not down so much in the U.S. because sellers are holding firm to what they're looking for. Their fundamentals are good; rents may still be increasing. They have good tenants; their tenants are not defaulting. So if the underlying fundamentals are strong, you're not having a capital call from your bank on your funding, then you can continue to work through the malaise and not have to sell your property for a return that's going to be sub par according to your planning.

DARBI: Right. Now you mentioned Eastern Europe before. Can you expound on that a little bit? Is there Overlay?

PETE: Sure. Eastern Europe is a developing marketplace. Eastern Europe is a place where a lot of these markets are in their first up cycle. These are places where the economy has changed radically over the last 20 years. And we've gone from a period of radical change from what happened in the late '80s and the fall of the Wall and crumbling communist systems, through a lot of political trouble and growing, shaking off the old. And it took these nations sometime to get their stride, but they're starting to really get into their stride now. And as I've been working on this global project, building a database and looking at every market here at Real Capital, it's been amazing to me the number of small markets that you wouldn't even think of where there's really exciting real estate activity going on, new modern shopping centers springing up for developing middleclass who wants to get out. They want to shop. They want to be out there. They want to buy consumer goods.

Anyone who travels throughout the world knows that there's a branded culture out there that you see everywhere you go. And there's something good and bad about being every corner of the world and seeing Prada everywhere you go. The good is that, wow, there's people here that can afford Prada and can afford to shop in this great shopping mall. So if you're in the real estate business and you see these quality shopping centers, quality live-work centers, nice office properties springing up, it's an impressive thing to watch in the real estate industry.

DARBI: Okay. So we've heard that for Asia the country again, as you mentioned, currently seen as the favored destination for foreign investment is China. Does your research…

PETE: Totally backs that up, yeah. I mean, the big - China they're buying a lot of developing land. It's just a huge country, so it has to be the biggest market. There's a whole…

DARBI: What do you think about this - the Olympics and all these protests and the torch Overlay?

PETE: Well, yeah, you know, they should have seen that coming, I think.

DARBI: Yeah.

PETE: I think the thing that's going to be the most interesting is if the Chinese are able to control the pollution issue there. And I come from here in New York where it's not the clearest of skies but it's not that bad. For athletes out there, I think that's going to - might - it could theoretically be an issue. You know, political issues that they have to deal with over there. And that's all part of the game.

DARBI: Yeah. Yeah, I do a sketch comedy here on Monday nights and we did a joke about the torch, you know, finally arriving in China and then they relit it and then they used it to ignite, you know, six new coal-fired power plants and garbage operators. You're laughing, not crying.

PETE: Yes. Overlay

DARBI: So it sounds like Japan may also be in financing troubles similar to ours. Is it true that they also relied heavily on the CMBS market? What's your take on that?

PETE: Yeah. It's - I mean, the numbers are much lower in Japan but they were - they are the real advanced, modern market in Asia. There's a couple of other smaller ones like Seoul. But China, Vietnam, and Malaysia, these are real developing up and coming markets. The advanced markets in that part of the world are going to be Australia, Japan, and these nations are going to therefore be part of the modern western financing system. They're going to have modern capital markets that use extensive REIT and other public structures and therefore they're also going to have public debt markets. So while they're not quite at 40 percent, Japan saw a significant amount of CMBS flow as well and their market has tightened as well but it doesn't seem as if this is going to really offset the economic gains that Japan has made over the last few years.

DARBI: Okay. So amidst all this slowdown, we've heard that investment in Asia and South America doubled in the first two months of this year, especially in the BRIC countries: Brazil, Russia, India, and China. What does your data say about that?

PETE: That's exactly what our data says. I mean, these nations, these areas of the world are still booming. They're the developing economies. Now, it's easy for the numbers to double when the numbers are kind of small. And the investment flowing into these places compared to the flows into Western Europe or flows into the United States into cities like New York, London, Paris where the numbers are in the multiples of billions, it's a smaller number of billions in these other nations. Eastern Europe is similar.

It's really the case down in South America where it's only been the last couple of years where people are starting to look there. Some long-term players like (Inaudible 0:11:22) have been down there for years, and they're really involved in the marketplace. But for the most part a lot of the new players since this BRIC phrase was coined a couple of years ago, I think by Morgan, people have been looking more and more at the South American portion of it and questions about Brazil come to me hot and heavy on an almost a daily basis from our client base. Questions on these other parts of the world as well, Russia, Eastern Europe, they've been hotter longer. The spike has been Brazil and other South American countries in the last couple of months.

DARBI: Okay. So what about if it was your money? If you were considering a cross-border investment yourself, where would you go?

PETE: I've got a fairly decent risk tolerance, so I would definitely be thinking about these things. You know, it's the risk-reward balance that comes in a lot of real estate. This isn't New York City. It's not a New York City office building. That in a lot of ways is a bond with a high-quality tenant that you know it's going to be there and paying for a long period of time. You go to Brazil or Poland or Romania and you have to make friends and partners with local groups. You have to hope you get in with the right people. You're vetting a lot of relationships.

But there's a lot more risk and there's also the chance for a lot more reward. And that's the game. So if you are a foreign investor and you know that you're going to get your, you know, 5 percent to 8 percent return for your investors and you're going to buy a high-quality office building in a high-quality, well-known marketplace, you're not going to (Inaudible 0:12:53). If you're going to buy an up and coming kind of office building where you're hoping to have in a developing market where their value is going to have a greater increase, you would think about maybe buying a quality office building at places like that and U.S. investors are.

There's also the risk that could come with being in one of these markets that if something happens in their economy, if there's some kind of political upheaval, that's not the way Brazil is operating these days or has been for years, so there's a lot more comfort with how these things, you know, will go forward and a lot more comfort with that you're going to be able to put your money in, you'll be able to get your money out with a very nice return.

DARBI: Okay. So let's move back over to the U.S. commercial real estate trends. There's word of a fairly strong push from wealthy Middle Eastern buyers to pick up real estate investment trusts in our market, particularly apartments. Is this trend anything to be concerned about? What are your thoughts on that?

PETE: If they're paying quality price then buyers and sellers are happy. That's what a good marketplace is all about. If people want to bring their money here - the great thing about a real estate investment is they can't take it home with them, you know.

DARBI: Yeah.

PETE: They can come and they could buy art, they can buy cars, they can buy anything and ship it away and we could think that we're losing something. They could - you know. But with an office building, apartment building, any kind of real estate investment, it's here. It's going to stay here. Do they maintain it? Do they upkeep it? Do they continue the quality of the investment? And is it going to grow for them? Yeah. And then maybe the next time around an American will buy it. We've seen it happen before and everybody makes a profit. Whenever anyone worries about one class or other of an investor coming in, I think it's just more activity; it's good for the marketplace.

DARBI: So the same thing happened with Australia in recent years with U.S. commercial properties. What's going to shake down from that? There are several Australian investments.

PETE: Well, the Australians have made a couple of really large investments in the United States over the last couple of years. Now (Inaudible 0:14:49) into some debt problems in the last couple of months and there's some issues whether they're going to have to unload some of their holdings here in the United States because they were over leverage. We'll see what happens with that.

Again it's all the business - do you over leverage, you stretch yourself too far in the credit crunch. There's a massive credit crunch going on. If you are in a situation where you were going to have to refinance at the end of 2007, you've got significant problems right now and we know who the players are that are caught in that kind of trap. But we also know that most players were not caught in the have-to-refinance-now. Maybe they'd like to but with rates are coming down, properties are still strong, hopefully there's not going to be a lot of distress in the marketplace that, you know, creates underlying weaknesses and causes a rough market. At this point, it seems as if soft landing is, as people were talking about, is kind of where we're at.

DARBI: Okay. Of all the trends in the global and national marketplace, is there one that you think is potentially the most problematic for American investors?

PETE: Again, it's always the risk-reward play, you know. Are there things that could happen in certain markets that could be really bad for investors? You know, there are all these issues. How do you get your money out of India? How do you get your money out of somebody's developing markets? You know, you can put together a portfolio in Malaysia. Are you going to be able to float it on the local stock exchange and bring your investment back home? Or are you going to have to just continue to roll that forward and hope that at some point, the capital flows are going to work a little bit more in your favor?

In a lot of these markets, they recognize that in order - and they're enhancing their systems. They're bringing in REITS. They're bringing in other public entities that make the markets a lot more efficient and make it a lot more transparent because they know in a lot of these developing nations that transparency brings deal flow, brings happy buyers and sellers, brings better prices for everybody. They know that happy investors who don't come up short and are able to go home with their profit or understand their loss are happy investors who are going to come back. Investors who feel they got burned by a political system going to be gun-shy investors who are not going to come back. So as the world develops and the world evolves, I think a lot of the developing nations realize that they want happy investors bringing their money in and out of their markets.

DARBI: Okay. So just to recap, what are some of the encouraging trends for U.S. investors? I think you've touched on a few of them. If you can kind of hit the highlights.

PETE: Encouraging trends for U.S. investors, I think that the home market is solid and stable. It's an encouraging trend. There's not a lot of pain out there here or in Western Europe. Volume is really down. But prices are still stable and I think that's something that's really a tremendous strength to our market and everyone should be kind of happy about that. A downturn or a softening without a lot of pain is, I think, a good thing. You know, I know a lot of people profit on the pain but it's a balance. And I think that where the market has - in the West has found a pretty nice balance as it slowed down. And I think that as the economies get through this credit issue and start to pick up, real estate is going to be at a nice plateau to start picking up again in the western markets.

If you are a risk player, a value-added player, you're into development, you're looking for higher returns, I think there's a tremendous amount of opportunity out in the world that an investor who is looking for that can really be happy with. I think the ability to invest in development in Asia and in Europe and in Central America gives you a tremendous amount of options to look at in terms of the economies that you're dealing in and the currency issues that you may or may not want to take into effect as to why you may or not want to get into a Euro or into a South American currency.

I think it's great to have a variety of opportunity plays. Variety of potential distress plays may be coming up for the people in the western markets who really got hurt by the credit crunch but it's not a tremendous part of the market. I think overall the market is really pretty stable. So while some people maybe aren't that busy these days, I think that the pain is not so thorough is really a great sign for the marketplace.

DARBI: Okay. Well, if listeners want to get this kind of investment research data on a regular basis, what kind of subscriptions are available from your company, Real Capital Analytics?

PETE: We publish a variety of monthly capital trends reports on the U.S. market, looking at all the common property types: office, industrial, retail, apartments. We publish a quarterly hotel transaction that looks at the world. And we now publish a global capital trends report that comes out eight times a year being fed into the famous Real Capital Analytics Online Database. You can go in and you can see the actual transactions that are taking place behind the numbers, which adds a lot of transparency to the marketplaces and a big value of what we bring to the market. So if anyone goes to www.rcanalytics.com, they can download some of our sample global reports. First couple of issues are there for free. Sign up for a free trial. And if you're interested in becoming a client, we have a lot of subscription options available.

DARBI: And they can sign up right on the website. Okay, so give that website address again.

PETE: The web again is www.rcanalytics.com.

DARBI: Excellent. All right. Thanks, Pete. This has been a very insightful discussion on commercial real estate and I'm sure our listeners appreciate your spending time with us today. So, guys, if you are an investor looking for expert assistance with financing commercial real estate, be sure to check out the new commercial loan programs offered by Steelhead Capital, Your Commercial Mortgage Advantage.

Again that web address is www.steelheadcapital.com. This has been Darbi Worley, your host for Capital Synergies. Pete, thanks again for joining us and we hope to speak with you again soon.

PETE: Thank you, Darbi.

DARBI: This has been Darbi Worley, your host for Capital Synergies. We will see you next time.

[End of Transcript]

May 14th, 2008

March 2008 Commercial Real Estate Trends Podcast
-- Transcript of Capital Synergies Podcast

DARBY: Hello. This is Darby Worley, your host for Capital Synergies Talk Show for Real Estate Investors. Capital Synergies is brought to you by Steelhead Capital, your commercial loan advantage. Today we have with us, again, Mr. Dan Fasulo, Managing Director of Research for Real Capital Analytics. Dan, welcome back to the show.

DAN: Thanks for having me again.

DARBY: So Dan is here to take a look at the recent activity in the investment sales market trends, and to share with us his take on some of the dramatic changes we’ve seen in the commercial real estate sector. Dan, so last time we spoke with you back in December, we talked about the affect of the residential sub-prime on the commercial market. Where do you think we stand today?

DAN: Well, you know, unfortunately, for whatever reason, too many investors clump up residential and commercial in the same bag, and the residential and commercial real estate markets are really two distinct marketplaces, and there’s not much crossover. Where the crossover certainly is, is investor psychology and how that’s impacting decision making on that side. I certainly don’t think…besides maybe in the condo arena, there being a direct connection on the sub-prime part, however...

DARBY: So there isn’t a commercial lending version of the sub-prime products with those high…?

DAN: Well, I think maybe your closest comparison could be the CDO Marketplace for commercial real estate, which many expect to have significant troubles as asset values have dropped. And CDOs usually represent the riskiest part of the loan structure, and many have expected the values for those types of assets to fall dramatically.

DARBY: And just to back up for a second. What does CDO stand for?

DAN: Commercialized Debt Obligation.

DARBY: Okay. You also shared with us some words of caution regarding secondary markets. Are you still feeling the same way about that?

DAN: Well, I mean, nationwide, everyone’s being affected by the liquidity crunch right now, and just the lack of availability of debt capital. But certainly the U.S. hasn’t been affected the same throughout. There’s certainly a bifurcation going on between the more domestic based U.S. markets – which are arguably already in recession – versus the markets that are more linked to the ongoing global economic expansion – like your Manhattan, or San Francisco, and D.C. The primary markets with global exposure have held up better than your more domestic U.S. markets as far as activity and pricing. But we still are seeing declines across the board, unfortunately to report.

DARBY: So now, does the issue continue to be access to credit? Or are there other dynamics in play?

DAN: Well, at first there was certainly a credit crunch, and raised debt costs, and lenders really were putting more restrictions on who they would lend to, where geographically they would lend, but now I think we’re moving into a period where there seems to be more economic uncertainty which is driving decision making at this point. And I say that comfortably because in our recent analytics that we’ve put together, in previous slow-downs we’ve seen, we track all the major buyer capital groups – whether it’s institutional debts, or is it private investors – and previous blips on the down cycle we would always see one sector pull back and another kind of fill the gap. Right now, we’re seeing an across the board slow-down in acquisition activity by all different capital groups, and it really seems to indicate that there is uncertainty right now in the marketplace, and there’s certainly the disconnect between buyers and sellers right now. Sellers... and we’ve seen the situation over the last several months where we’ve seen a tremendous spike in offerings pulled from the market, where sellers would bring their property to market, and they would receive some bids for a particular asset, and they didn’t like, basically, what the market was telling them. They didn’t like their bids and they decided to just pull their property off the market as opposed to going through with the sale, and we’ve seen a tremendous spike in that activity. And that leads us back to the disconnect between buyers and sellers, and you have a situation where property fundamentals – occupancies and rents – have remained relatively strong, but the buyer is coming into a situation saying, “Hey, my debt costs are so much more expensive. I’ve got to put in more equity. You’re going to have to lower your price.” Unfortunately, sellers just haven’t come to the table ready to throw real significant discounts yet.

DARBY: Right. So as a follow-up to the question on the health of secondary markets, is there any hard data yet on how far values or cap rates may have moved?

DAN: Yeah. Well, I think it’s obvious that from the height of the marketplace – probably in the summer of ’07 – we’re certainly down 10 to 15 percent for commercial property values nationwide. Now, it certainly varies on a market-by-market basis. In Manhattan it may be 5 to 10, in certain markets in the Midwest it may be 15 to 20, but there’s no question that we’ve seen asset values fall and cap rates rise recently.

DARBY: Yeah. There’s a big article on – it must be three or four weeks ago – in New York Magazine talking about how historically, real estate in Manhattan has been kind of impervious to market fluctuations, but because there is so much new commercial building going on in terms of condos, that perhaps five years from now it might be – for the first time maybe ever – better to rent in New York than to buy. Do you... what do you think about that?

DAN: That kind of moves over to the residential side a little bit.

DARBY: Right. So that doesn’t affect the guy who’s building the rental building or the condo? That doesn’t qualify as commercial?

DAN: Yeah, I guess on the development side of it, but from my perspective development versus historical norms has been very limited in all the major markets across the U.S. like in Manhattan or D.C. And I think the market is actually tremendously undersupplied with new construction, and that’s what gives me a little comfort going into this slow-down, is that we certainly have not seen the type of over-building on the commercial side that we have seen on the residential side.

DARBY: Okay. So following on with that, is there…would you say then that like the hotel or office industrial/retail space might be better than apartments? Or are other areas there are property tax that stands out as either particularly bad or surprisingly resilient in this market?

DAN: Actually, we’ve been a little surprised that multi-family property – apartments – have held up relatively well versus the other property types in the U.S. and we were sitting down a few months ago and trying to figure out why, and we came to a couple of different conclusions. One was: apartments in the U.S. already went through a significant correction in 2006, so we had a situation where we lost the condo converters, if you recall, and it really drove cap rates back up and shot prices down. So we had that significant correction already in apartments. And then on top of that, the debt markets haven’t dried up on the multi-family side because Fanny Mae and Freddie Mac are still very active lenders there, and really giving some support for the debt markets for apartments where that support is obviously lacking for the other commercial property types right now.

DARBY: Okay. So where do we stand on foreclosure rates for commercial properties?

DAN: I think the latest report was that it’s slight increase, but we’ve been very fortunate not to have any significant commercial default at this point. This goes back to the point we were talking about before, that underlying property fundamentals remain in relatively good shape right now. We’re not seeing any widespread tenant defaults. While there may be decreasing occupancies in certain markets, overall occupancy levels and rent levels still remain at or near their record highs for many markets. So we haven’t seen a situation where that many investors are in danger of a default. Probably the only investors that are really in jeopardy are the investors who purchase property at the top of the marketplace and then finance those investments with short-term financing. They’re obviously in a very difficult position right now because the refinancing markets have pretty much dried up, or if not dried up they’re on completely different terms than when the investor originally made the deal. So... all-in-all, I don’t see any real significant situation where we have tons of commercial defaults unless there is an extended slow-down in the economy.

DARBY: Okay. There are some analysts that would say that for all practical purposes the CMBS market is gone forever. Do you agree with this?

DAN: No, I don’t believe that at all. Not in the slightest. I think it’s a very efficient way of placing debt. It really divides the risks appropriately among those who can take them. I think it’s only…I think when it does reappear, eventually, I think it will reappear in a much more conservative format, probably the way it was when it was a novice product. But I think it’s only a question of when it comes back, not if.

DARBY: Okay. So you don’t think there’s some kind of like hybrid of it that could emerge that would supplement it? Or...?

DAN: No, not at all. I think there’s a lot of unfounded fears right now, a lot of misconceptions, and unfortunately, the same thought process that drove investors to really buy up all this paper originally is really driving the lack of activity now – if you know what I mean. It’s just more investors need to be educated about what CMBS is, and what it could do, and I think it’s a very efficient way of placing debt, and it will be back.

DARBY: Okay. So that leads me into my next question. So given that the forces of capital have changed significantly, what do private investors need to know to be able to adapt and succeed to the new market position?

DAN: Well, there’s no question this is going to be a challenging year for private investors, especially if there’s a necessity to access the debt markets. I think 2008 will be a great year for your private investors to really focus inward on their portfolio – just try to strengthen the core of their assets, improve property fundamentals, et cetera. And I think there will be many opportunities for investors who can use a significant amount of equity in their acquisitions. I think there certainly will be some great deals to be made in 2008, but overall it’s going to remain difficult until the debt markets can return to a period of normalcy. We’ll always come back.

DARBY: Yeah. Good times don’t last, bad times don’t last.

DAN: There’s a lot of drama both ways.

DARBY: Yeah. So looking ahead kind of near term, what do you see on the horizon for the rest of 2008?

DAN: Real Capital Analytics – my firm – has expanded our operations overseas. I tell you, the more we venture out and start really tracking overseas markets, and understanding the fundamentals, and the pricing structures, I seem to get more and more bullish about the prospects for the U.S., especially in many of the major markets where there’s no oversupply. I think 2008 could, if we’re looking back, could wind up to be a very great buying opportunity for commercial property investors here in the U.S.

DARBY: When you say that the major markets, you’re talking Washington, New York, but where…are there others around the country that are...?

DAN: I’m talking an overall. There’s a good deal in every single market. You just have to find it. And there’s bad deals in every market. I think if you’re just trying to play a market, per se, I would be in the primary market for 2008, but on a deal by deal basis, you can find opportunity in every U.S. market right now. I just think that some of our global cities in the U.S. remain relatively undervalued versus our global counterparts that we’re tracking – whether it’s London, or Paris, or Moscow, or Tokyo. I think there’s certainly value, and if you recall after the credit crunch occurred in August, and we had a corresponding fall in the Dollar about the same time versus the Euro and the Pound, and everyone expected this flood of capital – this flood of foreign capital – to come into our market, and it never really came. And it was... from many conversations with overseas investors, it mostly had to do with the economic uncertainty surrounding the U.S. economy as opposed to, “Hey, my currency is worth 5 or 10 percent more. Let’s go buy in the U.S.” But there certainly is a mindset out there developing that on a risk adjusted basis the U.S. is starting to look more and more attractive to overseas investors. There’s certainly some value on the rate side that many are noticing right now. It’s rumored that for the first time some of the Sovereign Wealth Funds might be interested in maybe taking down a rate or two. It’s rumored that Cutter is... their Sovereign Wealth Fund is interested in maybe partnering and taking down McGuire Properties – a major office based in southern California. So I think that there is going to be opportunity in 2008, and investors are just going to have to do the proper homework, and not make any blind bets this year.

DARBY: Yeah. And speaking of proper homework – and I’m going to guess that you’re going to say this is kind of a case-by-case situation – but for people... regarding the management of their portfolio, is there a general word of advice that you would give in terms of buy, sell, hold?

DAN: Well, you answered my question originally. It always depends on the position of the assets, or whatever position the investor is in. But I think this is a great year to really focus inward on one’s portfolio and improve it as much as possible, and bring it to market in a better day when the markets are really back to normal.

DARBY: If an investor feels that they really need to sell relatively soon, should they try and get out before anything gets worse?

DAN: That is not a mindset that we’ve seen much of at all. We certainly have not seen any type of panic selling yet, nor do I expect it unless there’s some sort of severe economic downturn. We’ve seen none of that whatsoever.

DARBY: Okay, great. Well, Dan, if our listeners wanted to get this kind of investment research data on a regular basis, where can they go to learn more about subscribing to your reports from your company Real Capital Analytics?

DAN: They can certainly go to our website at www.RCAnalytics.com. We have a bunch of free reports up there that they can download, and they can certainly find all the information they want on the side.

DARBY: Okay. Say it one more time.

DAN: www.RCAnalytics.com

DARBY: Excellent. All right. Thanks, Dan, this has been a very insightful discussion on commercial real estate, and I’m sure our listeners appreciate you spending time with us today. So guys, if you are an investor looking for expert assistance with financing commercial real estate, be sure to check out the new commercial loan programs offered by Steelhead Capital, your commercial mortgage advantage. Again, that web address is www.SteelheadCapital.com. This has been Darby Worley, your host for Capital Synergies. Dan, thanks again for joining us.

DAN: My pleasure.

March 19th, 2008

2008 Outlook for Commercial Real Estate Investors
-- Transcript of Capital Synergies Podcast

DARBY: Hello! This is Darby Worley your host for the Capital Synergies Talk Show for real estate investors. Capital Synergies is sponsored this week by Steelhead Capital, your commercial loan advantage. Today, we have with us, Mr. Dan Fasulo, Managing Director of research for Real Capital Analytics. Dan is here to help us take a look back at the past quarter and the year 2007 and to share with us his take on some of the dramatic changes we’ve seen in the commercial real estate sector. Good afternoon and welcome back, Dan.

DAN: Thanks for having me again.

DARBY: So, let’s jump right into it. Recent housing start data showed a major uptake in multi-family start with another of home developers reorienting towards multi-family. What does the supply picture look like for 2008?

DAN: Well, there’s no question that more developers are shifting towards multi-family as the housing slowdown has certainly hit the condo marketplace pretty hard. There’s some competing viewpoints on this; on one side, the housing slowdown is creating more renters out there who are looking for apartments. As far as how that’s going to affect the market, I think it’s going to be really be a city by city type of scenario and some of the more overbuilt markets maybe in the Southwest or in Florida will certainly get more impacted than on more supply constrained markets on the coast.

DARBY: Okay.

DAN: And as far as the impact on values, you have to remember that multi-family property in the US really already went through a pretty significant pricing correction after we lost the condo converters in 2006. So, we haven’t seen the type of softening in the multi-family sector just yet that we may have seen with some of the other property types.

DARBY: Okay. How have the debt markets evolved since the last time we spoke?

DAN: Well, I wish I have some positive news on this front, but you know the CMBS market place as we used to know it is still pretty much shut down. I think, which actually has been a bullish sign, and which has been a little bit of a surprise to me is we kind of didn’t realize how much demand there was from the traditional lenders like portfolio lenders and insurance companies. And both of those groups have really been expanding their loan originations of the last few months to meet the needs of the marketplace. And you got to remember these groups were kind of shut out from the marketplace for several years. You know, being outbid by the CMBS universe which you know, just wasn’t giving them the spreads they were comfortable with. But, you know, they feel the…a market need right now and they’re certainly willing to lend but like always it’s on their terms. You know, buyers need to use more equity.

DARBY: Right. Do you foresee any better…uh, more competitive pricing for 2008?

DAN: I certainly hope so. And you know, I don’t think we’re going to return to the period of extremely oppressive underlying we saw in early 2007; about the only thing I can guarantee, right there.

DARBY: Okay. Are you seeing a rise in commercial real estate foreclosures, and if so, is there a particular product type or region that you know, is affected more than any other?

DAN: Simple answer to that is, no. You know, unfortunately, commercial real estate seems to get mixed up with residential into the same bag. But they’re very two distinct marketplaces and we certainly haven’t seen the type of defaults on a commercial side that have been present lately on the residential side of the equation. So, and you know, real estate fundamentals are strong nationwide right now. And I think that as long the US figures out how to stay out of recession, I really don’t foresee a tremendous waterfall of foreclosures in the near future.

DARBY: But with all the, you know, the uncertainty in the commercial debt market, a number of people were predicting far fewer commercial real estate trades; are you seeing that in the data yet, and is it isolated to secondary markets as many had thought?

DAN: There’s no question, Real Capital Analytic has tracked sales volumes that are off significantly versus the comparable periods last year. For September and October and even into November, for most of the major property types, sales activity is off 50 percent. Looking at individual property types, industrial and hotel have held up the best so far, but both of those are off slightly as well.

DARBY: Okay. Have you seen any real evidence yet for an upward move in cap rate and if so, how big is the shift?

DAN: I think I get this question maybe ten times a day. [Laughing] Um, there’s no question that we’ve seen cap rates move up certainly in notable percentage, however, it’s not a nationwide phenomena, and the best way to describe it is, I think the market has bifurcated into, you know the global US cities were cap rates have not risen as much and in some cases are basically flat versus the more secondary domestic US markets where there’s no question, we’ve seen significant rise in cap rates and for some property types, 50 to 75 basis point is easy.

DARBY: So, how about the shift that’s happening with the dollar, how does our weak dollar play into real estate values?

DAN: Well, there’s no question that makes US real estate more attractive to overseas investors. However, I just, you know, there has been a lot of press recently about this, whether there be a wave of new offshore investors coming in, buying properties here, I just…I don’t…I think if those overseas investors as to where they are in the US are more sophisticated than ever. And I don’t think just because the dollar falls 5 percent, you’re going to see a rush of new allocations. I think where the impact is, is if you’re a European investor and you’re looking to diversify, and you want to be in the US real estate, you just might wind up buying more at this point. You know, your currency is going further and you just might see overseas investors buying more than they would have, given, if the dollar was in a different position right now.

DARBY: And how does that affect the value of treasury?

DAN: Well, you know, I’m certainly not an economist and you know, commercial real estate is, you know, a small piece of the overall economic pie. So, I don’t think it can make a significant impact on the value of treasuries.

DARBY: Okay. So, if you were to offer any advice for investors as we had in 2008, what would it be?

DAN: Well, I’m certainly an Econ 101 guy and I strongly believe that even though you might overpay a little bit to get in, the supply-constrained US markets on the coasts, the ones…the markets that are very linked in to the global economic expansion and those who did might best, that’s for 2008. As far as other types of niche investments right now, I really see some opportunity in the mezzanine space, you know, we’ve certainly seen the situation where there’s less players right now in the mezzanine space than there was earlier in the year and the yields have gotten to very attractive levels.

DARBY: What about any areas to steer clear of?

DAN: Well, you’re going to get somebody upset right now. [Laughter]. But, I think your markets where they’re having significant effects from the slowdown in the housing markets would certainly be on my radar as markets to be very careful in. And I think secondary markets in general, where the market is dominated by private investors who rely and stick debt to purchase their properties will be the most affected. You know, your Manhattan-type markets where there’s such a diversity of capital sources and with more investors could just basically write a check and purchase a property as opposed to using a lot of debt. I think those markets will hold up the best.

DARBY: Well, they certainly seem to be; prices are definitely not dropping here in Manhattan.

DAN: They certainly aren’t. To give an example of that situation, you know, teachers, in a large pension fund just came in and purchased a building from Ethel Green on Park Avenue South and they did it with cash.

DARBY: Wow!

DAN: And you know, this credit crisis or credit crunch, whatever you want to call it, is actually creating opportunity for some buyers. I think it would have been very difficult for teachers to win the bid for that property earlier in the year where they might have been competing against several highly leveraged private investors.

DARBY: Well, if listeners want to get this kind of investment research data on a regular basis, what kind of subscriptions are available from your company, Real Capital Analytic?

DAN: We offer a variety of different subscriptions and we can certainly work with different clients to meet their needs. Our basic subscription is an annual subscription which would give them access to all the transaction activity we have tried in the US through our website and it also comes with our companion, Capital Trans Monthly Reports and their individual market reports. We also have a new global product coming out that we’re really excited about. We’ve been tracking transaction activity overseas for over 12 months now. And we tracked over $400 billion worth of transactions globally, non-US.

DARBY: And so, where do our listeners go to learn more, if they want to subscribe to those reports, do they go to your website?

DAN: Certainly go to www.rcanalytics.com and we have a very simple website to navigate and certainly get all the information they need there.

DARBY: All right, great! Thank you, Dan. This has been a very insightful discussion on commercial real estate and I’m sure our listeners appreciate your spending time with us today. So guys, if you are an investor looking for guidance in the acquisition or disposition of commercial real estate, be sure to check out the new advisory services offered by our sponsors, Steelhead Capital, just go to www.steelheadinvestments.com and request your no obligation portfolio review. That’s www.steelheadinvestments.com. This has been Darby Worley, your host for Capital Synergies.

January 25th, 2008

Investment Advisory Services from Steelhead Capital

Steelhead Capital offers their new Investment Advisory Services program for commercial real estate investors.

Learn More »

DARBI: Hello! This is Darbi Worley, your host for the Capital Synergies talk show for real estate sectors. And today we have with us Mr. Sean Aguilar, CCIM and Vice President of Steel Head Capital, along with Mr. Matt McLeod, also Vice President of Steel Head Capital. And Matt is also the head of their Investment Advisory Services division. Ah, good morning Sean and Matt, welcome to the show.

SEAN: Good morning, Darbi.

MATT: Good morning, Darbi.

DARBI: Great! Thanks for joining us. So, many investors, especially the more experienced ones, with portfolio values of, say five to ten, even hundreds of millions of dollars, realize the value of having independent, objective, investment advisors on their team. More importantly, these services help investors maximize their portfolio earnings and minimize their risk. So Matt, what does a buyer of commercial property gain by working with your buyer representation services?

MATT: We try to provide the individual investor with an institutional approach to buying real estate. We have a solid background in working with Institutional Investors, which we define as organizations whose main purpose is to invest capital in real estate. Our goal is to give the same level of sophistication that we see on the institutional side to the individual or “Mom & Pop” investor, who is looking to purchase real estate for their portfolio. We’ve identified tools which are essential to the success of the institutional buyer but typically are not utilized or available to the individual. What our clients gain is access to these tools and information which allows them to make more informed decisions when buying real estate. Examples of the services that we offer to our clients include Deal Flow or access to investments that we see, our market knowledge and insight, and our institutional strength underwriting. These services are crucial steps to the investment process and many investors just don’t know that they are available to them.

DARBI: Well let’s say that an investor from the Bay area comes to you with a smaller portfolio, maybe three or four properties and wants to expand; does it ever make sense for an investor…an investor in California to look outside the state for a new acquisition?

MATT: That’s a great question, and the answer is yes. And let me give you an example. About four/five years ago, the Southern California market was seeing record sales prices. As a result, many apartment owners took the opportunity to sell their investments for strong returns. However, once they sold, they did not necessarily want to reinvest their dollars in the Southern California market as they felt it was at its peak. They also didn’t want to go to Northern California that had already seen record sales prices.

Many wanted to look for a market where they could get more for their money and have the potential for appreciation rent growth. Many of the Southern California investors took their sales proceeds or investment dollars and purchased apartments in Las Vegas. Las Vegas, just so you know, at that time was seeing strong growth in the apartment market as people and employees were leaving high cost of living in California and moving to more affordable areas. The Las Vegas strip was also expanding as hotel construction was at a record pace, further driving up demand for housing in Las Vegas. I had an investor that sold a fifty unit apartment building in Los Angeles and traded it into a two hundred unit building in Las Vegas.

DARBI: Yeah, I was going to say, it’s really…it’s an opportunity to take advantage of the lower cost of living in another state without having to move there.

MATT: Absolutely! I can tell you that many investors who bought in Las Vegas from four/five years ago, made a wise decision as those investment dollars have doubled in that five year span.

DARBI: Okay. So what about if that investor wants to sell off only part of his/her portfolio? What’s the reason for them to work with Steel Head, as opposed to simply listing the property with a realtor, or putting an ad on Loop.net or something like that?

MATT: Well, when it comes to selling a property, exposure and presentation are really the key elements in the sales process. And we have a system in place that creates the broadest possible exposure for a single property or for someone that wants to sell their entire portfolio.

DARBI: Okay. Great!

MATT: We use a direct marketing campaign, which uses a database that we have, that would actually match the property with the most likely potential buyer.

DARBI: So Sean, what do you think of all the talk surrounding the residential lending market? And what kind of impact do you see this having on commercial real estate investing? We’ve talked about this on our show a few times, but I’d like to get your input.

SEAN: Well, clearly, more recently the Feds lowered their discount rate as well as the Federal Fund Rate by fifty basis points and, you know, it's having an immediate impact on the market in the short term. Cost of credit, you know, which basically means from a homeowner or consumer point of view, your credit card debts are going to, your cost of debt will drop slightly for those residential owners out there who have adjustable…adjustable rate mortgages, you know, their payment is scheduled to go up, but maybe it won’t go up as high as it was expected to because of the drop in the discount rate.

You know, that said, I think for the single family market there’s, you know, there’s still some pain out there still to be taking place and it…it’ll probably take maybe nine months to two years to stabilize depending on which markets you are in throughout the mainland U.S. But its impact on the commercial real estate really isn’t as big as I think everybody is perceiving it to be because they’re basically two different asset classes.

We’re still seeing a lot of activity on commercial real estate where there’s been some hiccups, quite frankly it’s, when you look at the amount of leverage being obtained by; on the institutional side with the hedge funds you know, clearly that source of debt is having its challenges in getting placing…in getting closed on. You’re reading about it in the papers right now, when it comes to certain larger companies doing buy-outs of others. But in reference to the focus of our clients through our advisory services, we really think it’s a benefit right now because they’re not really playing in that field.

There’s plenty of capital right now with the local banks and insurance companies, you know, the regional banks, they basically have been unaffected by what’s been happening with this so-called credit crunch. The life insurance companies and the regional banks, if anything, their business has picked up dramatically. It’s been the Wall Street money that’s been having an impact closing deals. And for the market, we tend to work with; as much as we do business with the Wall Street, we still have all the other available flavors of lenders, if you will that we work with that are very much committed to doing deals.

So, our financing side for the real estate investing…the money’s there, to lend ... I still think it’s a good time to be buying real estate if you’re buying the right property and you’re buying with the fundamentals in, you know…just to kind of leverage off something that Matt said, you know, we’ve got the background here, we have kind of a platform and the experience, you know, we just don’t source properties but we also do diligent analysis and financing. So…

DARBI: Sounds like it…it’s still a good time to... sounds like it's always a good time to invest in commercial real estate but now, more than ever, it’s not the time to really go it alone.

SEAN: Absolutely not! It’s... yeah you really need a partner to, you know, somebody who is active in the market on a daily basis to help you anticipate where some of the hiccups may come and help you structure a way so that you could execute your plan so you can acquire the properties that you’re looking.. but, you know, it’s a good time to buy; interest rates overall are still low but you definitely need to partner with somebody that is active out there that knows what’s going on and can help you get through the deal because, you know, as much as there is a lot of uncertainty out there, there’s still good deals out there. You know, Matt referenced the experience with the South Cal. buyer selling and buying many more units in the Las Vegas area. You know, there…there’s still good deals out there if you can find properties that have maybe rents that are below market at…therefore, you know, by increasing rents you can still get a really good return on the deal in lieu of, you know, what’s going on out there in the capital markets.

DARBI: Great! So Matt, where can our listeners go to learn more about the New Investments Advisory Services from Steel Head Capital?

MATT: We invite everyone to visit our new website, which is www.steelheadinvestments.com.

DARBI: And there’s all kinds of tools out there, correct, there is they can fill out a form and kind of get some information, kind of see where they’re at with their deal.

MATT: And if they want someone to do a free evaluation of their property or their entire portfolio, we would be more than happy to get in touch with that person.

DARBI: Okay. Well before we close, you have any other final words of advice for our listeners?

MATT: Please take advantage of us. One of the best things about our service on the purchasing side when we’re out there helping you try to find an investment property, is typically our fee is paid by the seller of that property so you get the advantage of all these great tools that we have at no cost. So really try to take advantage of what we have to offer.

DARBI: Outstanding! Well guys, thank you so much for coming on the show. It’s really been a helpful discussion on commercial real estate and the New Investment Advisory Services from Steel Head Capital. Thanks for coming on.

MATT: Great! Thank you, Darbi.

SEAN: Thanks, Darbi.

DARBI: So, if you’re an investor looking for guidance in the acquisition or disposition of commercial real estate, be sure to check out the New Advisory Services offered by Steel Head Capitol. Especially in these changing economic times, having this experience on your side may be more important and wise than ever. So you can go to www.steelheadinvestments.com and request a no obligation portfolio review today. This has been Darbi Worley. I’m you host for Capital Synergies. Join us next time on the show and thanks for listening.

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October 3rd, 2007

Preferred Residential Mortgage Loans from Steelhead

Steelhead Capital offers their new Preferred Residential program for home mortgage loans.

Learn More »

Darby Warly: Hello. This is Darby Warly your host for the Capital Synergies talk show for real estate investors and today we have with us Mr. Britt Miller, Vice President of Steelhead Capital. Britt is here to tell us about a new type of home of home mortgage called Preferred Residential. We’re going to speak about working with a mortgage company with a commercial lending background. And we’ll ask Britt for a few insights into today’s residential mortgage market. Good morning Britt.

BRITT: Good Morning.

DARBY: Thanks for joining us. So many of today’s home loans are in the same high dollar amount one slot of that belonging to commercial properties. We’re talking about one, two, three million dollar plus loans in top markets. In so to respond to the complexities of these residential transactions, Steelhead Capital a nationally recognized authority in the arena has recently launched a new platform called Preferred Residential.

Now Mr. Britt Miller our guest he’s the Vice President of Steelhead Capital and the head of this new division. To go with this new platform Britt is also going to tell us about their new website, steelheadresidential.com. And give us some insights into the current residential mortgage market. So just to start off today, what inspired your move from the commercial lending division of Steelhead Capital into the new Preferred Residential program.

BRITT: Prior to joining Steelhead Capital, almost three years ago now, I actually came from the residential world. I was on the wholesale side where I had started my own company with a group of partners. And what brought me back to the residential world although it is very fragmented and there is a lot of different players, I really believe there is a great opportunity to educate both your clients and also to really negotiate on their behalf.

And what I mean by that is and this isn’t a knock on the industry, it’s just a reality. I think over the last 4 of 5 years with the ease of capital that’s out there I really believe a lot of loan officers were looking for the path of least resistance for they’re documentation type, etc. So I saw it as an opportunity to take some of the disciplines I had learned on the commercial sides and really go out and represent my clients in their best interest and what loan would serve them the best.

DARBY: Yeah. You’re being kind, but there are a lot of guys out there looking for the quick dollar right?

BRITT: Exactly.

DARBY: [Laughs.] Sounds like you still have the perfect set – skill set and experience to launch this new program for Steelhead yes?

BRITT: Well another things as well - what really got me into the lending world was on the residential -being somewhat of an active investor myself - I actually thought that - and this is going back a number of years ago. I did think that I kind of knew the lending world and after getting closer and closer to the business and actually sitting on the lender side I actually didn’t know a lot the nuances that were involved in a residential loan. What’s the word I’m looking for? Part of me is I enjoy doing this by all means. I’m very passionate about it but secondly I’m really able to relate to people being an active investor, buying some properties. You know I think I’m able to give some people a perspective that they relate to.

DARBY: Ok. Let’s talk about your commercial lending background. Say I’m a homeowner looking to secure one of those one, two three million dollar plus residential loans, what advantage does your commercial lending background bring to that transaction?

BRITT: You know that’s a great question and I think its probably more relative given today’s climate in the lending market as opposed to even six months, a year ago. I think over the last year there has been a lot of tightening in terms of credit in the secondary market, and as a result lenders are doing a lot more due diligence on the borrowers than they were a year ago. And what I noted earlier by having that discipline on the commercial side, and what I mean by the discipline, it’s really fact-finding, gathering all the materials.

DARBY: The qualifications are a little more stringent.

BRITT: Exactly. Yeah and then being able to articulate what you have to your different capital sources. That’s really how you do it on the commercial side. On the residential side albeit the disciplines are a lot different and your focusing more on the creditworthiness of the borrower as opposed to the assets on the commercial side.

I’m seeing especially on larger loans the amount of due diligence, and the underwriting, the scrubbing that a lot of these lenders are now doing it requires loan officers to be on their toes. And with that I mean you have to make sure that you’re gathering all the proper paperwork, you know the file inside and out. The last thing you want is a surprise, i.e. the guy has a knock on his credit report. Where to be honest with you a lot of lenders, over the last few years didn’t necessarily have to go through a credit report closely. You know if his credit scores were there. So I think again just underlying it’s really the due diligence and the discipline in being able to serve up the package to the appropriate lenders. To make sure that you are finding a lending partner that can deliver.

DARBY: Let’s just talk about - let’s dive into the idea of actually getting a residential loan. I understand there are many ways to structure a residential loan? How do we determine the best possible financing for each person’s needs, each buyer’s needs?

BRITT: I think the first point is everybody’s level of expectation is a little bit different. Everybody wants the best terms. I think it’s very important to understand what is important for somebody and a perfect example is I had a recent closing done in Southern California where my client truly believed and I support this as well, if he was able to purchase a multi million dollar property for couple hundred grand less than what it was truly worth.

We had a situation where there was some moving parts with the seller who had to come to the table with actually some dollars because he was actually selling it for less than what his loan amount was. And in that situation the objective was we needed to close the sale in a short period of time so my number one priority was certainty of execution, I had a very tight timeline. Certainty of execution at the best terms that I could get.

DARBY: So does that usually bring with it a higher interest rate?

BRITT: You know what in this particular situation due to the lender that I went with, because I do a lot of volume with them I was very comfortable. I articulated back to my client I didn’t really think we were giving up a lot. I still covered the market. I probably took that deal to 5 or 6 different lenders and I still think at the end of the day we still came up with a loan that was very aggressive given the market.

DARBY: Right. So that also speaks to the years of experience you have. You’ve got relations you can draw upon I imagine to get the best deals for your clients?

BRITT: Well you know you hit on a really good point and what I find is and I think this is just the nature of all businesses, a lot of times you’ll find people that - and rightfully so that deserves the best deals that are out there. And I think when you net it all out, an effective mortgage broker you have to have confidence that they are going out and representing you in your best interest.

My approach is I’m not going to take a loan to the lender I do the most business with because I know I can get it closed. There are certain times when that approach is necessary but I think at the end of the day, if you know that your going out and covering the market and this is a discipline again that I think is transferable from the commercial lending world to the residential world.

If you’re covering the market your saying to your client that. “Hey I’ve gone out, I’ve talked to some portfolio lenders, I’ve talked to a couple local banks, I’ve talked to some lenders that are going to sell this. This is going to be a Fannie loan, etc. Here are the pros, here are the cons.” What I’ve actually done, this is for a larger transaction down in Palo Alto where home prices are two and a half million upward...
DARBY: Yeah.

BRITT: My client who is very sophisticated, you know - I took a template I use on the commercial lending side which outlined, you know - I think I took it to 8 or 9 different lenders. I showed the pros and cons of each, what the terms were, what the lender costs were, what the margin was going to be after the loan went from its ARM period, or from its fixed period to its adjustable period and I think that by demonstrating this to my client this is what I do behind the scenes, he was very comfortable with me.

DARBY: Yeah, yeah. You know you can’t really turn on the television these days without hearing about all the sub prime lenders and all the chaos that has been caused in the residential market. What do you think about all that talk and how much impact do you see this having on residential loans going forward?

BRITT: You know it’s…I think it’s been inevitable for quite some time and I think it’s a real wake up call pretty much for the entire industry from appraisers to loan officers, to underwriters, to processors, to borrows. And what I mean by that is honestly everybody’s affected right now. Yesterday there was an announcement from a large, large lender, who I would consider in the top five stating that on August 6th cumulative loan devalue for stated borrowers is being capped at 80 percent. We’re talking - that’s a significant change in the industry.

DARBY: And we saw that the stock market felt that yesterday. It’s not just the lending industry, it’s the whole economy!

BRITT: You know it’s an interesting time as well because, and I want to make sure people don’t take this the wrong way, I really believe and I touched on this earlier. You know the market has been this, it’s like there’s a loan for everybody. That has really been the approach.

DARBY: Right.

BRITT: And now it’s getting back to basics. Its getting back to an effective loan officer when they have some down time, when they’re not prospecting, or they’re meeting with the client, or they’re not putting together a loan package, you have to be on the phone with your lenders. You have to understand what is the underwriting criteria. How are they treated stated self-employed borrowers? What are they doing with the full borrower who has five separate entities? You have to really get into the nitty gritty and understand what are these lenders going to be looking for? It’s not as simple now as - the industry got so how should I say this - lax is probably the appropriate word.

DARBY: It was a thing like a free for all, yes.

BRITT: It got to a point where a lot of – you know, and again the lenders have to take responsibility for this as well, if you rewind and I’ll go back to 2004 which was not that long ago when I was on the wholesale side, there was not a significant pricing discrepancy between the - between showing no income and no asset verification versus going stated, stated. I mean literally stating what somebody makes and stating their assets. The lenders, the market had priced it maybe an eighth maybe a quarter difference. And as a result of that the entire industry was trained to go down that road.

DARBY: Right.

BRITT: Why would you do a ton of heavy lifting where the loan might not go through when you’re going to get maybe an eighth to a quarter break? So what’s happening now is like the brakes have been put on. Loan officers are now being required to reevaluate their pipe line. Reevaluate the type of borrowers their working with and at the same time you have to go back and reeducate some of your borrowers. It may be a year before somebody’s in a position before they can refinance.

So I think an effective loan officer in this transitional period has to be very proactive with their clients because, you know, it may take a twelve month period where we need to restructure you assets so you liquidity is sufficient to refinance out of your ARM that’s coming due August of ‘08.

And I think that in itself the last people who are going to figure it out is the borrower unfortunately and it’s the people that are in the business that are seeing this unfold on a daily basis. There’s literally been significant, significant press releases or announcements, for lack of a better word over the last 60 to 90 days that are paramount when comparing it to a year or two years ago. A year ago you could get 100 percent of devalue up to basically a million bucks. Some of the lenders may be a little bit less. You could go stated, stated, with a 620, 640 FICO score up to a 100 percent CLTD. That market is gone.

DARBY: Yes. And what I keep hearing on the news is that they were unscrupulous loan officers that were. I mean this was not in your loan market at all but borrowers were really kind of taking on way more than they can chew and not really understanding what they were signing up for.

BRITT: You know it is. You’re walking a fine line. I mean we’re talking about over the last few years a significant amount of money where if you’re sitting down with somebody and they’re looking at a $700,000 - $800,000 loan, depending on how you price it out, let’s just assume, you know you are talking a point, point and a half. That’s a loan officer that’s staring at possible $8,000-$12,000.

DARBY: Yeah.

BRITT: And I think everybody in the industry would agree if we’re being honest with ourselves, that there were some borrowers that probably should not be getting the loans. Especially if you looking at sub prime loans.

DARBY: So if I were looking to purchase a home right now what kind of advice would you have for me to obtain the best financing possible given current conditions.

BRITT: Find out what you can afford.

DARBY: Right.

BRITT: Find out what is going on in the market especially in the dynamic market that we’re in right now. And I’m a big believer that there always going to be transactions regardless of the market. It is pretty fluid.

But I think just as important you need to align yourself with an agent and that might be a referral of your mortgage broker, it maybe a referral of a family friend. Make sure you are engaged with somebody that knows the market that you’re in. And what I mean by that is at the end of the day an effective loan officer can definitely save you some money by all means but it’s just as importantly you need to make sure that you’re buying the right property at the right price.

I’ve seen some people repay by $50,000- $75,000 because they’re caught up in the moment. And I think that really pales in comparison to maybe a loan officer that’s doing your deal for an extra quarter of a point that may amounts to $2,500 dollars. But you’re going to turn around and pay an extra $75,000 for a property.

DARBY: Yeah. And I think it’s always good to have an objective opinion. When you’re buying a house there’s a lot of emotion involved, you know?

BRITT: Absolutely. And I think you bring up a really, really key point. You know when I go out and work with people and that’s whether it’s a real estate agent or whether it’s an attorney, whether it’s an accountant, a doctor, whatever it may be. I’m really paying somebody for their advice. If somebody’s just going to sit there and tell me sure you can do that. Yes you can do that, that’s not necessarily the type of person I want to align myself with.

And what I mean by that and how it relates to the business I’m in is I really believe there’s a lot of options out there people can work. There’s big banks, there’s Bank of America. Charles Schwab even has a lending program. There’s credit unions, there’s mortgage brokers, etc.

The advantage I think you really have is with the mortgage broker and I’m assuming here if the mortgage broker is engaged, their doing a lot a business, they have strong relations with their lending sources, the advantage you have is with a broker is this is somebody who’s doing it day in or day out. Their opinion should not be biased. Their opinion should be purely objective.

If Washington Mutual is the right loan for that given situation, Washington Mutual is that lender. If Aurora Loan Services due to the fact that it’s a non-owner occupied or going high LTD, they might be the appropriate lending source.

So my point being is as a starting point for somebody that’s maybe getting into the market for the first time or maybe somebody’s going through a transition and i.e. their starting their own business. Maybe they’re getting out of a particular field they’ve been in for 15 years, maybe they just made a large investment and their liquidity has been affected, I believe a starting point is a mortgage broker, they’re going to be able to give you a really good sense on what their options are, what their alternatives are, what it may cost them, what they may have to give up. And from there I would recommend go out and talk to a direct lender. See what they have to say.

DARBY: Ok. If our listeners want some more information about the Preferred Residential program, tell us the website again.

BRITT: It’s www.steellheadresidential.com.

DARBY: And are there some tools out there to help people kind of get started on the path to know what they can qualify for? What’s all available to our listeners on the website?

BRITT: What I would recommend as a starting point right now, I mean, I think it’s a very personal business. Everybody’s situation is a little bit unique. We will have on the website different loan programs that are available. But I firmly believe a 15 to 20 minute conversation can uncover a lot of information. A 15 minute conversation - let me restate that can basically replace 45 minutes to an hour maybe of going out and researching on your own.

DARBY: Great. Well, Britt, this has been a very helpful discussion on residential loans and your new program called Preferred Residential from Steelhead Capital. Thanks for taking the time to speak with us today.

BRITT: Thank you so much.

DARBY: And again congratulations on the launch of the new website www.steelheadresidential.com.

BRITT: I appreciate it. Thank you.

DARBY: This has been Darby Warly. Your host for Capital Synergies. We’ll see you next time.

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August 29th, 2007