Well is running dry for real estate deals

Real estate lending evaporates, transactions stall and buyers walk.

Tom Fredrickson, Crain's New York Business
August 19, 2007


The credit crunch is paralyzing the New York real estate market.

In the past few weeks, financing for almost all large commercial and residential projects in the city has dried up.

As a result, some property developers and investors are being forced to abandon deals and are losing hundreds of thousands of dollars in deposits. Those who are closing deals are being forced to double their down payments and pay significantly higher interest rates.

"The blood on the streets proved that things go down as well as up," says Geoffrey Rice, a senior director at CB Richard Ellis/Capital Markets. "The markets have just changed."

The credit crunch results from the meltdown in subprime residential loans, which has quashed investor interest in any type of real estate securities. Wall Street banks issue most large loans, which they package into securities and sell to investors. In recent weeks, growing concern about bad real estate loans has brought that activity to a virtual standstill.

With the residential real estate market looking increasingly overbuilt, interest has been particularly weak in financing new condominium developments anywhere except in prime Manhattan locations.


Deals on hold


"Condo developments in fringe locations are soft," says Dan Fasulo, managing director at Real Capital Analytics.

With the securitization pipeline for all sorts of projects closed, 37 commercial deals in Manhattan collectively worth $9.5 billion remain unfunded, according to Real Capital Analytics. They include $1.29 billion to acquire the Park Avenue Atrium office tower; $1.2 billion for the Manhattan House apartment complex; and about $53 million to buy an industrial property at 511 W. 21st St., demolish it and put up a hotel. These transactions may still be done, however.

In the past month, such Wall Street firms as Goldman Sachs, Lehman Brothers and Bear Stearns, as well as money-center banks like Citigroup and J.P. Morgan Chase, have drastically reduced the number of deals they are willing to finance.

"We are finding it almost impossible to get a real quote or anything that will stick," says James Murphy, executive managing director, New York metropolitan region, at real estate brokerage GVA Williams.


Deposits at risk


Several sources say they know of cases in which investors are losing deposits because they can't find financing. The chief hurdle most of them failed to clear was the additional equity that lenders are requiring. Buyers could lose many millions of dollars in the next several weeks as the 30- and 60-day closing deadlines--typical in New York--arrive.

One Brooklyn investor who borrows on Wall Street says that in recent weeks he has walked away from acquiring about eight office building and shopping centers collectively worth $150 million.

One of those deals required a $500,000 deposit, which is now lost. The buyer thought he had locked in an interest-only mortgage at 6%, but his lender changed the terms, making the loan 7% and requiring monthly principal payments. The monthly cash outlay for the latter loan would have been 37% higher than that for the former, the investor says. "I would have ended up making no money."

About the only transactions moving ahead are smaller ones financed by savings banks and insurers; those lenders will not sell mortgages in the secondary market but hold them in their own portfolios.

In the past two weeks, New York Life has begun processing $200 million of commercial real estate loans nationally. Manhattan-based Amalgamated Bank, which caps its mortgages at about $25 million, is hiring commercial lenders and aims to increase its commercial loan portfolio to $1 billion from $600 million.

"We view the current disruption in the marketplace as a short- and intermediate-term opportunity," says Amalgamated Chief Executive Derrick Cephas.

Wall Street is altering terms on the few loans it is completing. Lenders cite contract provisions that allow such revisions in response to "material adverse changes"--namely, the freeze-up in the debt markets. The result is that interest rates on commercial mortgages in the pipeline are now a full percentage point higher than 10-year Treasury notes. Lenders are also demanding equity contributions of 30% or more, compared with only 10% or 15% before the credit crunch.

With so much uncertainty, some sellers are lowering prices to help make deals happen. Mr. Murphy at GVA Williams says prices for office buildings under contract for $100 million are being slashed by up to 6%.

"Prices are down 5% to 10% on all purchases," says Ira Zlotowitz, president of Eastern Union Funding, a Brooklyn-based commercial mortgage brokerage. "No one thinks prices are going to go up."