One can forgive commercial property owners if they seem a bit giddy lately. Just four short years ago, their property values had been cut in half in the wake of the crippling global economic recession. No lender would return their calls and those unfortunate enough to have loans come due often lost their properties to the dreaded special servicers.
The changes in the financial envionment today is nothing short of remarkable. With real estate now considered a prized asset class, commercial property owners enjoy unprecedented access to capital. An abundance of buyers eagerly bid up commercial real estate values and a superabundance of lenders line up to compete to finance their properties.
What's more, the timing for the changes couldn't be better. With another wave of mortgage debt expected to come due at year-end and
into 2017 for properties that were financed when values were at their previous peak, it is once again 'the best of times' to own commercial property.
Now, instead of worrying whether they'll be able to afford to pay back their loans, commercial property owners have the luxury of debating which options offer the better opportunity for enrichment: cashing out at today’s values, or pocketing money by refinancing and maintaining ownership for more upside?
Given the extraordinarily low interest rate environment, which fortunately for such owners has lasted longer than anyone expected, refinancing is getting an increasingly long look by those who prefer the option of maintaining ownership of their best performing properties while
still being able to draw out substantial cash from those assets to fund additional investing.
The enviable dilemma facing property owners was aptly framed earlier this month by Stephen Blank, senior fellow, finance at ULI, who wrote:
"We are now faced with a choice: either we go ‘risk on,’ competing in the market on the market’s terms, i.e., justifying real estate pricing based on relative value compared with alternatives, and searching for yield in (secondary and tertiary markets) and in new sectors (student and seniors’ housing, medical office, and the like), all the while enjoying the ‘lowest-risk’ premiums in memory. Or, we go ‘risk off’ and try to smile knowingly
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while sitting on the sidelines.
Not an easy choice as there is incredible pressure to invest -- not at all costs, but invest nonetheless."
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Monty Bennett, chairman and CEO Ashford Hospitality Trust, doesn’t think refinancing means having to sit on the sidelines. His REIT has been refinancing to draw out capital from its current holdings and buy more.
In July Ashford Hospitality refinanced three mortgage loans that had a combined outstanding balance of $325 million with new loans totaling $469 million resulting in approximately $104 million in excess proceeds.
It used that money to acquire a pair of hotels in Fort Worth, TX and in Silicon Valley, CA. At the same time, Ashford is also selling into this market. It has two small hotels with no debt that it is in the process of selling.
Shaner Hotel Holdings, a Pennsylvania-based hotel owner-operator, is also taking advantage of refinance opportunities to capitalize on current market conditions.
Just this week, it closed on a 10-year, $226.6 million commercial mortgage-backed securities (CMBS) loan with JP Morgan Chase, providing ample capital to reposition and expand its hotel portfolio.
Others, perhaps chastened by the still-fresh knowledge of how quickly real estate cycles can turn, continue to believe that selling off properties when buyers are plentiful is the best option in today’s market.
"We continue to be biased in favor of dispositions and maintaining line capacity and cash, as we continue adding build-to-suit projects to our pipeline,” Will Eglin, CEO of Lexington Realty Trust, told investors this month.
Eglin said that through 2015, Lexington expects to cut $150 million of secured balloon debt from its balance sheet through property sales. And it expects to pay off another $112 million by issuing unsecured debt.
"While we continue to unencumber assets from time to time, we may access secured financing when we believe it is advantageous to do,” Eglin added, “particularly in connection with ground sale-leaseback transactions or financing for a term longer than 10 years.”
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By Mark Heschmeyer
November 19, 2014/Costar.com
To Sell or Refinance? In a CRE Market Flush With Capital, Owners Enjoy Luxury of Choice
Owners Enjoy Luxury of Choice