Colorado Real Estate Journal -
John Yarberry loves to speak about commercial real estate. Yarberry, a senior vice president at Wells Fargo, was able to address a wide range of topics regarding commercial real estate when he joined two other bankers – Kirk Monroe and Ron Tilton, executive vice presidents at Vectra Bank Colorado and FirstBank Holding Co., respectively – on a banking and finance panel at the recent Rocky Mountain Commercial Real Estate Expo and DU Fall Forecast. The 18th annual event, hosted by the University of Denver’s Franklin L. Burns School of Real Estate and Construction Management and the Denver Metro Commercial Association of Realtors, drew about 1,000 brokers, developers, lenders and others in the commercial real estate industry to the Colorado Convention Center Nov. 2 During his presentation, Yarberry displayed a chart that compared, on a historical basis, 10-year Treasury yields and commercial real estate cap rates. “As you can see, we are experiencing historic lows in Treasury rates due to the Fed’s policy of easing by purchasing securities,” Yarberry said. “This has had a huge effect on the real estate market and debt markets,” Yarberry continued. “The Fed’s strategy is largely in consideration of the mountain of commercial mortgage loans maturing in the middle of this decade.” So what does that mean for rates? “In the near term, this has taken the interest rate out of the market equation,” Yarberry said. “This had made it possible to refinance and restructure deals in order to see the necessary results of the deleveraging of market values.” The drop in Treasury rates, he said, has “pushed money into the stock market and into commercial real estate. The higher stock values have allowed insurance companies and pension funds to allocate more dollars into commercial real estate.” Real estate investment trusts, he said, also have been able to raise “considerable funds” for investments. Following his presentation, Yarberry said that today’s low rates are a double-edged sword. “What will happen when the investors who bought properties at these historic low rates need to refinance at a time when rates are likely to be much higher? I just hope that the rents have risen enough to cover the increased rates.” Some borrowers have been able to lock in rates at 4 percent or lower, with a cap rate in the 4.5 percent to 5.5 percent range, he said. “Will rental rates have increased sufficiently in order to offset the low cap rates based on a point-in-time market value appraisal?” Compounding the risk, he said, is the potential debt service requirements required in an environment of much higher rates. Banks, he noted, also benefit from increased demand from commercial real estate borrowers, as the new loans provide a strong spread between what they are paying borrowers for deposits and what they can lend the money at. “A 4 percent or 5 percent mortgage is a pretty good deal,” Yarberry said. “It relieves owners with cash flow issues and provides a decent return for lenders.” Indeed, Monroe noted that about the only way banks can make money is by making loans. He said that banks, however, such as Zions Bancorp., the parent of Vectra, learned their lessons from the crash of 2009 to 2010, joking several times that he is a master of “stating the obvious.” In the Denver area, Vectra has been taking advantage of backing multifamily developments and, more recently, loans for single-family home construction and residential land purchases by builders, he said. Vectra, he said, would also like to make more industrial loans, although he said Denver is not a huge hub for industrial projects, like the West Coast. For a very large deal, he said that Vectra would prefer a “club arrangement,” in which it might team up with one other bank, rather than in a syndication situation with a number of banks. It turned out to be too hard to keep all of the different banks on the same page, he said. At the risk of stating the obvious, and although he said it sounds like a cliché, he said that after the downturn Vectra more than ever is treasuring building relationships with clients. One thing bank officials learned during the recent crisis is that it was important to work with clients who knew they could call someone at Vectra and discuss their situation, he said. Tilton noted that “banks are healthy” now. In fact, many banks are now more profitable than they were during the boom days of 2006 and 2007, before the financial crash. “Banks are also trying to simplify their balance sheets,” Tilton said, by sticking to basics when making loans. Indeed, Yarberry said “sound, consistent and disciplined underwriting” trumps historically low interest rates. “Long-term success is only achieved from a consistent approach to commercial real estate credit,” Yarberry said. “I would also argue that the same long-term consistent approach is also a recipe for success for real estate investors.” More good news for investors and lenders is that delinquency rates for construction, land development and multifamily are dropping. Overall, they are 3.4 percentage points lower than at the peak, he said. “The crystal ball seems to be more shiny when you are not focused on problems, but opportunities,” Yarberry said.