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FEATURE ORIGINATION blemish, the bank won't touch you," says Mark Taylor, prin- cipal and managing director of Mountain West Debt Fund in Salt Lake City. "The truth is that most good developers have a blemish. Very few people came through 2007 and 2008 unscathed." Defining Commercial W pending on who is writing the definition. For instance, some banks and regulatory agencies lump single-family, multifamily, and construction loans together. Others include owner-occupied property in the commercial loan mix. The MBA, however, con- siders only income-producing property as a commercial loan. "When it comes to commercial hat constitutes a com- mercial loan can vary de- "That is the area that we tend to focus on in a lot of our analysis. Given those parameters, " says MBA's Woodwell. " with commercial lending staying healthy. The last major economic downturn for commercial real estate lending came way back in the late 1980s and early 1990s. And it was bad. In fact, Woodwell believes that the current recession has been much more devastating for lenders and developers. "During the late 1980s and early 1990s, we had a lot of new commercial construction going on," he says. "So not only was there a falloff in demand for real estate, there was also a lot of new supply for commercial real like out West, there was some commercial property overbuild- ing. Commercial lenders of all sizes in those sections of the country have become more selec- tive about which projects they will underwrite. "It's kind of good that banks are holding back and not just loaning to every person who wants to put up a commercial building," Taylor says. "Well- qualified projects that have great tenants and are well located are having trouble finding financing even if a project is approved and says. "If there is another crisis of some sort and the CMBS market does shut down, the big lenders are going to be stuck holding this stuff. So I suspect that they will want to make sure they are underwriting good things." And while it's true that new regulations have reined in the ability of banks and lenders of all sizes, Daniel and others believe that commercial mortgage lend- ing's 800-pound gorillas aren't really that bogged down, particu- larly if the commercial asset has good rent roll, good tenants, good cash flow, and a solid borrower. "To a certain extent, they don't have as much flexibility because there is a lot of scrutiny from many different angles," Daniel agrees. "I suspect that the bigger the bank, to the extent that its balance sheet is in order, the regulators are not all over them." real estate, [MBA] is talking about mortgages backed by office build- ings, apartment buildings, and shop- ping malls, MBA's 2011 Datanotes found that commercial and industrial loans contributed $1.3 trillion, or 18 percent, to bank holdings. Commercial loans accounted for $1.1 trillion of the $1.3 trillion. That was second only to resi- dential and home equity loans, which accounted for $2.5 trillion, or 33 percent, in bank holdings. During that same time period, Looking Forward T according to the MBA report, commercial and multifam- ily loans had a 30-plus-day delinquency rate of 4.63 percent compared with an average of 5.44 percent for all other types of loans. At the end of last year, the study reported, commercial and industrial loans had a delin- quency rate of 1.73 percent, lower than single-family construction loans (14.81 percent), single-family mortgages (9.63 percent), credit cards (3.27 percent), and all other types of loans (3.01 percent). Woodwell also believes that history has a little something to do mercial real estate properties led to high vacancy rates and lower rents. And while the current downturn has witnessed a signifi- cant drop in demand for com- mercial real estate, the amount of available new space was limited. "So in terms of this recession's estate coming online." The abundance of new com- impact on commercial real estate, it was bad but was probably rougher during the last down- turn," Woodwell says. "When you look at the real estate cycle, it was different this time. There were a lot of lessons that were learned during the last downturn that worked to the industry's advantage during this downturn." In some parts of the country, the bank likes it." Overbuilding in one region on the American economy in general, let alone for commercial lending. For the most part, indus- try insiders like Daniel and Taylor don't predict a big change in the coming year. Both believe that in the long run, things will be fine. Whether or not that happens will depend on several things. "Every time I talk to a banker may affect the lending decisions or strategies of smaller banks or local lenders. But it really doesn't matter to the top banks and lend- ers because they are originating loans nationwide. That allows them to pool all of their products into a package and sell it to bond holders through CMBS. In fact, the big banks and mortgage lenders have actually become more aggressive in under- writing loans over the past few years. Mortgages packaged and sold through CMBS are rated and closely scrutinized, making them more attractive to investors. "It's not like we're talking subprime stuff here," Daniel sessment and adds that a wild card, like Europe falling off an economic cliff, can change everything. "There are a lot of things that or a hedge fund manager, there are so many clouds of uncertain- ty," Taylor says. "I don't think we're in for another big drop. I think government, builders, and banks are trying to avoid that. But the net result is a long, drawn-out, slow recovery." Daniel agrees with that as- here are just too many mov- ing parts to get a solid read can go wrong," Daniel says. "Again, if the status quo remains, then I think we'll be OK. If not, then there is definitely some wind blowing in our face and hopefully it won't blow us out to sea." THE M REPORT | 45 ORIGINATION SERVICING ANALYTICS SECONDARY MARKET