The financing market for commercial investment real estate turned close to upside down in July and August and it's hardly gotten around to righting itself.  I saw an article recently by the chief economist for the international brokerage network NAI saying that typically these things take about 18 months to correct. 

All is not horrible, though (unlike the housing market in many places around the country, like Poinciana, Florida).  Most larger institutional owners (REITS, pension funds, and the like) only leverage 50% to 65% anyway, and those guys can still get loans quite easily, even if the spreads have gone from 110 bps over treasuries to as high as 200 over since earlier this year.  At least T-Bills are DOWN overall, something I predicted rather astutely in a CoStar article earlier this year (sorry, hyperlink not readily handy) that became the third most read article to date for them.  The market has definitely been effected, though, by the debt market moves, particularly deals that were being driven by the high-leverage players that were living on 80% or greater LTV deals with low interest rates and long interest only (I/O) terms, even 10 years.  A correction was long overdue for sure (who thought of 10 year I/O debt at 90% LTV anyway...like property values never go down? - must have been somebody not long in this business).

So how do you get a good deal in a bad lending market - just buy deals with the loan already in place.  For the longest time CMBS ("conduit") debt has been the biggest potential burden on deals, with large defeasance costs to get rid of wrong-sized debt hurting deal pricing (where the debt that can be assumed is too small on an LTV basis for the sale price because it was put on at a higher LTV in the previous purchase but the property has appreciated significantly since then).  If there is only a few years left on good debt the benefits can be minimal, I admit, but for those more confident in the normalizing of the debt markets in 1-2 years, even a very short term in-place loan can be a long enough bridge to a better future, especially if there is a value-add play on the property that would normally encourage a refinancing a year or two or three into the deal anyway.  It's nice to pick up a deal in today's market with an in-place loan with an interest rate in the low to mid 5s, when the market is a point higher.  Since I/O has almost gone away, those deals that had gotten through that period and started amortizing are no longer looking as ugly to assume the loan on as they were 6 months ago, either.

In fact, in the right situation, suddenly this market gives deals with in-place financing a huge advantage over deals that are free and clear (or where the debt is so wrong-sized that it doesn't matter).  Finding those deals doesn't just make it easier to get to closing, it makes it easier to offer better terms overall.  That doesn't necessarily mean just pricing, though that is relevant, but especially important is the ability to make an all-cash/non-financing-contingent offer knowing the financing is already in place (all this assumes, of course, that the financing is readily assumable as it generally will be).  Shorter due diligence and closing timing means a stronger offer to a seller every time.

The only buyers that don't get to reap this benefit are TIC (Tenant In Common) buyers, who can't assume traditional debt, whether conduit or balance sheet debt, because the loan servicer will not allow a TIC ownership structure to have up to 35 separate owners jointly assume the debt if it wasn't created originally that way.  The next market cycle, though, I fully expect the lending market to have gotten over the TIC assumption issue and I figure it is only a short time before a TIC ownership structure can assume existing non-TIC debt, or at least there will be a hybrid debt model that comes out that will allow that and eventually force others to follow suit, as that industry continues to grow and become, potentially, the next REIT phenomenon.