Struggling property loans burden banks, curb deals

By Jonathan Keehner and Al Yoon

NEW YORK (Reuters) - Bankers hoping for an upturn in the stagnant market for commercial real estate lending should not hold their breath.

Property buyers are finding that commercial mortgage backed securities, a key funding source for big real estate deals, remain difficult to sell to investors such as hedge funds -- more than three months after originations first seized up amid fallout from the subprime mortgage crisis.

Few investors or traders now expect the funk to end until at least the second quarter of next year.

Most banks who package pools of commercial real estate loans into bonds, or CMBS, are unwilling to lend more money to real estate buyers because they have such a huge backlog of the securities that cannot find a home.

"If 30 firms were quoting and closing deals in April, it's more like five today," said Steve Schwartz, the New York-based co-head of JPMorgan Chase & Co's (JPM.N) real estate group, a top-ranked underwriter along with Wachovia Corp WB.N and Morgan Stanley (MS.N).

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Bankers say current appetite in the CMBS market is limited to smaller offerings, perhaps only $300 million to $500 million in size. That is a far cry from the $6.9 billion in CMBS that financed Blackstone Group's $23 billion acquisition of Equity Office Properties Trust earlier this year.

Bankers are finding it particularly difficult to find buyers for the debt from what are seen as riskier deals.

For example, sources say Wachovia has struggled with CMBS from Lightstone Group's acquisition of Extended Stay Hotels and, so far, may have only found investors for a modest, high- yielding piece of it.

"They're having a hard time getting anyone to look at the rest of it," said a fund manager familiar with the offering.

Lightstone, a private real estate company, purchased the hotel operator in April from private equity firm Blackstone Group LP (BX.N) in a highly leveraged deal, with $1 billion in cash dwarfed by $7 billion in debt. Lightstone is not known as a hotel operator, which some say adds risk.

"The buyers have no experience in the hospitality space and nonetheless just bought one of the largest hospitality companies in the world," said a banker familiar with the CMBS market who asked not to be named. "Wachovia is having trouble finding anyone to take that risk."

A Wachovia spokeswoman declined to comment on the company's CMBS business or on that particular deal. But Lightstone Group chairman David Lichtenstein told Reuters the bank had done well considering the head winds it is facing.

"Given the difficulty of the environment, I was actually pretty surprised by how much they were able to sell," Lichtenstein said.

The logjam impedes the pipeline of potential property deals over the next year, bankers said, which will weigh on growth in commercial property prices in the most attractive U.S. markets.