Excerpted from REjournals.com, December 11, 2008

by Mark Thomton
Minneapolis-St. Paul

Stability. Security. Growth. These three words aren't being thrown around the commercial real estate market much today, unless they are preceded with the phrase "We need more..."

However, Grandbridge Real Estate Capital LLC has carved out its own successful niche that allows the firm to use these three powerful, and now rare, words to describe its own business.

While the majority of real estate firms are contracting services, Charlotte, N.C.- based Grandbridge is actually expanding.

The firm opened its Chicago office in September of 2008, bringing its national total to 28. Grandbridge has a significant presence in the Midwest with offices in Minneapolis, Milwaukee, Madison, Kansas City, Columbus, Indianapolis and the aforementioned Chicago.

John Davis, executive vice president in the firm's Minneapolis office, made his way to Grandbirdge via Collateral Real Estate Capital. He joined Collateral in 2003, where he and his associates were quite successful in growing the firm's clientele and transaction volume. It drew the attention of BB&T, which acquired Collateral in 2007 and merged it with its own subsidiary, Laureate Capital LLC, creating the new company called Grandbridge. The merger effectively doubled the size of each firm, which then combined to account for $20 billion in servicing.

This year has been another strong one for Grandbridge, but Davis knows that 2009 may prove challenging, as it will bring industry-wide struggle and a much slower market.

"The virtual elimination of the CMBS market has created challenges for all of us," he says. "Interest rates have risen, cap rates are increasing and we are now into a phase of significant de-leveraging of commercial real estate. This will continue through 2009."

Grandbridge has the luxury of representing 50 insurance firms, yet even that large number will not completely offset the loss of the CMBS market, he says.

"The insurance companies are being hard pressed to fill that void (of the CMBS)," he says. "Their allocations to real estate debt are sporadic, and investment officers are challenged to find relative value as compared to other asset classes."

The role of the investment firm has changed in this new environment. Prior to the financial crisis and the tightening of lending restrictions, creativity was not a necessity to produce deals and move transactions.

"CMBS debt that was attainable at up to 80 percent LTV with interest-only terms has now reverted to insurance companies providing 60 to 70 percent loan-to-value with no interest-only terms," says Davis.

Now, Grandbridge's goal is to live up to its namesake and literally figure out how to bridge that capital gap from 60 to 65 percent to the ultimate need of 75 to 80 percent that today's market requires.

Davis highlighted many ways that his firm is attempting to orchestrate new deals. They are nothing radically new to the industry, but to someone who has only been in the business for a few years, they may seem like relics of a bygone era.

"We can access a range of financing options from preferred equity and second mortgages, to joint ventures and mezzanine financings," Davis says.

Grandbridge has shifted a large portion of its business to multifamily financing, as the apartment market has been one of the few resilient sectors. The firm found Fannie Mae and Freddie Mac to be a strong source of lending throughout the year.

"For multifamily, the bright light is the fact that Fannie Mae and Freddie Mac continue to be the most active lenders in this environment," says Davis. "Grandbridge is a Fannie Mae Delegated Underwriting and Servicing (DUS®) lender and a Freddie Mac Program Plus® seller/servicer, and we are having a wonderful year in multifamily. Our multifamily agency business has accounted for 50 percent of overall business. Fannie and Freddie continue to offer attractive terms and interest rates. You can borrow in the low- to mid-6-percent range."

Davis points out that most debt for commercial properties is ranging from 6.75 percent to 7.75 percent.

The firm has also been aggressive with seniors lending and recently funded a $350-million seniors housing credit facility, consisting of 16 cross-collateralized first mortgage loans with cross-default provisions. The fixed-rate debt facility was funded in two separate closings and sold to Fannie Mae.

"We are one of the nation's best firms for seniors multifamily, and I believe the same statement can be made of our affordable group," Davis says.

The next year will bring challenges as Davis expects commercial real estate valuations will be problematic with increased cap rates and a limited growth in rental rates. The firm's portfolio has held strong thus far, but it will be under greater duress in 2009 as the above scenario plays out, he says.

Yet there still is reason to be positive as the pure real estate fundamentals of this downturn are much better than they were in the early 1990s, the last time the industry went through a major down cycle.

"Commercial real estate fundamentals remain very strong," says Davis. "This crisis was not caused by commercial real estate, but now the meltdown has transcended all asset classes. Still, in our loan portfolio of $22.6 billion our 60-day-and over delinquency ratio is only .35 percent."

Davis still believes there is a great deal of capital in the market, which was not true of the early 1990s, but until the market stabilizes, it will remain on the sidelines.

While the commercial market has not been overbuilt, now it is caught in pervasive economic woes that are hurting landlords as they struggle to retain tenants.

Despite the realities of the current market, Davis is optimistic that there will be opportunities in the coming year, not just for Grandbridge's clients, but for the firm, too. Some property owners will be forced to sell in the coming months, which could mean bargain deals for well capitalized parties.

While that scenario will play out in the real estate market, it will also play out in the competitive market, too. Some firms will not be able to survive the coming months, making their assets and clientele list an enticing acquisition for successful firms.

"We have the great ownership and support of BB&T, which is the 14th largest financial holding company in the U.S., with $137 billion in assets," says Davis. "That support has been powerful, and it has allowed us to open a de novo office in Sept of 2008 in Chicago. In spite of this time of turbulence and market uncertainty, we are giving careful and thoughtful consideration to further expansion."