A changing arena for real estate finance.

Are we in a recession, coming out of one, or already at the beginning of economic recovery?

While economists analyze trends and signs found in unemployment, productivity, business investment and consumer spending, New York City's real estate industry and the financial institutions that fund it, continue to be cautious.

While the reality of the 2001 recession was a far cry from a decade ago, the feeling of this recession has been significant. Coming off the fast-paced real estate market of the mid to late 90's that was fueled by the productivity, growth and expansion of corporate America coupled with interest rates beginning their fall, the downturn has been formidable and the resultant impact quite strong.

The September 11th attacks, repercussions from the fear of terrorism and the war in Iraq exacerbated a sense of concern about a market which was becoming awash in vacant space.

While there has been a tremendous upside due to the Federal Reserve Bank's focus on fighting recession with low interest rates, it has also been worrisome to think of a real estate market being supported by these rate trends and owners and purchasers becoming dependent on rates that cannot and will not remain constant.

Fundamental real estate values remain questionable right now. Though there have been indications of continued stabilization and improvements in pricing and some strength between asking and taking rents, particularly in Midtown, commercial office buildings still have vulnerability.

How much new vacant space will be put on the market on the World Trade Center site remains unknown, which is especially troublesome to a lagging Downtown market, the overall city office market and the ripple effect to the tri-state area.

As we approach the end of the third quarter, short-term interest rates are spiking up, but this may be short lived as opposed to longer-term rates, which appear to be rising with this spread to continue.

As money becomes more expensive, it becomes more difficult to close deals with the same underwriting as previously used as loan to value and debt service ratios are reduced.

How do banks get refinanced?

As a result of fluctuations in rates, we may be undergoing a transition phase in real estate financing as banks slow down, reanalyze lending strategies of the past few years which were based on historically low interest rates, and focus on redefining lending parameters with a long-term view.

For short-term lenders, such as BRT Realty Trust, business is brisk and will continue to thrive, particularly as banks exhibit hesitancy in lending. Non-conventional lenders traditionally fill the gap when commercial banks lean toward a conservative tightening of underwriting standards.

By providing immediate funding for acquisition or refinance of undervalued or stabilized real property, short-term lenders are a critical resource for borrowers unwilling to deal with delayed or rejected applications from commercial lenders.

BRT, which is a public mortgage REIT traded on the New York Stock Exchange (NYSE:BRT) will, for example, provide bridge financing to 85% loan to value secured by first and second mortgage loans and participation loans to 90% loan to value and joint venture opportunities.

Throughout this period, low interest rates have assisted the purchase of commercial and residential properties at sustained high prices and production of a profitable return has been feasible.

Price levels for acquisitions have consistently risen and remain high. In New York City, it is very difficult to produce a reasonable return on investment with new acquisitions.

Property owners are not selling because prices are not being met, and instead are turning to long-term refinance and maintaining equity interest in their property.

At BRT, transactions involving new acquisition loans are far less numerous than the refinancing of debt or obtaining loans to turn properties to alternate uses, such as conversion of industrial or commercial buildings into residential, re-tenanting retail space, etc.

BRT is also doing much larger transactions. While just a few years ago, BRT concentrated on loans between $1 and $10 million, we are now lending from $1 million up to $40 million and actively working on and seeking these larger deals.

We are also providing one-source financing with a blend of first mortgage debt coupled with higher rate mezzanine financing in one attractive lending product.

While there are positive signs, no one can say with conviction that we are indeed in economic recovery, nor that we will be on our way by the end of 2003.

In this highly competitive and complex market, especially in light of a growing hesitancy on the part of conventional lenders, borrowers seeking to take advantage of time-sensitive and value-added real estate opportunities requiring speed will be turning to bridge lenders such as BRT, as a short-term, strategic financing solution.