Colorado Real Estate Journal - April 5, 2017
The annual Mortgage Bankers Association Commercial Real Estate Finance/Multifamily Housing Convention was held in February in San Diego. The convention was attended by more than 3,000 commercial and multifamily real estate finance professionals. Members of the HFF Denver team attended the conference and met with a variety of lending sources, including life insurance companies, agencies, commercial mortgage-backed securities, commercial banks and debt funds. Commercial and multifamily lending and borrowing reached $502 billion in 2016, according to the MBA, which was flat compared to 2015. However, volumes were up substantially from a low of $83 billion in 2009. The dollar volume of loans originated for the agencies (Fannie Mae and Freddie Mac) increased by 10 percent, commercial bank volume increased 6 percent and life insurance company loan volume was up 4 percent. CMBS saw a 15.5 percent decrease in volume in 2016 compared to 2015. The MBA predicts that originations for commercial and multifamily loans will increase to $537 billion in 2017, a 9 percent increase over 2016 volumes. Consumers of debt in 2017 will benefit from the availability and variety of lending sources. There is liquidity from all providers of commercial real estate debt and pricing remains competitive. Life insurance companies. Life insurance companies’ new loan allocations are generally above the previous year’s allocation. Unlike 2016, when many life insurance companies reached their allocations by the middle of the year, most life insurance companies have been slow to originate loans in 2017. While interest rates increased at the end of 2016 into the beginning of 2017, spreads have declined by approximately 20 basis points from where they were at the end of 2016. Life insurance companies will continue to aggressively compete on interest rate for lower leverage loans on quality assets in prime locations. Longer-term debt, up to 30 years fully amortizing, continues to be available. Life insurance companies are also evolving in an effort to drive fee business and compete on different fronts. Several firms have new separate account clients representing other life insurance companies that lack a distribution platform or foreign pensions that will pursue everything from shorter-term bridge loans to mezzanine loans and longer-term core loans. Agencies. Freddie Mac and Fannie Mae had a loan production cap of $36.5 billion each in 2016 as mandated by the Federal Housing Finance Agency. The FHFA established that the 2017 multifamily lending caps for Fannie Mae and Freddie Mac will remain at the same level they were for 2016. As in 2016, the FHFA will conduct a quarterly review and adjust the caps as necessary. Total agency originations were $107 billion in 2016. The agencies exceeded their volume caps by expanding their production on loans that are excluded from their caps. These exclusions will remain constant for 2017, and will be an emphasis for the agencies’ production goals for 2017. Volume cap exclusions include targeted affordable housing, small multifamily properties (five to 50 units) at 80 to 100 percent of area median income or below (percentage dependent on market), manufactured housing, seniors housing at 80 percent AMI or below, unsubsidized market rate properties at 60 to 100 percent AMI or below (percentage dependent on market), properties located in rural areas at 80 percent AMI or below, and loans to finance energy or water efficiency improvements. Properties that qualify for volume cap exclusions will continue to see interest rate reductions of up to 30 basis points. The agencies will continue to offer maximum leverage up to 80 percent loan to value, with interest-only payments available up to the full term of the loan, depending on leverage. Fannie Mae in particular has the ability to offer loan terms exceeding 10 years and as long as 30 years fully amortizing. The agencies continue to offer nonstandard products, including lease-up, moderate rehab and value-add loans. Additionally, Freddie Mac is exploring a construction loan product for market rate properties that maintain affordable rents during the life of the loan. CMBS. The CMBS market experienced declining volume in 2016 due to tightening underwriting standards and wider loan spreads. The number of CMBS lenders has declined from an estimated 40 at the outset of 2016 to approximately 10 to 15 going into 2017. The majority of the remaining originators are large institutions. Another factor affecting the CMBS market in 2016 was the impending “risk retention” requirement. Commencing in December 2016, risk retention requires the sponsor of a securitization to retain 5 percent of a CMBS issuance on their balance sheet, or in the alternative the buyer of the noninvestment grade “B-Piece” must hold the security for at least five years. CMBS issuance in 2017 and beyond has many uncertainties attached to it. While the expectation is that CMBS spreads, and conversely interest rates, will widen as a result of risk retention, the opposite has occurred thus far in 2017. The remaining issuers in the market are competing aggressively for the best of the best properties, and in some cases, spreads and interest rates are below those of life insurance companies, especially for low-leverage loans. The CMBS market has become more conservative. Maximum leverage and interest-only periods are down from previous years, while at the same time, the emphasis on asset quality and location has increased. In the short term, the lack of new CMBS issuance has resulted in a supply and demand imbalance that has resulted in improved pricing for CMBS loans. However, it is expected that CMBS pricing will increase as the market normalizes throughout 2017. Commercial banks. Commercial banks are expected to continue to feel the effects of regulations that were implemented in 2015, which will constrain their lending in 2017. These new standards were instituted primarily as a result of the economic downturn, and require an increase the amount of capital banks must hold against commercial real estate loans, especially construction loans. As a result, along with concerns about supply and concentration risk in certain markets, construction loans have become less desirable. Banks will continue to be selective for new construction loan opportunities, and new loans will be more conservative than in past years, which translates into increased pricing. Commercial banks still have very active lending programs for stabilized product both on a short-term and long-term basis. Selective banks can now offer competitive loan terms exceeding seven years or longer. Traditionally, banks have only offered loan terms of up to three to five years. Pricing for term loans continues to be competitive, with floating rates typically in the range of 225 to 275 basis points over 30 day Libor. Many banks can now offer competitive fixed rates for term loans, or swap to fixed rates. Debt funds. Debt funds have increased their role in the commercial real estate lending market, particularly in providing nonrecourse loans on value-add properties with riskier profiles and filling the void for construction loans as a result of tightening bank construction lending. These entities are unregulated, and are exempt from same rules as banks. Debt funds will lend a higher level of proceeds on a nonrecourse basis, albeit at higher interest rates. They will typically lend up to 85 percent of cost, with the ability to advance proceeds for future expenditures, with a term of three years at floating rates typically in the range of 350 to 600 over 30 day Libor. The availability of loans from debt funds is expected to expand in 2017. There are more debt funds than ever, and new funds are expected to senter the market in 2017. Pricing for loans is expected to tighten given the availability of capital in the space. Debt, and sources of debt, remains plentiful and readily available in 2017 with a variety of choices and loan structures, which makes for a competitive lending environment for prospective borrowers.