It was only one year ago when regulatory measures were playing a major role in determining the status of the commercial debt market. As Northmarq Capital senior vice president Michael Chase points out in this article, GSEs caused a slowdown in early 2015 yet the implementation of new rules eventually spurred a recovery. These rules were put in place to permit certain exclusions from lending maximums. As the year progressed, CMBS financiers muddled through a series of additional disclosure requirements put into place with Regulation AB. At the same time, commercial banks waded through excessive risk retention standards. High volatility commercial real estate investing quickly became a puzzle for those in search of development financing to piece together.
As we transitioned into the new year, the commercial and multifamily markets began to hit their stride in spite of bolstered regulatory measures. The Mortgage Bankers Association reports that over $2.8 trillion of outstanding commercial and multifamily mortgage debt were in place at the end of this year’s first quarter. This figure represents an increase of 1.2 percent compared to last year. Out of the four main lending groups, three of them began the year with a bump in outstanding debt. These primary lending groups are GSEs, life insurers and commercial banks. Only the CMBS market had less outstanding debt. The Commercial Mortgage Alert reports that as of this year’s second quarter, CMBS originations are nearly 60 percent lower. Yet the deals that the CMBS market has avoided this year are being undertaken by market competitors and various capital sources like mortgage REITs and private debt funds.
Commercial real estate investing experts are in agreement that the main stimulus for this year’s debt market has been steady low interest rates. The Federal Reserve hiked key its key rate last December for the first time in 10 years. The Fed Funds rate went up by 0.25 percent, spurring the 10-year U.S. Treasury to dip from 2.28 percent down to a record low of 1.37 percent. However, this low is actually quite high in comparison to sovereign debt of other nations. As time has progressed, long-term rates have decreased and the difference between these rates and short-term rates has lessened.
Now that last year’s lending cap challenges are squarely in the past, GSEs are on a roll. Five months ago the Federal Housing Finance Agency declared that lending caps would be boosted for Freddie Mac and Fannie Mae by $4 billion each. This increase arrived along with alterations to excluded categories, empowering GSEs to pursue moderately priced properties and green properties. As of last June, Fannie had reported $22.8 billion year-to-date originations with one-third of its ’16 volume removed from the cap.
Another general economic trend of note is the easing of construction loans provided through commercial banks. This easing can be partially attributed to HVCRE risk retention standards. Commercial banks are certainly a power player yet their role has been somewhat reduced to financing with permanent fixed/floating rates. These institutions can still provide clients with extensive flexibility throughout the life of a loan. The MBA reports that commercial banks enjoyed a 44 percent boost in commercial and multifamily origination business in a year-over-year context. This boost was referenced in the latest remarks from the Office of the Comptroller of the Currency. The office is keeping its eye on the heightened credit risk posed as a result of less stringent underwriting standards.
Those in search of executions with minimal leverage are still resorting to life insurers. Fitch Ratings has noted that upwards of 80 percent of life insurance companies enjoyed increases in mortgage portfolios during 2015. The combination of intense competition, low treasury rates, limited opportunities and a general shortage of alternative commercial real estate investing options has created a scenario that is ripe for opportunistic buyers. Rates for short-term and long-term requests have reached record lows while enhanced flexibility is now readily available. Though CMBS probably won’t approach its ’15 volume, momentum is certainly picking up after a weak start. CMBS should remain competitive through the year’s end thanks to narrow bond yields and an influx of new strategies put in play by adventurous market participants. In summation, 2016 is best characterized as a market that favors borrowers. There is certainly a considerable amount of capital available for the proper opportunities.