Commercial real estate finance industry leaders expect the market to remain favorable in 2017, with the pace of U.S. economic growth rising, interest rates incrementally higher, new construction relatively low, and ample capital and credit available to meet borrower demand for new loans and refinancings, according to the annual survey of Commercial Real Estate Finance Council members released last week.
The CRE Finance Council is the global trade association for the commercial real estate finance industry whos members are participants in the $3.8 trillion U.S. commercial and multifamily real estate mortgage market.
Incrementally rising interest rates in 2017 are viewed as influential but tolerable by survey participants, especially if they accompany a stronger U.S. economy.
Rising interest rates are expected to result in slightly higher borrowing costs, with capitalization rates, generally speaking, expected to rise as interest rates increase.
Spreads on commercial mortgage-backed securities are likely to remain volatile in 2017 due mainly to external factors such as contagion from other asset classes and geopolitical trends.
“It continues to be a very good time to be in the business of commercial real estate finance, and to be a commercial real estate investor and borrower,ˮ saidCRE Finance Council executive director Lisa Pendergast.
“Though there is some concern that we are nearing the peak of the current U.S. real estate cycle, valuations are generally holding with ample credit available for new loans and refinancings of maturing quality loans.
“The dynamism of the commercial real estate finance market continues to be impressive, with CMBS issuers adjusting to new risk-retention requirements that took effect on December 24, 2016 and portfolio lenders, private equity and a new generation of other lenders stepping in to fill gaps and enable opportunity in the investment marketplace.”
The vast majority (84 percent) of survey respondents believe CMBS issuance will total between $50 billion and $100 billion in 2017, with a plurality predicting issuance for the year in the $75 billion to $100 billion range.
The majority of respondents expect bank balance-sheet lending volume to hold steady in 2017 relative to 2016, with insurers and CMBS conduits increasing their volume over the prior year.
Nearly70 percent of respondents have a favorable outlook for real estate capital and credit availability and foreign investment in real estate debt is expected to continue apace or accelerate, with domestic investment remaining about the same
A majority (55 percent) of respondents believe the market is at its peak, versus 43 percent who believe we are in the middle of the current U.S. real estate cycle
The vast majority of respondents (72 percent) believe that 50 to 75 percent of CMBS loans maturing in 2017 will pay off or be refinanced in full and on schedule
The majority of respondents (5 percent%) believe secondary market liquidity has stabilized and will be the same in 2017 as it was in 2016, but slightly more than a third see less liquidity in 2017
Some 80 per cent of respondents believe interest rates will be somewhat higher in 2017, in the range of 25 to 100 basis points; 72 percent expect interest-rate hikes to have “some” impact on their business performance (versus “significant” or “minimal” impact) and 70 percent of respondents see cap-rate spreads (spread above the risk-free rate) trending higher in 2017
Multifamily lending is likely to be the most constricted in 2017 due to oversupply of multifamily units in some markets, with construction lending expected to be down mainly due to higher bank capital requirements for construction loans.
Retail, office and industrial property markets are seen by the majority of responders to still be in the middle of their real estate cycles, with hotel and multifamily property markets at their peaks.