By Neil Bane, Dan Lisser & Geoff Smith, Walker & Dunlop
Today’s real estate market is a strong engine of growth and opportunity as it continues to evolve to new heights following the Great Recession in the past decade.
First, there is greater liquidity across all markets and product types than seen in recent years.
Further, the remnants of the pre-Recession era, the peak years of 2005-2007, have provided much of the impetus for the positive outlook in the larger market going into 2016, as many of the loans originated in those years are coming to maturity.
Several other larger themes prevail in today’s market climate, a key one being the increasing liquidity in the market, leading to the popularity of alternative financing sources.
Higher-leverage financing is available at consistently lower rates, along with other longer-term fixed-rate products.
Today’s market continues to be favorable for borrowers, with several players in the game, a large selection of financing products, and competitive leverage to lock in the lowest rates and best terms.
Longer-term loans are expanding in popularity as many borrowers anticipate rates to rise while construction loan rates are increasing due to the recent BASEL-3 regulations.
Banks are holding back on providing capital to construction projects as they are required to hold higher reserves on these types of loans.
This is creating a loss in appetite among banks for construction loans amidst a larger environment where multiple players in banks are fighting for capital.
These changes over the past year in the wake of larger market trends and shifting norms have also resulted in:
- Increased favoring of established, brand-name developers, particularly in the condominium market;
- A greater supply of capital is leading to steeper lender selectivity, giving rise to usage of extensive financing and lower pricing;
- Bifurcation of the developer market; Larger firms are locking in the best rates while smaller firms must leverage more equity to secure financing, squeezing their returns.
Three funding sources, Life Companies, Government-Sponsored Entities (GSEs), and CMBS demonstrate examples of these market trends and the impacts they exert on particular sectors of the larger real estate industry.
Life Companies – A ‘Strong and Stable’ Asset Class
Life Companies saw a consistent strengthening of their market position throughout 2015, as more insurance companies increased their allocation of funds to commercial mortgages even into Q4, when they typically wind down. Other key highlights include:
- Continued advantages for borrowers – Life Companies keep their loans ‘on the books’ for direct servicing, as opposed to other asset classes, i.e. CMBS, that outsource that to a 3rd party;
- Very competitive, crowded marketplace – giving rise to greater options and rates for borrowers, and use of alternative funding sources as vehicles to drive ‘take-outs’ of GSE products; and
- Prevalence of Debt/Equity Combinations – particularly for multifamily lending projects.
Government-Sponsored Entities (GSEs) – The Continued Quest for Competitive Position
Amid the flurry of the current real estate market, GSEs are tasked with the challenge of developing consistently innovative products to remain a competitive player.
Multifamily projects continue to be the primary focus for GSE growth, amid increasing acquisition volumes, particularly in the senior and student housing markets.
CMBS – Still the Highest-Leverage, Non-Recourse Fixed -Rate Option Available
On the CMBS side of real estate financing, capital continues to be plentiful and opportunity is free-flowing, comparable to the years before the Great Recession in 2003-2005.
The crowding in the CMBS originator market has given rise to new opportunities and new challenges, such as pricing issues and tightened credit spreads.
Additionally, the volatile nature of the capital market space has led to a slightly higher cost of fixed loan products available to borrowers, pushing AAA’s to 40-50 basis points wider and BBB’s 200-225 wider since April 2015.
A portion of this credit spread widening is offset by the rallying of the 10 year Swaps index.
The top trends and opportunities in the CMBS space include:
- Continued advantageous climate for borrowers- rates remain low, at 4.5-5% on 10 year loan products, supportive of the cap rates paid by investors on new acquisitions;
- Demand for CMBS mortgages to remain strong into 2016-this trend follows the patterns seen throughout 2015;
- New and expanded business opportunities are on the rise- with the maturation of loans originated in the peak refinance years between 2005-2007; and
- Stipulations on debt are ‘comfortable’ from an historical standpoint- which is leading to firmer valuation rates and more appropriate pricing levels.
As 2015 wanes and 2016 dawns, confidence within the real estate finance market remains high and growing.
As has been true throughout the past year, ‘slow and steady’ is continuing to win the race, with a bevy of opportunities for continued growth potential consistently streaming forward across all areas of the real estate market.