Rates, Tapering & Lending Sources: What’s a Borrower to Do?
As the commercial real estate market continues to improve, lenders of all kinds are getting back in the game. With a possible rise in interest rates on the horizon and the unknown effects and timing of tapering, commercial real estate professionals and lenders are watching the lending environment with eagle eyes.
With financing rates, terms and underwriting having such a huge impact on commercial real estate, I invited some industry icons to Studio One to get a view of the latest trends and an idea of what lies ahead. If you’ve heard the Commercial Real Estate Show you know we like to have fun; we called this week’s show, Show Me the Money.
Sourcing the right lenders for particular assets is important, and fortunately we have more choices today than we have had in years.
The CMBS market has resurged as one of the biggest lenders. “Last year, we finished 2012 with $46 billion of CMBS bond issuance,” said Steve Renna, president and CEO of the CRE Finance Council. “We expect to close 2013 at about $90 billion, and many are predicting more than $100 billion in 2014.”
The improvement in the CMBS market can be attributed to a number of factors, particularly that borrowers are back with improved balance sheets, Renna said. Also, “with corporate bonds not performing as well, CMBS is an attractive alternative” to investors, he added.
The CMBS market is also notable because of its willingness to lend to all major property types, including hospitality, self-storage and manufactured housing communities, said Tom Walsh, senior vice president of Grandbridge Real Estate Capital.
Fannie Mae and Freddie Mac remain the top choices for multifamily lending; however, they are starting to experience more competition than before, Walsh said. “Each lender category has its place in the multifamily market right now,” he said. “Fannie and Freddie are still garnering a huge market share, but life insurance companies and CMBS are both doing a lot of multifamily lending.”
Banks are also doing their fair share of multifamily lending, said Mark Hancock, senior vice president of the Bank of North Georgia. “Banks are in growth mode and trying to lend money. Bank analysts are looking for earnings growth and improvements to net interest margins.”
Banks are also looking at retail and office properties. Hancock added. “We are bullish on the office market.”
While the volume has slowed greatly, we are still selling some non-performing notes, closing workout sales and listing properties foreclosed by lenders. But more often these days the new owners are not banks, they are investment funds that bought pools of loans and special servicers.
“The issues with distressed assets aren’t really on the commercial bank side,” Hancock said. “[They’re] on the CMBS special-servicing side.”
A lot of loans will mature from 2015 to 2017, and it’s still unknown as to how that will be handled, Walsh said. “Every CMBS loan is non-recourse, so the borrower has to do a serious financial analysis to decide if they want to support a property for the long run if that means writing a check to pay it off at the closing.”
If a borrower realizes they aren’t going to be able to pay off their loan, the best thing they can do is go to their master servicer, Walsh said. “Let them know early that you might have a potential problem brewing with your maturity 18 months from now. They might not be able to work with you, but it’s a lot better than waiting until 60 days before maturity.”
Tapering Effect on Interest Rates
Interest rates have been a hot topic of discussion in the commercial real estate market during the past several months. “We expect that in 2014 the Fed will at least pull back on quantitative easing through the tapering of agency mortgage purchases, though it’s unlikely that it’s going to raise the Fed’s fund rate,” Renna said. “There is going to be some tapering, and we expect it will be before the second quarter of 2014.”
The Fed’s change in chairmanship to Janet Yellen in the early part of 2014 will also create caution about taking liquidity out of the marketplace, Hancock added. “This is Yellen’s recovery, and she can’t lose it.”
If rate increases occur gradually, it shouldn’t cause illiquidity, Renna said. “We think that there will be some increase in rates, but we expect that the markets largely are going to be able to manage this increase, particularly on the long-term end as long as it’s gradual,” he added.
Show Me the Money
Lenders are back in action. Underwriting requirements have eased some, and lenders are actually competing to fund loans in some cases. The lack of new construction during the last four years, combined with what I believe is pent-up demand caused by uncertainty, should cause rents, occupancy and values to increase for the next several years. I expect to see continued property level performance improvements and increased transaction levels. As lenders continue to see the benefits of lending in what may be the largest commercial real estate recovery to date, we could all be like Jerry McGuire yelling, “Show me the money!”
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