At the 2013 Mortgage Bankers Association CREF/Multifamily Housing Conference, David Durning, president and CEO of Prudential Mortgage Capital Co., explains Prudential’s targets for balance sheet, Fannie Mae, Freddie Mac and FHA, CMBS and bridge financing for 2013.

Could the conduit financing recovery reverse course overnight? Not likely, according to some experts, who believe a sudden evaporation of conduit financing is less likely this time around because the economic recovery appears to have legs.

Make no mistake, spreads for conduit loans can spike, as has been demonstrated in recent history. “We have seen disruptions before. There were a few instances in the last years. Spreads can increase suddenly, and CMBS financing can become non-competitive very quickly,” said Gary Tenzer of George Smith Partners.

A recent false start in the CMBS market occurred in 2011, when the recovering market was derailed by the European debt crisis and concerns about the U.S. economic recovery. “Because of the volatility, it was difficult to price deals on the front end,” explained Rusty Fleming, partner at Morris, Manning and Martin L.L.P. When the loans were taken to market, the conduits were not able to obtain the yields they anticipated. “That shut down the market.”

However, though a reversal of the current CMBS financing recovery is “always possible,” it is currently unlikely, according to Fleming. “We feel the U.S. and world economy are at different places now compared to two years ago.”

Tom Muller, co-chair of the real estate and land use practice group at Manatt, Phelps & Phillips L.L.P., agreed that the conduit market “would not be as easily derailed again.” He elaborated: “We expect the conduit market will be sustained for the next several years because the U.S. general economic recovery will be sustained for the next several years.”

Tenzer said borrowers can protect themselves against possible CMBS market disruption by locking in rates. “CMBS is a volatile market. Until you get to the point of locking the rate, you do not know you have a deal.”

CMBS financing allows for early rate locks of about 30 days in advance. But Tenzer also stressed that the borrower should not lock the rate until the due diligence, such as environmental reports, has been performed. Borrowers could lose their deposit if they lock the rate and decide not to complete the transaction.

 For more on the conduit market’s performance, see “Comeback Redux” in the May 2013 issue of CPE.

Life companies and pension funds increased their market share of commercial property financing last year despite ongoing industry deleveraging, and the mortgage loans yielded a total return of 4.7 percent for the institutions in 2012.

According to the Giliberto-Levy Commercial Performance Index, 25.6 billion in new permanent mortgages were originated in 2012 by institutional balance-sheet lenders. The Index principal balance ended 2012 at a total level of 180.6 billion, compared to 178.7 billion in 2011. The Giliberto-Levy Index is a private debt market index that tracks senior loans made by balance-sheet lenders, primarily life companies and pension funds.

“The good news here is that the life company/pension fund activity is actually increasing and gaining market share in the overall commercial space,” said Michael Giliberto, co-founder of the Giliberto-Levy Commercial Performance Index. He noted the increase in principal balance was occurring at a time when the commercial property sector was still deleveraging.

Speaking at a webinar reporting on the Giliberto-Levy 4Q Index, Giliberto noted that office and industrial lending by the institutions lost market share last year, while apartment lending by the institutions gained share. Office mortgages comprised 26.3 percent of total mortgage lending by the institutions, industrial made up 12.6 percent, and apartments were 20.1 percent of the total. Sixty percent of the institutional senior loans consist of five- to seven-year loans.

The Giliberto-Levy Index showed total returns from the balance sheet loans was 4.7 percent for the institutions in the whole of 2012. Giliberto noted that this return was higher than 10-year Treasury returns.

The Index showed that while 10-Year Treasury yields increased from 1.65 to 1.78 percent in the fourth quarter, 10-year mortgage spreads narrowed from 2.60 to 2.35, resulting in a net decrease in mortgage yield of 0.12 percent for the institutional lenders.

Fannie Mae’s priority in 2013 will be to continue focusing diligently on loan quality. “We intend going into 2013 to pay careful attention to the market to make sure we appropriately buy loans that meet our credit standards,” said Jeffrey Hayward, senior vice president, head of the Multifamily Mortgage Business, Fannie Mae.

Hayward was speaking to reporters at a press briefing held during the Mortgage Bankers Association’s annual Commercial Real Estate Finance/Multifamily Housing Convention and Expo.

Fannie Mae has announced that it provided $33.8 billion in financing to the multi-family market in 2012, the third highest acquisition level in its history. The company said it remained the largest source of multi-family financing in 2012, financing nearly 560,000 units of multi-family housing.

The real significance of the total production volume achieved last year “is not necessarily the number, but the fact that we continue to serve all segments of the market, and that we did it through…Delegated Underwriting Servicing. In essence, every dollar that we advanced, there was risk sharing involved,” said Hayward.

Hayward noted the multi-family financing market was also bigger in 2012 compared to the year before. Fannie Mae reported that its loan production increased in the categories of multi-family affordable housing, small loans, large loans, manufactured housing communities, and student housing, while falling slightly for structured transactions and seniors housing. “[In] almost every segment of the market, we were at least flat, or in some cases way ahead of where we were in 2011,” he commented.

Hayward pointed out that Fannie Mae through the first quarter has earned more than $1 billion in net profits for U.S. taxpayers. “We understand that is part of our responsibility to deliver benefits to the taxpayer, and we are proud of our ability to have done that.” According to Fannie Mae, 88 percent of the units in its current book of business support families of modest means earning 100 percent or less of Area Median Income.

Fannie Mae and Freddie Mac are required by the government to reduce their investment portfolios by 15 percent annually. The targeted portfolio size for each of the GSEs is $250 billion, which is projected to be reached in 2018, four years earlier than expected. However, that does not mean that Fannie Mae’s level of participation in the multi-family market will shrink, as the agency is currently securitizing its multi-family loans and not retaining them on its portfolio.

In answer to a question, Hayward said he is not aware of any directive from the government for Fannie Mae to reduce its footprint in the multi-family space.

“Our participation in 2013 will be the larger result of what the DUS lenders ask us to do as we work in partnership with them. It will be the result of choices they make in the marketplace … We will be there to provide liquidity when we are called upon. That is how we see our mission.” He also said that Fannie Mae will continue to make financing available to primary, secondary and tertiary markets.

Last year, Fannie Mae multi-family financing achieved averages of 65 to 66 percent on LTVs and slightly below 1.50 in Debt Service Coverage, Hayward reported. He said that the likely greater competition in the financing marketplace this year would be welcome, and he acknowledged that if the conduits start providing greater loan proceeds or more favorable interest-only features, Fannie Mae’s will see its market share decline in 2013.

San Diego—Mortgage originations for commercial properties will increase by 11 percent in 2013, the Mortgage Bankers Association (MBA) forecasted. The market share of multifamily financing may tick down this year as capital supply to the other commercial real estate sectors make a comeback.

At MBA’s Commercial Real Estate Finance/Multifamily Housing Convention & Expo, MBA released its 2013 mortgage financing outlook. Originations of commercial and multifamily mortgages will grow to $254 billion in 2013, compared to $229 billion in 2012. (In its inaugural financing volume forecast, MBA had predicted the 2012 volume to be $230 billion.)

“Our forecast anticipates Fannie Mae, Freddie Mac and FHA, as well as life insurance companies, will all continue to have strong appetites for making loans, and—coupled with growth in originations for CMBS—the total market will continue to expand,” stated Jamie Woodwell, MBA’s vice president of Commercial Real Estate Research, in a press release.

At a press briefing during the conference, Woodwell predicted that multifamily financing will total about $105 billion in 2012. This financing volume far outstripped expectation, as only $77 billion was originally forecasted for the multifamily sector for the year.

Multifamily financing volume may experience a slight shrinking in 2013 and subsequent years to “a more traditional size” relative to the overall commercial property mortgage market, said Woodwell, during a press briefing held at the conference. Woodwell said multifamily financing had seen its share of the overall commercial property financing market increase due to funding availability and multifamily fundamentals. In 2012, multifamily financing was 46 percent of total commercial property mortgage financing. As mortgage funding for the other sectors are returning a little more strongly, however, “we’ll see more of that traditional balance” between the multifamily and commercial property market shares, said Woodwell.

MBA forecasts GDP to increase to 2.0 in 2013 from 1.8 percent last year, while unemployment rate will fall to 7.6 percent, compared to 8.1 percent for 2012. MBA said the 10-year Treasury yield will rise slightly from 1.8 percent in 2012 to 2.2 percent for 2013. However, actions by the Fed, on which a large part of the interest rate prediction is predicated, could be unpredictable, noted Jay Brinkmann, chief economist and senior vice president of Research and Education.

In the fourth quarter of 2012, MBA reported that commercial and multifamily mortgage originations increased by 49 percent compared to the fourth quarter of 2012. “During the fourth quarter, commercial and multifamily mortgage borrowing and lending hit the highest level since 2007,” stated Woodwell. MBA’s mortgage bankers originations index shows originations for 2012 increased by 24 percent compared to 2011.

The fourth quarter increase in commercial/multifamily lending volume was driven by increases in originations for hotel and office properties, according to MBA. The mortgage financing volume increases, relative to fourth quarter 2011, were 331 percent for hotel properties, 78 percent for office properties, 49 percent for multifamily properties, 46 percent for industrial properties, 5 percent for retail properties and 26 percent for health care properties.

By investor type, the dollar volume of loans in the fourth quarter compared to the same period in 2011 rose by 228 percent for CMBS, 68 percent for commercial bank portfolio loans, 51 percent for GSEs and 18 percent for life insurance companies.

MBA President & CEO David Stevens

The low-interest-rate environment is driving the demand for relatively higher-yielding commercial real estate loans, and the commercial real estate financing industry cautiously greeted the rapid return of liquidity into the sector during the Mortgage Bankers Association’s (MBA) 2013 Commercial Real Estate Finance/Multifamily Housing Convention & Expo. The exposition opened on Monday with a record attendance level of about 2,600.

“As the year begins, we can see positive momentum,” said Debra W. Still, 2013 MBA chairman, at the opening session. “Commercial and multi-family real estate finance has enjoyed a relative calm amidst the storm.” Still, she noted favorable conditions for both financing and commercial real estate–interest rates are lower than ever before, and yields and cap rates remain attractive relative to those of other investments. “Multi-family markets have arguably never been stronger, and office and retail markets offer plenty of upside.” Still cited, however, challenges to the commercial property sector including the European sovereign crisis and federal deficit, and she referred to the current “artificially low” interest rates.

“You feel good about the business environment, and you should,” said David Stevens, MBA president and CEO, in addressing attendees during the opening session. Stevens said that delinquencies are at the lowest level since 2009, the $2.4 trillion in mortgage outstanding is increasing, and CMBS issuance is expected to grow this year to $65 billion from $45 billion last year. “This really reflects the demand and recovery on the private capital side.” Life insurance companies and banks, meanwhile, are also looking to retain mortgages, he said.

On the other hand, although the low interest rates provide many benefits, Stevens said, capital is struggling to obtain concurrently desirable yield levels and asset quality in the low-yield environment.

One fear among market participants is that debt investors’ bid for the relatively higher returns offered by commercial property could lead to lower underwriting standards and a weakened CMBS sector—all too soon–as lenders compete for the same deals.

Debt investor groups across the board are generally said to be increasing their appetites for commercial loans this year. CMBS and bank financing has returned to the market, while life insurance companies and the GSEs are expected by many industry players to maintain if not increase the dollar amounts of their financings in 2013. Fannie Mae closed 2012 with $33.8 billion in multi-family financings, while Freddie Mac announced $28.8 billion in new multi-family volume for the same year.

A key driver of increased liquidity for the overall commercial property sector has been the recovery in demand among investors for CMBS. “Sustained bond market rally in the second half of 2012 has helped drive down funding costs, enabling CMBS lenders to reduce rates charged to borrowers,” stated Jones Lang LaSalle in a press release.

In the session “The Search for Yield,” moderator E.J. Burke, executive vice president and group head of KeyBank Real Estate Capital, commented that it appears “there is far more capital chasing for a home than there are good deals.”

“A lot of this has come back too quickly. We are concerned about how fast things have moved in terms of risk tolerances,” said Kevin Riordan, president, CEO and director of CreXus Investment Group. “I can’t answer if $100 billion is a normal market [for CMBS financing], but I think we are getting there too quickly.” Riordan also said that the “creep” over time of lenders institutions to the secondary market has already turned into a “herd.”

Life companies are still under-allocated to the multi-family sector in the billions, estimated Brian Casey, managing director and head of real estate debt strategies of MetLife Inc., in responding to a question about how much financing life companies would execute under ideal circumstances.

And Diana Reid, executive vice president of PNC Real Estate, said that banks have resolved their balance sheet issues and become more competitive in multi-family construction financing in the fourth quarter. As a result “there are more lenders looking for the same deals,” she said. Still, pricing, rather than recourse, remains the point of competition.

There were also questions raised about the self-regulation of CMBS and whether B-piece buyers are holding onto the risks rather than selling them. “I do not believe we are at CMBS 2.0,” said Reid, referring to the new, safer regime of CMBS that will prevent a repeat of 2007. Reid noted the Dodd-Frank risk retention regulations are yet to be released.

MBA announced this week that it forecasts commercial multi-family mortgage originations to increase by 11 percent to $254 billion in 2013 from 2012. Commercial and multi-family mortgage originations jumped by 49 percent in the fourth quarter compared to the same quarter in 2012.

By investor type, the dollar volume of loans in the fourth quarter of 2011 compared to the same period in 2011 rose by 228 percent for CMBS, 68 percent for commercial bank portfolio loans, 51 percent for GSEs and 18 percent for life insurance companies. For the entire year, originations in 2012 rose by 24 percent, MBA reported.

JLL said it expects capital availability to drive transaction volume increases of 15 to 20 percent in 2013. “Competition for core product is opening up attractive opportunities for borrowers,” it stated, and that JLL’s capital markets experts are “seeing a variety of aggressive debt structures,” on core products such as debt yields between 8 and 10 percent and DSC ratios of 1.15 to 1.35.

While making possible many deals and rescuing mortgages from default, the extremely low interest rates also introduce another point of concern: refinancing risk in the future when and if interest rates should increase again, and many speakers referred to that risk. Financed at extremely low interest rates, properties may have difficulty finding refinancing if interest rates rise significantly in future, especially if they have not amortized, or property values do not rise, adequately.

The longer the low interest rates persist, the greater the buildup of stress, said Sally Gordon, managing director, Risk and Quantitative Analysis Group, of BlackRock, Gordon presented a general session on portfolio diversification strategy.

The seeming lack of euphoria among lenders despite the return of liquidity could also  be attributed perhaps to the recognition that the abundance of capital, especially that slushing in the CMBS markets, could disappear overnight and be affected by both foreign and domestic developments, as has happened in recent memory. “Liquidity can evaporate faster than you even thought possible,” commented Gordon.

The potential volatility of the capital markets tied in with the life lessons of guest speaker John Bucksbaum, founder of Bucksbaum Retail Properties LLC. Bucksbaum recounted his experiences with the financial crisis in the late-2000s as former CEO of retail giant General Growth Properties (GGP). One of his biggest mistakes, where the GGP bankruptcy was concerned, was to allow mortgage maturities to compress in the same time period, said Bucksbaum. The second mistake, in view of the fact that liquidity could disappear very quickly, was to not raise equity when there was the opportunity, and to wait for higher stock prices before making a stock offering for the public company. “You don’t always know when you can raise equity. The day may come when “you need equity, and you don’t have it,” said Bucksbaum.

And as Gordon said, once liquidity dries up, it may be too late to mitigate the risk.

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New York—Follow the job growth. That was the key takeaway during “Secondary and Tertiary Markets: Identifying, Finding and Investing in Commercial Real Estate Opportunities,” the recent Multi-Housing News and Commercial Property Executive webinar sponsored by Yardi and moderated by Executive Editor Keat Foong. Panelists, which included Gary Ralston, managing partner, Coldwell Banker Commercial Saunders Ralston Dantzler Realty LLC; John S. Sebree, vice president, national director, National Housing Group, Marcus & Millichap Real Estate; Albert M. Berriz, CEO, McKinley; and Ernie Katai, senior vice president, Berkadia, looked into commonly overlooked markets and provided insights for investors.

Gary Ralston

Focusing on the commercial property sector, Ralston said that investors are still concentrating on safe investments, and on an aggregate basis in secondary markets, the prices are still down. The annual population growth of the United States is almost 1 percent, so, according to Ralston, the goal of investors is to focus on states that are growing above that, such as Florida, Texas and Nevada. Additionally, investors and developers should pay attention to areas of employment growth, which he says has shifted to port-driven areas.

Other important tips that Ralston provided were to work with the best local professionals and to know the employment numbers and supply on a granular level.

“It’s a battle out there, and it’s fought with swords and not lasers, so get in close!” Ralston said.

On the multifamily side, Sebree also showed that the outlook for tertiary markets is appealing, especially in terms of employment.

“Tertiary markets tend to be more stable over time,” he said. “The change in [job growth] is dominated by tertiary markets.” However, in terms of employment, Sebree said that secondary markets tend to be more unstable.

Multifamily markets tend to follow employment rates, so according to Sebree, apartment vacancies correlate with employment rates.

He also suggested looking into these markets when it comes time to invest. According to Sebree, the markets with the lowest vacancies are New York (primary market); Portland, Ore. (secondary); and Salt Lake City (tertiary). The markets with the most positive movement in vacancies include Houston (primary); Charlotte, N.C. (secondary); and Columbus, Ohio (tertiary).

“Today is an incredibly good time to purchase,” Sebree said.

Berriz, who is involved in commercial and multifamily properties, provided a case study of the areas of the country his company focuses on. He echoed the other presenters in their assertions of looking to the areas of growing employment.

“Strategically, we’re very surgical,” he said. “We’re only looking in certain areas, and if you look in these areas, there’s terrific job growth.”

These areas, which Berriz said are commonly overlooked, include Cary, N.C.; Spartanburg, S.C.; and Gainesville, Fla.

“Most people don’t travel to these markets because they’re hard to get to,” Berriz said. “I urge the audience to think about [different] areas.”

Berriz also suggested some other secondary and tertiary markets with the most opportunity for investors. These include Houston, Atlanta and Las Vegas.

According the Berriz, investors should also be looking into Class-B and C multifamily properties, and the retail sector. However, do so cautiously.

“Be careful, because there are a lot of Class-C properties that can’t be turned around,” he said. “Not all assets are created alike.”

The final panelist, Katai, spoke about lenders and how they look at secondary and tertiary markets.

“Lenders define secondary and tertiary markets differently,” he said. “It’s still a bit of a wildcard how lenders will deal with it.”

According to Katai, lenders are primarily looking for jobs and economic growth and the financial strength of the borrower. They are also looking for quality assets that have a lower purchase price. Lenders are also finding a lot of desirability in college areas. Additionally, he suggested looking for different sources of financing, such as co-ops of small banks, instead of the usual large banks.

“There is no formula—everything is per the individual lender,” Katai said. It comes down to basic fundamental issues. You have to do your homework.”

New York City’s tallest building outside of Manhattan, the 1.4 million-square foot Queens trophy tower known as the Citigroup building, is coming under new ownership.  Paramount Group Inc. and Colony Capital L.LC.  are buying the property for about $475 million, sources  familiar with the transaction said Wednesday.

A report by Lois Weiss in today’s New York Post indicated that the deal was scheduled to close on Wednesday, although it could not immediately be confirmed that the Paramount/Colony joint venture had completed the acquisition from SL Green Realty Corp. and its investment partner, JPMorgan Chase & Co. If a closing occurred Wednesday, or is imminent, it would reflect a rather lengthy gestation period for the sale; SL Green first disclosed that the deal was under contract last November.  The REIT estimated at the time that it would earn about $42.8 million in proceeds from the sale.

Formally called One Court Square, the 50-story office building designed by Skidmore, Owings & Merrill has dominates the skyline of Long Island City, a section of Queens located directly across from Manhattan.  SL Green acquired the building in 2007 as part of its $6 billion acquisition of Reckson Associates Realty Corp. and its 9 million-square-foot office portfolio.  The building is fully leased to Citigroup, which sold the asset to Reckson in 2005 for a reported $470 million.

In a statement Wednesday afternoon, Cushman & Wakefield Inc. said that had arranged preferred equity for Paramount and Colony. “The investment features a bond-like income stream, along with a going-in basis well below replacement cost,” said Helen Hwang, an executive vice president in Cushman & Wakefield’s capital markets group.