Business Cycles Matter
- Apr 16, 2014
Probably one of the best characteristics of real estate is the recurring business cycle markets and property types go through. You begin somewhere in the cycle with expansion or a recovery period, hit a peak, trend into recession, hit the trough, and experience a new recovery to start it all over again. It helps to make for predictability and planning for wherever you are with your portfolio or age in life. From 2013 to the present, the market has begun to see a love affair with debt funds since banks, while beginning to show signs of life, has been mainly kept to very conservative guidelines and leverage ratios.
Overall, lending has been growing. Commercial real estate lending has risen from $990.5 billion early in the first quarter of 2008 to just under $1.1 trillion in the third quarter of 2013. Multi-family loans originated by banks increased from $208.3 billion to $252.3 billion during the same period. According to Trepp, an analytics and data provider to the commercial real estate and banking industries, non-performing CRE loans represented 3.5 percent of CRE loan assets held by all FDIC-insured banks in last year’s third quarter. This number represents a 60 percent drop from a high of 8.8 percent from the first quarter of 2010. The number is, however, still 500 percent higher than it was in 2006 before the market began to see signs of strain.
What continues to be encouraging is the fact that institutional capital is partnering with traditional commercial banks to create leveraged debt opportunities so projects can be refinanced, recapitalized, or bought and sold. With more than $1 trillion dollars of commercial real estate maturing through 2018, the strategy is very complementary. According to Private Debt Investor, more than $12.8 billion worth of funds closed in 2013. Some funds are even willing to provide up to 90 percent of the cost of development using a “stretched senior” format (combining senior and mezzanine debt).
This trend is not only happening in the United States but also in Western Europe. There has been an increasing number of press releases in 2013 and more so in 2014 of local firms opening up offices in London and other major cities to capitalize on opportunities in Italy, Spain, Germany, Ireland, and the U.K. This includes the major players like Fortress and Oaktree along with well-known family offices that have significant capital to deploy and need additional opportunities to meet their hurdle requirements.
The market certainly seems to be turning the corner. If private debt funds continue to take the risk of higher leverage, their expertise and more efficient handling of a transaction will allow the market to see the market flourish and give banks courage to lend in broader spaces and property types.