Lenders Ready to Move Money

By Mark Scott, Founder & President, Commercial Mortgage Capital: Lenders are eager to hit their budget goals early and thus pricing typically is tight in the first quarter of the year.

Mark Scott

As we enter 2014, one thing we’ve noticed is the large amount of capital available on the part of lenders. They are eager to hit their budget goals early and thus pricing (loan spreads) typically are tight in the first quarter of the year. But there exists an even greater sense of urgency to get money out the door due to a sharp increase in CMBS volume. Add in the CREF-Mortgage Bankers convention, which took place the first week of February, and spreads further compress.

The reduced spread in loan rates translates to a reduction between the cost of funds for the lender and the rate at which these funds are lent out. Lending institutions can reduce their spread in response to factors such as more competition from other creditors, less perceived risk in the lending market due to favorable economic conditions or increased liquidity in the secondary market for these loans.

In fact, we’ve seen a tremendous run over the past 18 months and well-heeled, solid borrowers have sealed their portfolios with low rates. The life lenders who have reduced their rates want to pick the best deals and are seeking the cream of the crop.

In general, CMBS has become very aggressive and active – particularly in office, retail and industrial transactions below the $100 million mark. While life companies are snapping up A-quality assets, CMBS lenders tend to acquire properties that are B-level and below. They are also being more conservative and operating off of existing cash flows and avoiding pro-forma.

We can expect to see more transactions in 2014, but there’s also a level of fear that exists in the marketplace at the moment. There are serious questions regarding the health of the overall economy, and the fate of interest rates remains uncertain. As a result, borrowers remain eager to lock in loans at today’s low rates. Now is the time for borrowers to take a hard look at what makes the most sense for their bottom line and to recast, unwind, extend or rebind their loans into new 10- to 15-year term loans.