Market Players Foresee Strong Year for Capital Markets
- Feb 15, 2017
Availability of debt and equity capital will remain strong this year, despite concerns that the commercial real estate sector is reaching its peak, according to the annual survey of the Commercial Real Estate Finance Council (CREFC), a Washington, D.C.-based trade group that represents the real estate finance industry.
Participants in the survey—which included lenders, CMBS investors and service providers—were generally optimistic about the economy, with nearly 90 percent expecting the economy would get better or remain the same in 2017. The biggest concerns stem from geopolitical factors.
Roughly two-thirds of the participants expect the availability of debt to be very or somewhat favorable in 2017, with only 17.1 percent expecting unfavorable conditions. About two-third of participants expect favorable equity capital conditions to remain the same, although there was a split between domestic and foreign investors. Twice as many survey participants think domestic investment will decline rather than increase (22 percent to 11 percent), while the results were reversed for foreign investment (22 percent expect it to increase and 11 percent expect it to decline).
“It continues to be a very good time to be in the business of commercial real estate finance, and to be a commercial real estate investor and borrower. Though there is some concern that we are nearing the peak of the current U.S. real estate cycle, valuations are generally holding, with ample credit available for new loans and refinancings of maturing quality loans,” said Lisa Pendergast, executive director of CREFC.
On questions related to debt availability, participants were optimistic about each lender type. Just over half of those surveyed think life company lending will grow, while only 4 percent expect it to decrease. Some 81 percent predict bank balance-sheet lending to stay the same or increase, while 19 percent predict it will decrease.
In CMBS, 58 percent of those questioned believe volume will increase from the $75 billion floated in 2016. Most of those forecasts (44 percent) were in the $75 billion to $100 billion range, with 14 percent voting for more than $100 billion. The other 42 percent expect volume to decline, with almost all of the votes going into the $50 billion to $75 billion bucket.
On other issues related to CMBS, some 80 percent of respondents believe CMBS spreads will be volatile due to a combination of regulations, geopolitics and changes in real estate fundamentals, issuance and underwriting standards. Roughly three-quarters of respondents expect troubles refinancing 2007-vintage CMBS loans, voting that more than 25 percent of those loans will default. A minority foresees defaults of that vintage to be 25 percent or less.
Survey participants were very bullish on multifamily lending. About half expect lending by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac to remain the same, while 40 percent expect GSE volume to increase and 10 percent to decrease. On non-GSE multifamily lending, 61 percent expect it to be stable, with 28 percent forecasting an increase and 11 percent a decrease.
On the issue of where the market is in the cycle, 53 percent of respondents said the commercial real estate market is at its peak and 44 percent said it is in the middle. However, the results varied significantly by property type. Slightly more than half voted that hotels (54 percent) and multifamily (52 percent)—sectors that have had extremely strong recoveries from the last downturn—were at their peak. But the percent of participants that thought the asset class was at a peak was much lower for other property types, including office (28 percent), retail (26 percent) and industrial (21 percent).
Survey participants had mixed feelings when it came to the impact of new regulations on their business, with 38 percent saying that the mandates had no impact on the business, 33 percent saying it made them more competitive and 28 percent saying it made them more competitive. There was a large difference in lender types, though. Commercial banks were less competitive as opposed to more competitive by a 50 percent -to-17 percent margin, with a third saying it had no impact. The biggest impact will be felt in construction loans, survey participants said.
Life companies, on the other hand, were more competitive vs. less competitive by a 4 percent-to-25 percent margin. Surprisingly, given the attention to the impact of Dodd-Frank in the securitization markets, 31 percent of CMBS lenders voted they were more competitive and only 25 percent said they were less competitive. The vast majority of high-yield and distressed investors (67 percent) voted they were more competitive, while only 8 percent said they were less competitive as a result of new regulations. Doubtless, that reflects the increasing conservatism of balance-sheet lenders, which produces a greater need for mezzanine financing.
Pendergast said the survey on the whole reflects the resilience of the sector’s capital markets. “The dynamism of the commercial real estate finance market continues to be impressive, with CMBS issuers adjusting to new risk-retention requirements that took effect on Dec. 24, 2016, and portfolio lenders, private equity and a new generation of other lenders stepping in to fill gaps and enable opportunity in the investment marketplace,” she said.