Q&A: KeyBank’s 2017 Capital Markets Outlook
- Apr 04, 2017
CPE: What market trends have you observed during the past year, and how do you expect those to evolve in the near future?
Hofmann: One of the more notable things from 2016 was an uptick in international capital flows, on the debt and on the equity side. We’ve been seeing it on the equity side for some time, but it was interesting to see it flow into the debt space. The principals behind that money, they view debt as a late-cycle strategy, where you’re not taking last-dollar equity risk in markets where you’re above peak values.
We also saw non-recourse bridge lending–the debt fund product–pick up. In response to that, we also launched our own higher-levered, non-recourse bridge lending program. That space has continued to pick up, as people raise money to capture some of the maturities that will happen in 2017.
CPE: What opportunities do you see arising for investors as the remainder of the “Wall of Maturities” loans come due?
Hofmann: I think it’s difficult to say at this point, because you don’t know which borrowers are sitting and willing to inject capital into a property. It’s tough to see exactly what the balance sheet is of the sponsor behind the loans that are coming due. Given the high rate of defeasance we saw with some of the trophy properties that were pegged for 2017 maturity, the loans that are remaining could have some stress.
You’ve seen a lot of people take advantage of refinancing and paying the defeasance cost. And since there are some smaller loans in that pool, you’ll have an opportunity for small-balance lenders. It’ll be a great opportunity for CMBS. If there are some leverage issues where people need to right-size, I could see the mezzanine and debt funds playing a role.
CPE: What’s your outlook for CMBS?
Hofmann: We believe that it’s a viable product that will continue to grow. We saw risk retention implemented with the Dodd-Frank regulations at the end of the year, and it didn’t cause much disruption.
We’ve seen spreads tighten. We’ve seen borrowers still have access to capital. We’ve seen B-(piece) buyers raise a lot of money for the horizontal strategy, and then you’ve seen folks like ourselves approved to hold a vertical risk retention slice. Getting that regulation behind us and absorbing it and reacting to it gives a better message and more stability to the product, which is often a borrower’s concern.
CPE: How would you characterize the competition among lender types, including banks, CMBS, life companies and GSEs?
Hofmann: We have a unique position because we’re a commercial bank but we touch all of those products with our Fannie (Mae), Freddie (Mac), FHA, CMBS, life company and bridge loan platforms. We have a pretty good pulse as we see those capital flows. Obviously, the GSEs have been trending upward for the past few years, and they had a strong start to this year. We expect that to be a continued theme in 2017. CMBS, we believe, will continue to be viable. Banks provide a lot of liquidity to the market, and borrowers like the cost of capital and flexibility that a bank loan provides. In the long-term commercial space, the life companies will continue to stay steady or increase allocations, focusing on the trophy, best-in-class assets. And then you’ll see CMBS fill in the gaps.
CPE: Is loan quality slipping or tightening?
Hofmann: The markets have done a very good job at staying disciplined. At KeyBank, we’re very focused on sponsorship, so we’ll lend in a variety of strategies to people that we have a long-standing, meaningful relationship with. I will say that we haven’t seen credit quality slip because people are very focused on cash flow, on equity and on the credit metrics of the deal. I think that discipline is good for prolonging the cycle.
CPE: Where are we in the current real estate cycle?
Hofmann: We’re 7-plus years into the recovery. At this point, I don’t see any reason why it should be coming to an end any time soon. U.S. real assets are an attractive place for capital, both domestic and international. The economy seems to be on the right track. As far as any warning signs, I don’t think we’re concerned about those at this point.
CPE: How is the current regulatory environment impacting capital markets?
Hofmann: The next 12-18 months will be interesting to see how the new administration handles the regulatory environment. We’ve seen CMBS absorb, adapt and react positively to the regulations that have come in place. Whether there are increased or decreased regulations, it provides an opportunity to private capital. They’re the quickest to react, and they’re able to capitalize on it. As a bank, we feel good about our business and what the future holds for us and the regulatory environment we’ll be in. There will be good opportunities to deploy capital.
CPE: What do you perceive as the greatest threat to liquidity?
Hofmann: The threat is temporary disruption. When things happen internationally or here, there can be temporary dislocation in the capital markets. We’ve seen that over the past few years, but they seem to find an equilibrium again. Depending on if a borrower is facing a maturity or not, those temporary dislocations can cause some noise, and the market reacts, whether buyers or sellers have to come back to the table. Again, they seem temporary: the market finds its footing again and everyone moves forward.
CPE: What trends have you noticed in the types of projects being financed?
Hofmann: We still see a lot of multifamily activity. It’s really the full spectrum for us, since we’re such a relationship-focused bank. Our clients can find value and opportunity in a variety of markets, so we see a variety.
We’ve seen a lot of activity in the industrial space, and we like those metrics. As the economy continues to grow, you’ll see demand for office. You’re seeing people focus on a niche product and execute on a strategy. We’re very focused on finding those people.
CPE: Tell us more about KeyBank’s non-recourse bridge lending product.
We do a lot of recourse bridge lending, but we also made an entry into the non-recourse bridge lending space. It’s another product that our clients were looking for.
We’ve been very conscious in building out. The way the bank has worked, we have our balance sheet, and surrounding it are all of our capital markets executions. That way, we really provide the full suite of products and can present those options to clients and be agnostic to what they choose. We felt the non-recourse bridge product really rounded out the suite, and we see a lot of deal flow around it now.
CPE: Which capital sources will be most active in distressed assets?
Hofmann: I think it’ll come down to banks and debt funds. Borrowers with strong bank relationships will tap their bank to buy and reposition an asset, since flexibility will be key. For opportunities that don’t fit the banks, you’ll see the debt funds and the mortgage REITs fill that role. A big theme we see with our borrowers is a desire for flexibility, especially for distressed opportunities.
CPE: Is KeyBank active in affordable lending?
Hofmann: We have spent a lot of time and resources focusing on providing debt to the affordable housing space. We feel strongly about it and have seen a lot of activity around it. The agencies’ mission is very important in providing liquidity to the housing market, and we’re a partner with them in trying to meet that mission.
CPE: How has KeyBank leveraged technology?
Hofmann: Technology is changing extremely fast, so we put a lot of resources behind developing technology. It’s important we stay on top of it. On our originations side, we continue to invest in platforms to streamline our processes and track data to make sure we provide the most accurate due diligence information as we’re underwriting. We also service almost $200 billion in commercial mortgages, and so we’ve continued to really invest in that platform. I think our technology is top-of-the-market, as we provide servicing to the CMBS market, insurance companies, debt funds and other third-party providers.
CPE: What’s KeyBank’s competitive advantage?
Hofmann: Since we offer all the products from balance sheet capital to capital markets, we’re very poised to monitor the capital flows. If CMBS slows down, another part of our business picks up and vice versa. We’re extremely relationship-driven, and nothing can replace the value of those relationships. By having a very broad platform, we’re very well positioned to endure changes in capital flows as one source of debt becomes more favorable than another. The capital flows between executions instead of flowing outside the bank.