Strong Signs for 2014
- Feb 19, 2014
The Mortgage Bankers Association released a report earlier this month projecting that commercial real estate and multi-family mortgage originations should hit the $300 billion mark in 2014 to end the year with more than $2.6 trillion of mortgages outstanding. There are some strong signs supporting this which are not dependent on securitized mortgages maturing from vintage fallout years.
While the success of this volume depends highly on the fiscal stimulus not changing, 85 percent of the $16.4 billion of non-defaulted commercial loans should have the capacity to refinance in 2014. The big wave of loans maturing will occur from 2015-2017, amounting to more than $188 billion of loans, 10 times what we will see in 2014, which have a higher rate of leverage and may require a recapitalization solution.
With U.S. GDP expected to grow 2.5 percent in 2014, up from 1.7 percent in 2013, along with an improving employment picture, operating fundamentals should maintain acceptable debt service levels for all strata of the debt capital stack in commercial real estate. The basic food groups of property should see modest rent growth. The lack of construction that has occurred for retail and industrial over the last few years will create solid breeding ground where banks and other funders will have increasing comfort levels to ensure projects are successful. Multi-family may begin to see a slow-down in rent growth only because of the massive investment in new construction over the last few years. Office properties will likely lag as users figure out how to maximize less space in a competitive market and understand their changing needs.
The low default trend has been maintained by the relative stability of GDP and the improvement of property values overall. This should help borrowers for more covenant-lite restrictions in their loan agreements and perhaps even more leverage when it’s a close call against the appraisal even in a market where rates continue to rise.
Given that the economy – with all its defects – remains calm, companies, and therefore properties, are continuing to improve their performance. Better than expected revenues and improving demand will mean that companies will invest in capital expenditures and property to accommodate their growth – a sign we have not seen for several years. This should improve consumer confidence as employment opportunities continue to grow and individual spending increases.