No one knows what the future will hold for commercial real estate financing in the coming year but there are several factors that will have an impact. In the past year low interest rates, rental growth, and higher property values, and more investor activity has created a stronger financial landscape for loans but has also driven up the demand.
National Real Estate Investor has identified three major factors that will have an impact on commercial real estate financing in the coming year: interest rates, availability of capital and lender competition, and changes in CMBS regulations.
National Real Estate Investor reported that there is much uncertainty and speculation but they believe that interest rates will stay low throughout 2017, “While the Federal Reserve will likely raise interest rates in the upcoming year, these increases will not significantly impact lending activity. We anticipate these increases will not be more than a quarter of a percentage point. Even with these anticipated hikes, the 10-year Treasury rate will remain substantially lower than the four to five percent range, which we saw prior to the Great Recession nearly a decade ago.”
According to Fox Business, experts differ on the exact number of rate hikes that will come in 2017, “Some say that President Donald Trump’s economic policies won’t have their full desired growth effect until 2018 and therefore that’s when the rate hikes will really get started. Others say that there’s a real possibility that inflation and economic growth will get a little overheated this year, and even steeper rate hikes than predicted could be implemented.”
At the moment, rates for 10-year fixed rate loans are averaging 4.25 to 4.50 percent depending on leverage, and 15-year fixed rate loans are at an average of about 4.75 percent. Compared to rates from the past, the rates should remain relatively low in 2017.
Availability of capital and lender competition
There will be much more lender competition in the coming year as there are more and more sources of capital on the financial landscape. Availability of capital should remain strong in 2017 due to low unemployment rates, increased property values and rising rental rates.
“Rising property values, robust property fundamentals, low interest rates and a strong transaction market continue to drive potentially record setting paces in commercial and multifamily mortgage originations,” said Jamie Woodwell, MBA’s vice president of commercial real estate investor research. “Originations for bank balance sheets, life companies and Fannie Mae and Freddie Mac are all running ahead of last year’s record paces.”
According to the National Real Estate Investor, there are concerns that multifamily may be reaching its peak, multifamily is still one of the most desirable products to finance, “National vacancy rates are down, rents are up and overall market fundamentals remain solid. The challenge of making a down payment for single-family homes is delaying home ownership and driving a fundamental shift toward renting, making multifamily a strong asset class for investment.”
This is resulting to banks and other capital sources offering lower rates for multifamily and industrial type products and higher rates for office and retail. Lenders are focusing on less volatile deals. Industrial and multifamily will see increased competition in the coming year.
Changes in CMBS regulations
First of all, what is CMBS? Commercial mortgage-backed securities (CMBS) emerged in the 1990s and the market has been received by lenders favorably by lenders, borrowers, and investors. According to REIT, “The concept of creating fixed-rate bonds with different risk tranches out of a diverse portfolio of commercial property mortgages has led to improved loan availability and provided investors with attractive yields, analysts say.”
A new CMBS bill is taking effect and it requires CMBS lenders to keep five percent of the loans they issue instead of selling them as bonds. CMBS was intended to protect issuers against risky lending but the new risk retention rules will eat into their profit margins and this could drive some small CMBS lenders out of the market.
REIT explains it like this, “The rules require that every CMBS deal have a 5 percent share retained by an investor or a third party, for a minimum of five years. The 5 percent share can be either vertical, representing ownership across all of the bond classes, or horizontal, in which case the 5 percent share can be retained by a third party investor who typically buys the most subordinate bonds in a CMBS deal, commonly known as the B piece of the security. A combination of both a horizontal and vertical share is also permitted.”
NREI reported that there has been some talk about Trump repealing the Dodd-Frank risk retention rules. This would reverse the impact the new rules would have on CMBS lending. However, this change will not happen instantly and there is ambiguity as to when this reversal will take effect, if it happens at all.
Despite all of the uncertainty, the real estate financing landscape of 2017 should remain strong as the availability of capital stays strong and low interest rates will continue.