According to the Fall 2014 Surveyof Commercial Real Estate Lender Sentiment conducted by the Real Estate Lenders Associationand Chandon Economics, lenders continue to show no signs of reducing their commitment to the commercial real estate space, with commercial mortgage–backed securities (CMBS) lenders and life companies expecting to increase their market share at the expense of national and foreign banks. The survey also noted the relatively slower growth in agency lending.
Key takeaways from the survey include the following:
- The increasingly competitive lending environment leaves very little wiggle room for lenders; that said, underwriting standards can always be loosened.
- 35 percent of respondents anticipate decreasing costs for term loans.
- The majority of respondents anticipate that conduit lenders will continue to increase market share.
- Life companies and nonbank (shadow) lenders are expected to increase market share; life companies will benefit from their multivariant sources of capital while nonbank lenders continue to benefit by their flexibility and ingenuity.
- Regional and community banks will continue to exercise their local knowledge and “sharp elbows” to win business.
- While foreign banks will win their share of deals, they are not expected to be a major source of financing due to their focus on only the biggest and brightest deals.
- Equity investors favor industrial property; so do lenders.
The Next Wall of Maturities
Wait a minute—I thought it was a wall of indiscriminate equity investors we had to worry about. You know, lower and lower cap rates and then a massacre engineered by the Fed when they start to increase interest rates.
Now Trepp is warning us that we once again face a wall of maturities in 2015 to 2017. To be fair, they (and other analysts) warned us about the wall of maturities going back plus or minus five years ago; we chose to ignore it in favor of dealing with current problems. Well, the urgent can no longer drive out the important and kicking the can down the road may not cut it this time as a business strategy.
According to Trepp’s analysis, more than $300 billion in CMBS loans will mature in the 2015-to-2017 period—that’s more than 2.5 times the amount that matured in the 2012–to-2014 period. While we believe the market has the resources to absorb the shock, we are well advised to stress-test the numbers underlying any refinancing required during the next three years and dust off that Plan B from the last crises; we just may need it.
Monday’s Numbers
The Trepp survey for the week ending November 7, 2014, showed average spreads basically unchanged as lenders and borrowers alike focus on getting 2014’s remaining deals “papered” by December 31. Absent the appearance of a “black swan,” we expect nothing of note to change over the next six weeks. All-in cost remains in the wildly attractive 3.50 to 4.00 percent range.
What we do expect is see some new players—finally attracted by the spreads offered by real estate debt as compared to alternative fixed-income investments—enter the commercial real estate mortgage space. More to follow when we start to see prospective lenders’ preliminary interest converted into “lendable” funds.
Asking Spreads over U.S. Ten-Year Treasury Bonds in Basis Points | |||||||
| 12/31/10 | 12/31/11 | 12/31/12 | 12/31/13 | This week (11/7/14) | Last week (10/31/14) | Month earlier | |
| Office | 214 | 210 | 210 | 162 | 148 | 148 | 148 |
| Retail | 207 | 207 | 192 | 160 | 139 | 142 | 137 |
| Multifamily | 188 | 202 | 182 | 157 | 135 | 138 | 137 |
| Industrial | 201 | 205 | 191 | 159 | 139 | 142 | 139 |
| Averagespread | 203 | 205 | 194 | 160 | 140 | 143 | 140 |
| 10-yearTreasury | 3.29% | 2.88% | 1.64% | 3.04% | 2.38% | 2.50% | 2.45% |
The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly Capital Markets Update of commercial real estate mortgage spreads dated November 6 show no change in required spreads as compared with the prior survey period, confirming our suspicion that all everyone is thinking about and focusing on is getting this year’s deals closed as well as issuing commitments for first-quarter 2015 deals that have been in the pipeline for a while.
So long as event risk is off the table, everything remains right with the financial world.
Year Fixed-Rate Commercial Real Estate Mortgages (as of November 6, 2014) | |||
| Property | Maximum loan-to-value | Class A | Class B/C |
| Multifamily (agency) | 75–80% | T +160 | T +170 |
| Multifamily (nonagency) | 70–75% | T +170 | T +165 |
| Anchored retail | 70–75% | T +185 | T +195 |
| Strip center | 65–70% | T +185 | T +195 |
| Distribution/warehouse | 65–70% | T +185 | T +195 |
| R&D/flex/industrial | 65–70% | T +190 | T +200 |
| Office | 65–75% | T +180 | T +190 |
| Full-service hotel | 55–65% | T +235 | T + 255 |
| Debt-service-coverage ratio assumed to be greater than 1.35 to 1. | |||
Year-to-Date Public Equity Capital Markets
Dow Jones Industrial Average: +6.38 percent
Standard & Poor’s 500 Stock Index: +10.36 percent
NASD Composite Index (NASDAQ): +12.28 percent
Russell 2000: +0.87 percent
Morgan Stanley U.S. REIT Index: +17.59 percent
Year-to-Date Global CMBS Issuance (in $ billions as of 11/14/14) | ||
| 2014 | 2013 | |
| U.S. | $79.9 | $72.2 |
| Non-U.S. | 4.5 | 11.4 |
| Total | $84.4 | $83.5 |
| Source: Commercial Mortgage Alert. | ||
Year-to-Date U.S. Treasury Yields
| U.S. Treasury Yields | |||
| 12/31/12 | 12/31/13 | 11/14/14 | |
| 3-month | 0.08% | 0.07% | 0.01% |
| 6-month | 0.12% | 0.10% | 0.07% |
| 2-year | 0.27% | 0.38% | 0.52% |
| 5-year | 0.76% | 1.75% | 1.83% |
| 7-year | 1.25% | 2.45% | 2.10% |
| 10-year | 1.86% | 3.04% | 2.38% |
