Northeast Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Northeast United States.
Issue link: https://northeastrealestatebusiness.epubxp.com/i/632700
28 • January/February 2016 • Northeast Real Estate Business www.REBusinessOnline.com Casey, senior vice president, Mid- Atlantic Capital Markets, at Walker & Dunlop, who emphasizes the value of borrowers' locking in lower rates. "If your deal has a three- to fve-year time horizon, getting the interest rate pro- tection for the full term is currently a good trade." The Federal Reserve's announce- ment is good news, says Bach. "The Fed is confdent the U.S. is strong enough to weather turmoil including the oil and commodity bust, the weak manufacturing sector, and slowing growth in China." Most commercial real estate lending executives interviewed for this article share Bach's sentiment about the state of the U.S. economy and the com- mercial real estate industry. They are maintaining a business-as-usual, if not upbeat, tone about the capital markets landscape in 2016. Reasons for Bullish Outlook As a result of the Fed's action in December, the target for the federal funds rate increased a quarter point to a range between 0.25 percent and 0.50 percent. The range had been 0 to 0.25 percent. The Fed's move ended an unprecedented seven-year period of near-zero interest rates following the recession, according to Bach. "That still translates into historically low rates for commercial real estate lending and should be absorbed with- out too much disruption," says Diana Reid, PNC Bank executive vice presi- dent and head of the Pittsburgh-based company's commercial real estate business. What's more, the 10-year Treasury yield, the benchmark for long-term, permanent fnancing in commercial real estate, was 2.08 percent as of Jan. 13, which is near historical lows. The United States is viewed as a safe haven for investors, and the country's commercial real estate sector offers peace of mind that the often-jittery stock market cannot. Funds are ex- pected to continue fowing into all property types, especially well-under- written investments with strong spon- sors in markets with population and job growth. Optimistic Loan Originators The Mortgage Bankers Association (MBA) projects originations of com- mercial and multifamily mortgages will rise 6 percent in 2016 to $485 bil- lion. That positive projection was rein- forced in a newly released survey of MBA's top commercial and multifam- ily mortgage origination frms, which indicated that 61 percent of respon- dents expect their own frm's origina- tions to increase by 5 percent or more in 2016 compared with the prior year. If respondents of the MBA survey are correct in their predictions, com- mercial and multifamily originations will increase among all major investor groups in 2016, with CMBS experienc- ing the fastest growth. Some 64 per- cent of respondents expect CMBS loan originations to increase by greater than 5 percent. "With strong market fundamen- tals and [with so many] 10-year loans made during 2006 and 2007 maturing this year and next, lenders also antici- pate strong demand from borrowers," The commercial mortgage-backed securities (CMBS) market plays a vi- tal role in real estate fnance. Not only do conduit lenders fnance trophy properties in major metros, they also provide capital to small and medium- sized borrowers who own Class B and C properties in secondary and tertiary markets. The overall lending market for com- mercial real estate functions best when a healthy CMBS segment is providing fnancing solutions for properties and asset classes that other lending sources won't consider. And with an estimated $350 billion of CMBS loans maturing between 2015 and 2017, this fnancing vehicle is in the spotlight. "While the CMBS industry is more vulnerable to market conditions than banks and insurance companies, as witnessed during the latter half of 2015, CMBS is a viable product that fortunately is here to stay," says Coo- per Willis, executive vice president and co-director of the Southeast Re- gion for Bellwether Enterprise. U.S. CMBS issuance totaled $97 bil- lion in 2015, up from $93.1 billion in 2014, but annual volume fell short of expectations, according to Trepp LLC. The New York-based analytics frm closely tracks the industry's perfor- mance. Heading into 2015, the expec- tation was the market would generate between $100 billion and $125 billion in new issuance. As 2015 began, bond prices re- mained relatively stable. The risk pre- miums that investors require from the bonds they buy — known as spreads — ranged between 82 and 92 ba- sis points over swaps for the frst six months of the year, according to Trepp. This steadying market trend allowed lenders to proftably write loans for sale through CMBS. Through June 2015, nearly $52 bil- lion of CMBS had been issued. But then the fxed-income markets desta- bilized. Bond spreads began to wid- en, reaching levels not seen in years. Spreads jumped from 92 basis points over swaps at the end of June to 125 basis points over swaps in Septem- ber, a 35 percent increase in just three months, according to Trepp. Lenders that had written loans as- suming they'd be able to sell them at prices resulting in yields of 92 basis points over swaps were suddenly un- derwater, reports Trepp. The widening of spreads led to a decline in the num- ber of lenders participating in the mar- ket. Amid the volatility, the volume of CMBS issuance in the second half of the year was 17 percent less than in the frst half of 2015. William Ross, president of North- Marq Capital, projects CMBS deal fow to be in the neighborhood of $125 billon this year despite some of the recent hiccups experienced in the lending segment. "The CMBS market [has seen] a lot of vulnerability [re- cently], but as we enter 2016, we think it should settle down and probably return to a more normal buy-sell side mentality." Increased capital markets volatility, such as the recent one-day spike of 13 basis points in the 10-year Treasury yield, negatively affects the CMBS market. High-yield bonds experienced considerable pressure in the frst half of December, says Willis. If that trend continues, the Bellwether Enterprise executive believes that it could have "serious consequences" for CMBS. Diana Reid, executive vice presi- dent at PNC Bank and head of the Pittsburgh-based company's commer- cial real estate business, says the capi- tal markets volatility translates into higher rates for loans sold into CMBS trusts. "Higher rates plus spread vola- tility mean a tougher time refnancing the 2006 vintage loans," she empha- sizes. "We expect the special servicers for vintage trusts to be busy in 2016." A large volume of loans originated during the 2006-2007 period must be refnanced, and interest rate and spread volatility will make it harder to aggregate and hedge loans in anticipa- tion of issuance, adds Reid. The CMBS industry is also dealing with a new layer of complexity. Issu- ers and subordinate class buyers are fguring out what the "new CMBS 3.0 structure" will be to comply with risk retention rules, says Reid. Starting at the end of 2016, risk re- tention rules stipulate that subordinate debt buyers purchase 5 percent of a transaction. Also, those buyers cannot sell the investment for fve years. These new requirements come on the heels of Regulation AB, which increased the obligations of a CMBS sponsor and thus the cost and time in- volved in completing a deal. The B-piece buyers — investors who buy the non-investment grade portions of a CMBS issuance — will maintain a strong hand in 2016, sub- ject to the market working through the new retention rules, says Brian Casey, senior vice president, Mid-Atlantic Capital Markets, at Walker & Dun- lop. Casey cites the growing refnance market as a factor that will help boost CMBS volume this year. "Large issuers will continue to pres- sure smaller issuers. Knowing which structures and which property types are getting the best response will be key to accessing the best deal," says Casey. Joe DeRoy, senior vice president and head of CMBS at KeyBank Real Estate Capital, agrees with Casey that the B- piece buyers will continue to have a big infuence on the marketplace. "CMBS B-piece buyers have been shaping pools through restructures and loan kick-outs for some time," says DeRoy. "However, that became more prevalent in the second half of 2015." — Brian A. Lee CMBS MARKET PERSEVERES DESPITE VOLATILITY Annual CMBS Issuance Runs Hot And Cold* EXPECT ANOTHER YEAR OF ROBUST LENDING LENDING from page 1