Northeast Real Estate Business

JAN-FEB 2016

Northeast Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Northeast United States.

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www.REBusinessOnline.com Northeast Real Estate Business • January/February 2016 • 29 says Jamie Woodwell, vice president for commercial real estate research at MBA. The commercial/multifamily mort- gage debt outstanding at the end of the third quarter of 2015 totaled $2.76 trillion, with banks and thrifts holding 37.5 percent of that debt. Some 41 per- cent of MBA's survey respondents ex- pect commercial and multifamily loan originations by banks to increase more than 5 percent in 2016. A Note of Caution The boom period from 2011 to 2015 in commercial real estate investment was driven by a lack of supply, de- pressed valuations, availability of cap- ital and low interest rates, says Reid. "But in 2016, interest rates will go up, supply and demand [will be] more in balance and valuations are at a peak. Equity capital is ready to invest, but lenders will be more cautious about new development and investment." That note of caution is directed pri- marily at the apartment sector. Multi- family lenders have been anticipating a plateau in the sector's performance at some point, given the substantial amount of new product coming on line to capitalize on the improving economy and the prime millennial renter segment of the population. "The only caution fag is the large block of multifamily development causing banks to give pause to mul- tifamily construction lending," says Berkadia's Higgins. The national apartment vacancy rate climbed 10 basis points in the fourth quarter of 2015 to 4.4 percent, ac- cording to Reis. This marked the sec- ond consecutive quarter that vacancy ticked up for the multifamily sector, something that hasn't happened since the third and fourth quarters of 2009. Supply and demand had been in equilibrium between mid-2013 and mid-2015, but began to fall out of bal- ance during the latter half of 2015, reports Reis. Construction exceeded absorption by 12,350 units in the third quarter and by 15,263 units in the fourth quarter. By comparison, con- struction only exceeded demand by 3,471 units in the second quarter. The easier apartment upgrades and development deals have already been completed, according to Walker & Dunlop's Casey. "Development deals left on the drawing board from the downturn have largely delivered," he says. "Future projects that may be just a little bit off could be penalized. Be aware of the pipeline that can fip the switch and change direction to condo- minium [product] in the stronger mar- kets." Cooper Willis, executive vice presi- dent and co-director of the Southeast Region for Cleveland, Ohio-based Bellwether Enterprise, agrees that f- nancial institutions are keeping a close eye on new multifamily supply. "Construction fnancing will remain readily available, although multifam- ily underwriting will be most exposed to market conditions," says Willis. "At the frst sign of softness, expect lend- ers to tighten parameters for new mul- tifamily construction loans, albeit in hindsight." The MBA forecasts mortgage banker originations of multifamily loans to reach $187 billion in 2016, and total multifamily mortgage originations are projected at $225 billion. In 2015, mortgage bankers originat- ed $179 billion in multifamily loans, a year-over-year increase of 19 percent. Total multifamily mortgage origina- tions reached $224 billion in 2015. "Multifamily will continue to see abundant capital; the GSE sources have done a great job signaling to the market that they will be a little more active in 2016 than they were in 2015," says Walker & Dunlop's Casey. "Additionally, if the multifamily fnance market grows, the GSEs will take that into account and meet mar- ket demand in 2016," continues Casey. "When sources such as Fannie Mae and Freddie Mac use words such as 'uncapped product types,' investors should pay attention." "Ample" and "abundant" are terms that William Ross, president of NorthMarq Capital, uses to describe commercial real estate liquidity this year. But he observes "some caution- ary moods beginning to appear for multifamily in some markets where construction starts are near all-time highs." Willis expects "more of the same" on the debt side for commercial real estate in 2016. However, he notes that the lodging sector has similar product supply concerns as multifamily. Underwriters will defnitely moni- tor the volume of hotel construc- tion, which PricewaterhouseCoopers (PwC) projects to be 1.9 percent of total supply this year. As long as interest rate moves do not outpace rent growth and net operating income growth, commercial real estate will be steady. — Brian Casey, Senior Vice President, Mid-Atlantic Capital Markets, Walker & Dunlop 405 E. 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