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Projected Trends in Commercial Real Estate Financing

Tags: commercial financing; mba conference; refinance; purchase; construction; loans; market; rates; recession; trends
Wednesday, Feb 17, 2016
by Angela Kesselman
As a mortgage consultant specializing in financing for investment properties nationwide, I keep in the know of the market conditions. Here some exciting news from the 2016 MBA conference in Miami, FL. –Angela Kesselman, Associate Director of Finance Mortgage

Bankers Association’s (MBA) economists forecast that the Federal Reserve will raise interest rates twice in 2016 and potentially four times in 2017. In spite of uncertainty in the global markets, Federal officials are likely to base their increase or decrease decisions on the strength of the domestic economy, which is expected grow at an average rate of 2.3 percent this year. 

There’s a general consensus we are seeing the tail end of the commercial real estate up cycle. Conference attendees noted that the value of commercial real estate space doesn’t have a lot of room to rise further. 

The good news is, for the most part, property fundamentals seem to be improving. But many lenders are withdrawing in markets which are overly reliant on the oil industry and pulling back from multifamily construction loans in markets where supply is starting to overtake demand. In some markets the issue is more specifically about the wrong kind of supply, such as, a high volume of new luxury multifamily projects and the shortage of new class-B and class-C projects which usually generate greater demand. 

Online real estate lending continues to grow with the following predictions… Commercial real estate crowdfunding in the U.S. will grow to more than $1 billion by the end of this year and potentially to $10 billion in five years. 

Most industry participants admit that underwriting standards have somewhat loosened since the end of the Great Recession, especially in the commercial mortgage-backed securities (CMBS) space, but note they are still nowhere near the freewheeling days of 2006 and 2007. 

The sector causing the real estate lending community the greatest anxiety right now is CMBS. The CMBS market is choppy and volatile with profits and originations declining. Expect price widening. 

With about a 50 percent year-over-year increase in non-bank commercial/multifamily loan maturities in 2016, much of it in the CMBS space, is leading some market participants to worry there won’t be enough CMBS issuance to refinance all those loans. Life companies are stepping up their requirement to 75% loan to value with higher rates to accommodate these loans. 

Hiccups in the CMBS space could also provide more opportunity for mezzanine lenders. 

Loans on properties in secondary and tertiary markets, loans on retail assets, and loans on suburban office buildings, will be among those most likely to need additional capital to refinance or may face difficulty refinancing according to market experts. 

Banks remain active with 3-10 year terms. Construction funds will dwindle this year due to regulatory restrictions.