Annual Commercial Real Estate Finance Council Outlook
Positive Outlook for Commercial Real Estate Finance Market
While attending the annual CRE Finance Council (CREFC) conference in Miami on January 13-15, it was clear the overall mood from attendees was positive about the current state of the commercial real estate finance market. Those attending the conference were a cross-section of lenders, investors, and servicers; including commercial banks, insurance companies, pension funds, private equity funds, mortgage REITs, buyers of investment-grade and B-piece securities and loans, rating agencies and attorneys representing all sides.
The general consensus from the conference was that 2014 will be a lot like 2013 in terms of the amount and types of loans being made. Some of the speakers believed that the finance market is operating at 2005 levels, although no one wanted to speculate where we currently are in the cycle. However, the main difference from the underwriting and loans being made in 2005 before the recession is that lenders have learned to better leverage from the last cycle, have smaller risk limits and are more efficient with bank resources, which is reflected in the new loans being made. Also, lenders are not relying on underwriting alone for these loans, and are looking for credit enhancements from borrowers.
Lending Concentrated in Gateway Cities
The majority of lending is still concentrated in gateway cities on low leveraged assets. Mezzanine and portfolio deals are increasing again. Conduit lending on multifamily assets is also expected to increase in 2014. There still seems to be some distressed assets, although not as much in gateway cities, and it was discussed that some of these distressed assets will never be able to recover.
Job creation and growth will impact the next stage in the cycle. The Fed will likely increase interest rates this year which will lead to stricter underwriting standards. Cap rates are also expected to rise by at least 20-30 basis points in the next year as interest rates presumably rise and affect pricing. It was also discussed that there needs to be continued rating agency involvement, and that the rating agencies need to hold the line and not get affected by the positive environment at these conferences.
Based on the panelists’ views at the conference, it seems activity will continue to be strong in the commercial real estate finance industry as lenders and investors continue to be cautiously optimistic.
While attending the annual CRE Finance Council (CREFC) conference in Miami on January 13-15, it was clear the overall mood from attendees was positive about the current state of the commercial real estate finance market. Those attending the conference were a cross-section of lenders, investors, and servicers; including commercial banks, insurance companies, pension funds, private equity funds, mortgage REITs, buyers of investment-grade and B-piece securities and loans, rating agencies and attorneys representing all sides.
The general consensus from the conference was that 2014 will be a lot like 2013 in terms of the amount and types of loans being made. Some of the speakers believed that the finance market is operating at 2005 levels, although no one wanted to speculate where we currently are in the cycle. However, the main difference from the underwriting and loans being made in 2005 before the recession is that lenders have learned to better leverage from the last cycle, have smaller risk limits and are more efficient with bank resources, which is reflected in the new loans being made. Also, lenders are not relying on underwriting alone for these loans, and are looking for credit enhancements from borrowers.
Lending Concentrated in Gateway Cities
The majority of lending is still concentrated in gateway cities on low leveraged assets. Mezzanine and portfolio deals are increasing again. Conduit lending on multifamily assets is also expected to increase in 2014. There still seems to be some distressed assets, although not as much in gateway cities, and it was discussed that some of these distressed assets will never be able to recover.
Job creation and growth will impact the next stage in the cycle. The Fed will likely increase interest rates this year which will lead to stricter underwriting standards. Cap rates are also expected to rise by at least 20-30 basis points in the next year as interest rates presumably rise and affect pricing. It was also discussed that there needs to be continued rating agency involvement, and that the rating agencies need to hold the line and not get affected by the positive environment at these conferences.
Based on the panelists’ views at the conference, it seems activity will continue to be strong in the commercial real estate finance industry as lenders and investors continue to be cautiously optimistic.
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