Joined by all of our colleagues with Q10 Capital, we returned last week from the commercial real estate industry’s annual finance conference (“CREF”) held this year in Orlando, Florida. More than 3,500 registered members and hundreds of additional real estate finance professionals gathered from around the country to discuss industry trends, strengthen existing relationships, and forge new ones. The 3 1/2 day conference was a whirlwind of individual meetings, MBA panel discussions, formal dinners and meetings with Investors to discuss new allocations for commercial mortgages throughout the United States.
With much of our lending centered on major markets in Colorado and New Mexico, many of our Investor meetings at the CREF conference was focused on increasing allocations for 2016.
Life Insurance Company Lenders
Most of our Life Insurance Company Investors met or exceeded their allocation goals in 2015 and have larger appetites for 2016. As a group, Life Insurance Companies report healthy portfolios with an incredibly low overall delinquency rates of less than ½ of 1%.
With deteriorating global credit markets (corporate bonds specifically) in the second half of 2015, Life Company lenders were attracted to Commercial Real Estate’s healthy fundamentals (low vacancies and stable rental rates) and risk-adjusted yields. We expect this to continue, with an increasing focus on borrower experience and property specific metrics.
The second half of 2016 was very challenging for CMBS lenders, with credit spreads increasing steadily after a period of relative stability earlier in the year. The average monthly spread increase from July 2015 to January 2016 was more than 10 basis points, with the biggest increase seen in August. CMBS spreads remain elevated with no clear signs of decreasing. Despite this backdrop of rising spreads, conduit loan origination volume was strong in 2015 with more than $100 billion in new issuance. Much of this was driven by a wave of 10-year loan maturity refinances resulting from massive lending volumes from 2004-2007.
A noteworthy consideration for prospective CMBS borrowers is the impending risk retention requirement as part of the Dodd-Frank Act. Beginning in December 2016, CMBS issuers, or the B-piece buyer, will be required to retain a 5% interest in every new loan pool rather than selling their entire interest like they have done in the past. The new risk retention requirements are anticipated to cause further widening of CMBS spreads in the second half of 2016. Knowledgeable CMBS borrowers may be well served by financing their properties before the full impact of the new regulations are felt.
Agency/GSE Multifamily Finance
The two dominant GSE lenders, Fannie Mae, and Freddie Mac, remain very bullish about the market in 2016. After capturing more than 40% of the total multifamily debt market, agency lenders are well positioned with a variety of fixed and floating rate options for apartment owners.
Freddie Mac’s successful launch of their Small Balance Loan (SBL) program resulted in 1,005 closed transactions totaling more than $2.6B in its inaugural year in 2015. At CREF, Q10 firms were able to meet directly with David Cardwell, Freddie Mac’s Production Director for Small Balance Lending. Mr. Cardwell anticipates originations in this program to grow nationally to $3-4 billion in 2016.
In summary, Commercial Real Estate debt markets are healthy, and lenders are competing for quality transactions. Compared to previous credit cycles, loan to value and debt coverage ratios are more conservative which has kept most portfolio lenders in the market. Uncertainty in the global capital markets and additional regulatory constraints will be challenging for CMBS issuers, and we predict that some existing lenders will exit this market.
For additional information or guidance on a specific transaction, please contact us at Q10 Realty Mortgage & Investment Company.