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Commercial mortgage outlook: Get ‘em while they’re hot!

The tax reform package passed at the end of 2017 helped to continue an economic expansion now over nine years in the making. So far, it is the second longest in U.S. history, trailing only the ten-year period between 1991 and 2001. The strong economy has continued to support a strong commercial real estate market, which has in turn led to a strong commercial mortgage industry. While some lenders have hit their targets for 2018, there is still plenty of capital available for borrowers with no signs of reduced lender appetite heading into 2019.

Speaking with several industry colleagues, it was a common refrain to hear this year lacked the typical summer slowdown. Whether the U.S. economy is still in the “seventh inning” or “extra innings” or no matter how much “runway” is left, the general mood is investors are not entirely certain when the next downturn will happen, only that it will happen eventually. Therefore, while signs still point to continued growth out to at least 2020, it only makes sense to get deals done sooner rather than later.

The Yield Curve
One of the most significant trends in 2018 has been the movement of the flattening yield curve. The Fed continued to raise their benchmark rate following three increases in 2017 with three additional bumps so far in 2018. A likely fourth increase is expected in December. While short-term rates have moved up steadily, the impact of Fed rate movements has not translated evenly along the yield curve. Long-term rates continue to feel downward pressure, particularly from global economic forces. Much of the summer was spent debating whether the Fed would ultimately push towards an inverted yield curve and would that be a harbinger for an upcoming recession.

The spread between the two-year and ten-year U.S. Treasuries started the year at 54 basis points and shrunk to as little as 21 basis points over the summer.  Only recently has the spread started to widen again, but as of this writing, it is still just 30 basis points.

For much of the year, the flattened yield curve provided an opportunity for long-term investors. Many borrowers have been able to lock in long-term fixed rate financing of 10, 15 or even 20 years or longer for only a small premium over shorter-term loans. In addition, rising short-term rates have helped some borrowers get out of their current loans with reduced prepayment penalties. In particular, borrowers who previously fixed their mortgage rates using SWAPS are finding their derivative contracts are now “in the money.” This allows them to sell or refinance to pull out additional equity while receiving a prepayment benefit instead of a penalty.

Alternative Debt Sources
While traditional commercial mortgage capital sources are generally enjoying another strong year, the universe of alternative balance sheet, bridge, mezzanine and hard money lenders continues to exhibit distinctive growth. It seems as if each week there is news of another Mortgage REIT, private wealth fund, crowd-sourcing platform or even institutional lender announcing an alternative debt platform.

These debt sources are helping to fill the gaps not being met by traditional capital sources. For example, even though a reform of Dodd-Frank was passed earlier this summer, banks are still awaiting guidance from the OCC, the FDIC and the Fed. Meanwhile construction financing remains relatively tight from banks, so some developers have turned to the alternative debt platforms who are not subject to the same regulatory environment.

The level of competition has helped to further compress spreads, particularly in the bridge loan space.  Loans starting as low as 250 basis points over LIBOR are available from some institutional lenders looking to supplement the yields they are getting on their typical long-term debt.

Overall Commercial Mortgage Market
As of the end of the second quarter, the Mortgage Bankers Association (MBA) reported total commercial and multifamily mortgage debt outstanding increased $90 billion over year-end 2017.

Jamie Woodwell, MBA’s vice president of commercial real estate research said, “… 2017 marked the strongest year for mortgage debt growth since 2007.” This is not unexpected given the dearth of available long-term debt maturities from the lean years of 2008 and 2009 during the heart of the last recession. Without having to replace a large volume of maturing loans rolling off their books, lenders were able to make significant gains in their mortgage portfolios. 2019 will provide another opportunity for portfolio lenders who are looking to grow.

Borrowers hoping to close loans in 2018 still have a little time remaining to get their deals into the pipeline. Meanwhile, borrowers looking to target closing dates in 2019 may benefit from looking into opportunities to lock their rates now with lenders who can offer forward commitments for up to twelve months. Either way, the commercial mortgage industry shows few signs of slowing down for the remainder of 2018 and into 2019. For borrowers, there is still time to “Get ‘em While They’re Hot!”

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Top Takeaways from 2018 MBA CREF Convention

By: Michael Chase, Senior Vice President

The annual Mortgage Bankers’ Association Commercial Real Estate Finance and Multifamily Housing Convention took place earlier this week. After meeting with numerous capital courses and market participants, here are my biggest takeaways from this year’s convention.

Life Companies

Continuing a long running trend, life companies once again have plenty of capital for commercial real estate. Every life company we sat down with is looking to do more in the upcoming year.

Lenders looking to increase their holdings in commercial mortgages in 2016 and 2017 often had to first replace the runoff in their portfolios from maturing loans dating back to the peak origination years of 2006 and 2007. Even though, according to the MBA, maturing commercial mortgages for non-bank lenders is expected to drop 42 percent from 2017 to 2018, the appetite for commercial mortgages has not decreased. With less runoff in their portfolios, balance sheet lenders are viewing this as a prime opportunity to make gains in their commercial mortgage holdings.

The question is where the volume will come from. With less maturing loan volume to compete for, life companies will have to depend on financing transactions or look to early refinances and properties coming off construction or bridge loans. There may also be some opportunities for borrowers to request “top off” funding if their loan balance has reduced and/or the value of their property has increased enough.

Similar to last year, many life companies are being aggressive out of the gate as they look to fill large allocations and lock up the best deals. Aggressive pricing will be available so long as alternative yields in the corporate bond market remain low. Ultra conservative Class-A assets in A locations with A sponsors can potentially see spreads at or even below 100 bps over treasuries. However, the majority of transactions will likely fall somewhere within a range of 125 bps to 180 bps depending on loan size, leverage level, asset quality, location and strength of sponsorship. Spreads at the low end of the range have certainly compressed; however, not enough to fully offset the recent rise in treasury rates.

Life companies are able to offer fixed rate terms of 5-years to 25-years, and in some limited cases all the way out to 30 years or longer.

Have an upcoming maturity that is still 9-12 months out, and don’t wish to pay a heavy prepayment penalty on the current loan? For some additional spread several life companies can provide forward rate locks to help mitigate interest rate risk. This is allowing them to tie up business ahead of other capital sources such as banks or CMBS.

While spreads on conventional loans continue to tighten, several life companies are seeking opportunities for higher yields. One of the primary themes of the 2018 MBA CREF conference has been the increased availability of bridge capital. A few life companies had bridge programs in 2017; but the pool is certainly growing larger in 2018. Life companies are generally entering the bridge space seeking deals with some in-place cash flow and able to offer attractive rates in the range of 300 bps to 400 bps over LIBOR. There are also participating loan programs and JV opportunities available as well.

Continuing a trend from 2017, multifamily and industrial remain a close 1-2 when it comes to preferred asset types for the life company portfolios.

Agencies (Fannie Mae & Freddie Mac)

Agencies once again hit new levels of record production in 2017 with Freddie Mac originating $68 billion, up from $56.8 billion in 2016, and Fannie Mae originating $67 billion, up from $55.3 billion in 2016. Back in November of 2017 the Federal Housing Finance Agency announced a slight reduction in the lending cap for both agencies from $36.5 billion in 2017 to $35 billion in 2018.

It’s easy to see that both agencies have been able to do a significant volume above their stated lending caps by financing affordable and green transactions that qualify as uncapped business. Both agencies are back in 2018 looking to add on to a wide range of product offerings which includes affordable, green, mod-rehab, pre-stabilized and credit facilities.

Spreads have tightened for both agencies as they look to lock up business and get an early jump on 2018.


The CMBS market is looking to build  on the momentum of a strong 2017. With the implementations of Reg A/B and risk retention now in the rear view mirror, CMBS volume was able to hit a post-recession high water mark of $89 billion in 2017. The industry is hoping to match the volume in 2018, but like other lenders, they will have less refinance business to rely on to hit their goals.

Overall leverage in pools being brought to market continues to be kept at around 60 percent LTV. In some cases pools are being constructed with a “barbell” effect where smaller transactions below $30 million leveraged up to 75 percent LTV are offset by larger loans in the 50-55 percent LTV range.

Perhaps more than any other lender type, average spreads for CMBS deals have compressed considerably. The pricing range is now starting at around 150 bps over SWAPS for very low loan to value and high debt yield transactions and can go all the way up to 220 bps for full leverage loans with lower debt yields. CMBS is now in a place where they can be more price competitive with portfolio lenders for loans at 60 percent LTV with a debt yield of 9 percent or higher; but their niche remains being able to provide borrowers with an opportunity to get the highest leverage on a non-recourse basis.

As the number of investors in CMBS paper grows and the pool B-piece buyers continues to evolve, spreads could continue to compress as the year goes on.

Alternative Capital

Touched on earlier, one of the major themes of this year’s MBA CREF conference is the number of alternative capital sources which seems to be growing by the week. Private debt funds, high net worth individuals, mortgage REITS and crowd funding platforms are all entering the commercial mortgage market offering borrowers everything from alternatives to traditional bank financing to bridge, construction, mezzanine, preferred equity, joint-venture and hard money solutions.

Pricing ranges widely depending on the risk profile of the deal and the requested loan term. For example, borrower’s looking to close quickly without a financing contingency in their purchase contract could use a placeholder loan to close in as little as a few weeks for a loan term as short as 30 days at rates from eight to twelve percent.

The bridge loan space appears to be the most crowded and competition has helped to reduce pricing. While there are some fixed rate options available in the bridge loan space, most of the deals are still being done on a floating rate basis and a smart hedging strategy with the purchase of interest rate caps can help save borrowers significant costs.

Interest Rates & Regulations

The risks for a potential regulatory shock to the commercial real estate market appear to be relatively low heading into 2018; however, there are a few things to keep an eye on. Tax reform has been generally viewed as a positive for the commercial real estate industry, but as they say, the devil is in the details which are still being flushed out. States who may have felt burdened by aspects of the federal tax reform may also look to implement changes to their state tax codes. There is also a potential for reform of Fannie Mae and Freddie Mac which the residential and multifamily market will certainly be keeping close tabs on. For now though, none of these appear to be providing any major headwinds for the industry.

The biggest concern for most market participants will be what happens with interest rates over the course of the year. With significant movements in treasuries already since the start of the year, borrowers have seen their cost of capital increase even while spreads have compressed. While interest rates and cap rates are not directly correlated, the industry will be watching closely to see what affect rising interest rates may have on property values, and especially if they will lead to a significant reduction in sales volume.

You can follow Michael on LinkedIn at: linkedin.com/in/MJChase

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2018 commercial mortgage outlook: What a difference a year makes

At this time last year the industry looked out at 2017 with a high level of uncertainty.  What would be the impact of the new administration?  What would tax reforms look like and how quickly could they be implemented? Had property valuations reached their peak? These issues, among others, left many investors on the sidelines at the start of 2017.

If the start of 2017 was the time to “Wait and see,” the start of 2018 should be “No time like the present.”

In late December, the long-anticipated tax reform bill was passed, and by most accounts the new provisions are considered favorable for the commercial real estate industry. In addition, the regulatory environment appears favorable in the near term. Over the past several years industry buzz words such as “Reg AB,” “HVCRE” and “Risk Retention” and the uncertainty surrounding them were the cause of consternation. If anything, there is now an expectation for more clarified and even reduced regulations in the upcoming year.

So why is now the time to act? The simple answer is interest rates. For all the favorable news surrounding the commercial real estate industry heading into 2018, the one thing that is likely on the horizon is rising interest rates. After multiple rate adjustments in 2017, it is expected the Federal Reserve will increase the overnight rate three more times in 2018. While that only has a direct impact on the short end of the yield curve, global and domestic economic forces, which have been keeping downward pressure on long-term rates, may be starting to loosen.

Along with their anticipated rate movements, the Fed has announced they will be shrinking their balance sheet. China, the largest international holder of U.S. debt, has also made indications that they may begin reducing their purchases of U.S. Treasuries. Both could have an impact on the supply side of the bond market, resulting in increased rates. In early January, European bond yields reached multi-month highs on expectations the European Central Bank would end their stimulus programs. Several announcements have since been made to quell these fears, but if this should change it could be yet another contributor to higher interest rates in the U.S.

The good news for borrowers is there is plenty of capital available for commercial real estate financing.  All of the major capital providers such as banks, agency lenders, life companies and CMBS are in the market and looking to invest capital in commercial mortgages. In addition, the market continues to grow with alternatives such as mortgage REITS, private wealth funds and crowd sourcing platforms looking to fill the gaps not being met by traditional capital sources. Even in a risky interest rate environment spreads have compressed, keeping mortgage rates relatively low…for now!

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NorthMarq Capital’s Boston office promotes veteran investment analyst Katie Pontes to vice president

BOSTON (January 25, 2018)The Boston regional office of NorthMarq Capital is pleased to announce the promotion of Katie Pontes to vice president. In her new role, Katie will be responsible for the origination, underwriting, marketing and closing of commercial real estate loans. She will share her knowledge of commercial real estate and capital markets with clients to provide custom-tailored financing structures to help them meet their investment goals.

Katie joined the Boston office in 2015 as an investment analyst, where she has assisted in closing over $500 million in financing transactions with Freddie Mac, Fannie Mae, HUD, life insurance companies, commercial banks, and equity investors. Prior to joining NorthMarq Capital, Katie honed her valuation and financial analysis skills working for Capital Crossing, a private real estate firm that specializes in acquiring and servicing portfolios of commercial real estate loans.

“We are very excited to have Katie join the ranks of our production team here in Boston,” said Edward Riekstins, managing director of NorthMarq’s Boston regional office. “She is certain to bring energy, intellect and a high level of service while offering creative financing solutions for her clients.”

Katie is a graduate of Assumption College and holds a Commercial Real Estate Finance certificate from Boston University. She is an active member of CREW Boston and is involved in several different committees within the chapter.

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Yield curve continues to flatten making long-term financing more attractive

By Michael Chase

During the last US recession from 2007-2009 the FED adopted an accommodative policy reducing interest rates in an effort to provide economic stimulus. Throughout 2008 the FED Funds Rate was reduced rates seven times, until that December when it was set to 0.25 percent (effectively zero percent).

As the US economy began to recover in 2010 there was an inherent feeling that historically low interest rates were not likely to last forever. The FED Funds Rate was kept at zero percent, and a significant spread was created between the short and long-term interest rates. At one point the spread between the 5-year and 10-year US treasury reached 150 basis points!

Check out the full article on LinkedIn.

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Local Office Overview

Click image to download PDF

Click image to download PDF

The Boston office arranges all forms of commercial debt and equity financing for numerous property types including multifamily, student housing, industrial, retail, hospitality, etc. Download this two-page flyer to learn more about the Boston office.

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NorthMarq Capital hires industry veteran Mark Whelan as vice president of its Boston office

BOSTON (August 17, 2016) – Mark Whelan has joined NorthMarq Capital’s Boston-based regional office as vice president. At NorthMarq, Whelan’s principal focus will be sourcing debt and equity opportunities to be presented to a targeted set of capital sources through the creation of financing summaries which will include financial analysis of the subject property, project and market data and sponsorship information.

Whelan arrives at NorthMarq with 18 years of experience in the mortgage banking industry, during which time he has generated more than $2 billion in permanent, interim/bridge and construction debt placements.

Prior to NorthMarq, Whelan spent 10 years at Fantini & Gorga, sourcing and completing debt placements. Before this, he served on a two-man origination team in KeyBank Real Estate Capital’s Boston office for 4.5 years, during which the team originated more than $1 billion in debt volume through various capital platforms. Whelan has also worked as a loan analyst for Meredith & Grew (now Colliers International Boston), as a financial analyst for a subsidiary of Merrill Lynch and has served as a Commercial Real Estate Broker in the Cambridge, Massachusetts market for a Boston-based brokerage firm.

“We are very happy with the addition of Mark Whelan to our Boston office. Mark’s years of experience in the business as well as the relationships he has developed will make a great addition to the New England NorthMarq team,” said Ed Riekstins, managing director of NorthMarq’s Boston office.

Whelan graduated with a Master of Science in Finance from Bentley University. He received his Bachelor of Science in Business Administration with a concentration in Finance from the University of Massachusetts at Lowell.

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NorthMarq Capital announces Ed Riekstins as managing director of its Boston office

BOSTON (June 23, 2016) – The Boston regional office of NorthMarq Capital is proud to announce the promotion of Ed Riekstins to managing director. In his new role, Riekstins will manage the Boston office’s production for insurance companies, agency lenders Freddie Mac and Fannie Mae, CMBS lenders, equity investors and other financing sources represented by NorthMarq.

“With more than 20 years of finance and real estate experience, as well as serving in several positions of the Mortgage Bankers Association, we feel the Boston office is in good hands under Ed’s leadership,” said Jeffrey Weidell, NorthMarq Capital president.

Riekstins joined the Boston office in 2012 when NorthMarq acquired Q10 New England Realty Resources. At Q10 New England Realty Resources, he oversaw all commercial loan production and served as president and chief operating officer for the Boston/ New England office of Q10 Capital, LLC.

Early in his career, Riekstins was chosen for the inaugural class of the Mortgage Bankers Association (MBA) “Future Leaders” program. He is past vice-chairman of the MBA’s Statistics and Research Committee and has served on the Technology Committee. He also served as Treasurer for the New England CCIM chapter, as well as several other committees for CCIM. He is a candidate for the CCIM and CMB designation.

Riekstins is a member of the Real Estate Finance Association of the Greater Boston Real Estate Board and a member of NAIOP. He holds a BS in Business Administration from Boston University and an MBA from Bentley University.

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NorthMarq Capital featured in GlobeSt.com

Doug Nickerson, vice president of NorthMarq Capital’s Boston office, was featured in GlobeSt.com for securing the $50 million refinancing of Franklin Village Plaza, a 303,096 sq. ft. grocery-anchored, mixed-use property in Franklin, Massachusetts. Check out the full coverage here…

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Rates, regulations and allocations will continue to influence the market

Michael Chase

Michael Chase

Michael Chase featured in Real Estate Forum

As of year-end 2014, total outstanding commercial and multifamily debt was $2.64 trillion. By the end of the first quarter, the total increased 1.5% to $2.68 trillion. A favorable rate environment, combined with a lack of available alternative investments for lenders, set the stage for a very active 2015. In February, the Mortgage Bankers Association (MBA) projected 2015 commercial and multifamily mortgage originations to be $414 billion, a 7% increase over 2014. With $121 billion in maturities in 2015 and an additional $223 billion scheduled to mature in 2016, it wasn’t too difficult to see where this projected volume could come from. The anticipated positive momentum certainly panned out with the MBA reporting commercial and multifamily mortgage originations for the first quarter up over 49% from the prior year. While the commercial mortgage market has been robust through the first half of 2015, rates, regulations and allocations will continue to influence the market going forward. Read the complete story here.

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