By: Amanda Macikowski
San Diego was the site of this year’s Commercial Real Estate Mortgage Bankers Conference. Over 4,500 attendees were at this year’s conference representing Mortgage Bankers, Commercial Mortgage Backed Securities (CMBS) lenders, life insurance companies, agency lenders, banks, mezzanine, bridge lenders and preferred equity providers. NorthMarq Capital met with over 70 of these organizations during the three-day event. These groups will shape the commercial real estate market for the next year. As opposed to the conference in 2016, this year’s tone was more optimistic and lenders want to put out more money than the previous year.
Most lenders believe that the positive commercial real estate trends, which began in 2010, will continue through 2017. Lenders were concerned with refinancing the wall of maturities from the loans placed in 2006 and 2007; however, to date the majority of the loans have paid off with no workouts. As cash continues to accumulate on most lenders’ balance sheets, they are actively searching for yield opportunities. As US Treasury Rates remain at historical lows, many of our lenders are using floor rates, including higher loan-to-values, creativity, a larger spectrum of loan opportunities and a greater number of loan products.
Last year, NorthMarq continued to rank highly with loans nationally with both Freddie Mac and Fannie Mae. NorthMarq finished the year as one of the nation’s largest originator of Freddie Mac loans. Together these agencies again led the marketplace for multi-family loans. These low cost that multi-family debt provides continue to be about 25-50 bps less than most lenders on higher advantage transactions. There has been some leeway with the loan to values for refinances, with cash out now available up to 80%percent on a per exception/waiver biases. Agencies will continue to be more aggressive on Very Low Income Housing and Affordable Housing opportunities. New for the Agencies, this year will be Modified Rehab, Value Add, and Green Programs.
CMBS lending has once again weeded out the little shops with new risk retention regulations. 15 CMBS lenders have left the market because of both risk retention and lower volumes. CMBS issuers will have to retain a 5 -7.5 percent every new deal they issue, or designate a B-piece buyer to take on that risk. The first pool meeting the new risk retention regulations occurred at the end of 2016. The pool was set up as a vertical risk retention, which requires them to retain their slice for a set number of years without hedging or transferring the credit risk. In this pool, we found that the spreads were the tightest they have been since 2015. Other structural strategies that are risk retention compliant would include a “first loss” horizontal option and an “L-shaped” arrangement, which is a combination of the vertical and horizontal structures. We have taken the position that if CMBS is the only execution available for your transaction, then it is prudent to stick with CMBS lenders who have large balance sheets supporting them.
Loan sizes range from $2 million up to $50 million for most institutional grade properties. Basic product types of apartments, retail, office and industrial continue to be what most life companies are seeking. Most life companies’ loan-to-values will max out at 75%percent for multi-family and 70 percent for other property types. However, NorthMarq saw several life insurance companies approaching 75 percent values for property types other than multi-family in 2016. Five to twenty year loan terms with 15/15 or 20/20 self-amortizing loans will be available in 2017. Several life companies are becoming more flexible with pre-payment penalties moving from yield maintenance to declining balance. With US Treasury remaining at historical lows, several Life Insurance companies are using floor rates in the four percent range.
Mezzanine and Bridge Lenders
Mezzanine lenders and preferred equity groups continue to fill the loan-to-value gap in the shortfall created by the aggressive lending earlier in the decade. Average interest rates are in the 8 -12 percent range, allowing loan-to-values to approach the 80 to 85 percent range. Bridge lenders continue to seek turnaround/distressed assets in the $5 million and up range. Depending on in-place cash flows, loan to values will be in the 65 to 70 percent range. These non-recourse loans are totally driven by the markets the properties are located in and sponsor experience. Most loans are interest only for a two-three year period.
In summary, expect the 2017 lending environment to be consistent with last year. Most lenders are looking to maintain last year’s production levels. For more than 50 years, NorthMarq Capital has provided debt and equity to commercial real estate owners and investors through 36 regional offices coast-to-coast. With an annual production volume of more than $13 billion and a loan-servicing portfolio of $50 billion on behalf of more than 50 institutional investors, we are one of the largest commercial real estate mortgage banking firms in the world, and the nation’s largest privately held servicer and provider of commercial real estate debt and equity.