In anticipation of the MBA Commercial Real Estate Finance (CREF) 2018 conference, we wanted to share the finance trends we foresee in 2018. Some of these topics have already made an appearance in the commercial finance world, but others will become more apparent as the year progresses.
1. Green is still good. Agency lending programs lead the “go green” trend, offering rate reductions of 10bps to more than 30bps for achieving overall water or energy savings of at least 25 percent. The 2018 changes include no property age restriction or minimum capital to spend, though annual tracking of the savings will be required. This remains “cap free” business – so no volume limits.
2. Bridge is busy. In a pretty flat market, NorthMarq’s bridge business was up 60 percent in 2017. We expect more of the same in 2018. Life companies are entering the field in search of yield, along with debt funds and banks. This has caused spreads to compress, while LIBOR (or short-term Treasuries) has increased. Looking to fund a heavy renovation or short-term flip? Get a bridge.
3. Construction remains a challenge. The combination of bank capital constraints and lower debt yields on new projects creates equity gaps even when hard equity is brought to the table. Mezzanine and preferred debt are two solutions, but must work well with the construction lender, or no shovel goes in the ground.
4. Equity is selective but active. Investors are still looking to deploy capital across all sectors within multifamily. Projects with value-add components garner the most attention. New construction is still being capitalized with the right partners and in the right locations. Several life insurance companies have expanded their 2018 equity programs specifically for multifamily.
5. Tax reform helps, not hurts. Big picture: commercial real estate stands to gain on tax reform as the deductibility of real estate interest and the Section 1031 exchanges for real property were preserved, along with rate reduction. Multifamily, in particular, comes out well versus home ownership, especially in costly coastal markets.