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MINNEAPOLIS (Oct. 17, 2023) — Declining inflation pressures this year have allowed the Federal Reserve to respond with a more gradual pace of interest rate increases since May as it assesses the impact of its most aggressive monetary tightening of the last 40 years. The effects of monetary changes exhibit themselves with variable lags over a long period. The Fed’s job to discern the appropriate amount of tightening to achieve its goal of 2% inflation is complicated by the variable lags and current events — such as the potential government shutdown in November. The resulting economic uncertainty is impacting business decisions, effectively slowing economic activity.
Headline inflation increased 0.6% during August – the most in more than a year according to the latest CPI report. The year-over-year reading rebounded to 3.7%, up from 3.2%, primarily due to the 10.6% month-over-month surge in gasoline prices. There was some evidence that higher energy prices have fed through to the core index (excludes food and energy), which rose by 0.3% month-over-month — although base effects helped push year-over-year core inflation down to 4.3% from 4.7%. However, the downward pressure on core inflation elsewhere still looks intact, as core goods prices fell again, by 0.1% month-over-month. Nevertheless, inflation is still running above the Fed’s 2% target.
GDP and consumer spending
The final reading of second quarter 2023 real gross domestic product (GDP) was reported at a 2.1% annualized rate. Consumer spending in the second quarter was revised down to a +0.8% annual rate from +3.8% in first quarter, reflecting a pushback from consumers on higher prices. Real (inflation-adjusted) retail sales are down 1.2% year-over-year through August and have been flat or negative in nine out of the last 10 months on a year-over-year basis, indicating that transaction volumes are declining as prices increase.
Real disposable incomes – the fuel for consumer spending – have been down for three consecutive months at a -1.7% annual rate, and consumers continue to tap their savings or credit cards for their spending. The personal savings rate is now at a year-to-date low of 3.9%. Credit card debt has grown at a 13.9% annual rate since mid-2021, compared to the 6% annual rate in the four years before the pandemic. At the same time, delinquency rates on credit card loans are at 11-year highs — with the cost of credit card loans at 22%.
Tax receipts, manufacturing, and leading economic indicators
Federal tax receipts are declining, which is an indication of the slowing economy. Treasury receipts are down $437 billion this fiscal year through August compared to the same period in 2022, while outlays are up $142 billion – including $130 billion due to higher interest payments. The decline in tax receipts is mainly due to lower receipts from individual income taxes.
The Institute for Supply Management (ISM) manufacturing index for September came in at 49, the 11th consecutive month below 50 — indicating contraction in the manufacturing sector. Only five of 18 industries reported expansion. The New Orders Index has been in contractionary mode for 13 consecutive months indicating weak demand. The Leading Economic Indicators Index continues to trend lower – now for the 17th consecutive month through August. Since the inception of this index in 1958, such a string of declining readings has only happened when the economy is in or nearing a recession.
The labor market
Employment gains in September were surprisingly strong with an increase of 336,000 in non-farm payrolls – nearly double market expectations – and the prior two months were revised upward by 119,000. Employment gains were broad-based. The unemployment rate remained at a 19-month high of 3.8%. Wages grew only 0.2% during September, bringing the year-over-year growth rate to a two-year low of 4.2%. The labor market remains the strongest pillar of the economy providing more income to more people. Although wage growth has been cooling, the resiliency of the labor market is one of the Fed’s concerns as it tries to cool down the overall economy. Until the labor market shows weakness, it is unlikely that the Fed will consider lowering interest rates.
Interest rates and the Fed
As expected, the Fed held the federal funds target range unchanged (5.25% to 5.50%) at its Sept. 20 meeting, while leaving open the possibility of another rate increase before year-end. The most surprising and hawkish element of the meeting was the median expectation for year-end 2024 moving from 100 basis points of rate cuts to only 50 basis points in the federal funds rate. Markets are pricing in a lengthy pause in interest rate actions and have pushed back the timing of the first rate cut from the spring of 2024 to late summer.
The real (inflation adjusted) federal funds rate is now at the highest and most restrictive level since 2009. Based on Fed projections given after the September meeting, the real federal funds rate is forecast to increase by another 100 basis points over the next year, bringing it to levels last seen in late 2007. Even if the Fed does not increase headline rates any further, declining inflation pressures will effectively cause the real federal funds rate to increase and further tighten monetary conditions. In addition to its interest-rate policy, the Fed continues to reduce its balance sheet by about $95 billion per month – another policy tool that tightens liquidity.
With the Fed intent on keeping rates higher for longer and commercial bank lending standards remaining tight, the increased cost of credit and its reduced availability are significant headwinds for refinancing existing debt as well as for ongoing economic growth — especially for smaller companies.
BOSTON (Aug. 2, 2023) — Jeff Munoz, vice president of Northmarq’s Boston Debt + Equity team, recently authored a New England Real Estate Journal article, “Boston’s commercial real estate market remains resilient, underpinned by its strong economic fundamentals.”
Local and regional banks, which have historically been the overwhelming source of construction financing in Boston, have pulled back on funding construction projects. Although there are many reasons for this decrease, Munoz says “much has to do with where current rates stand and if the property’s cash flows upon completion can support the higher payments.” Investors may have to pay down their loan balances out of pocket or risk forcing a sale as construction loans with upcoming maturities could find significantly lower refinance loan amounts.
Where are lenders still active?
Amid economic instability, Class A offices, lab space and medical offices have experienced the strongest leasing activity, and newly built offices are in the highest demand. Munoz says this is where lenders are still active. The lab sector specifically has shown strength while tech and pharmaceutical demand for space continues to surge, and much of the new office supply coming is lab space.
What to expect
Munoz anticipates investors will expect more favorable rates in the next 24-28 months with a surge in short-term financing requests. Institutions that typically lend on 10-year terms or longer have started to adjust their programs to accommodate shorter terms.
“Although we cannot predict how rates will move in the future, we always explore loan structures that allow flexibility to refinance in case rates become more favorable,” said Munoz. “While this strategy may be the best play today, it’s worth exploring how short-term rates have risen compared to longer-term rates.”
Topics covered in the article include:
BOSTON, MASSACHUSETTS (February 21, 2023) – Jeff Munoz, vice president of Northmarq’s Boston debt/equity team, provided France Media’s Northeast Real Estate Business with responses for their 2023 Lender Insights. The special section features direct lenders and financial intermediaries from across the region who cover the challenges and opportunities in the year ahead, factors most affecting the lending environment and the property sectors to watch during 2023.
Northeast Real Estate Business (NREB): Are commercial real estate borrowers more interested in fixed- or floating-rate finacning today versus a year ago and why?
Munoz: Commercial real estate borrowers have been more interested in floating-rate loans today versus a year ago given the point in where the Federal Reserve is in its rate hikes. Expectations are that long-term rates will continue to fall versus short-term rates. Borrowers want the flexibility associated with floating-rate loans to take advantage of cheaper, longer-term debt in the near future.
NREB: If the U.S. economy does fall into a mild or moderate recession in 2023, which property type(s) stand to weather the storm the best and why?
Munoz: Historically, multifamily has weathered the storm well during recessions compared to other property types. The country needs more housing, and even throughout COVID, we continued seeing apartments reporting high occupancy rates. In a recession scenario, apartments will continue to have stable demand.
NREB: Are there any common questions you are fielding from borrowers today, and if so what are they and what advice are you giving them?
Munoz: Borrowers inquire about taking advantage of their current loans on swaps or defeasance from the past couple of years. Refinancing might be the best way to take advantage of large rebates against its loan balance in a less-favorable sales environment.
Read Munoz’s contributions in Northeast Real Estate Business.
BOSTON, MASSACHUSETTS (November 2, 2022) – Michael Chase, senior vice president/managing director of Northmarq’s Boston debt/equity team, authored a perspective for the New England Real Estate Journal that looks ahead to 2023 and what it holds for the industry.
It may only be the start of November, but for commercial mortgage borrowers and practitioners it might as well already be year-end. With a few rare exceptions, most new loan requests are likely to fund in 2023. Even during a time of rate volatility, many commercial real estate (CRE) lenders have already met or exceeded their origination goals. There are a few lenders already working on their new fiscal year; meanwhile, many others are taking their foot off the gas for now and looking towards what the new year will bring.
What can CRE borrowers expect as we head towards 2023? We are certainly in a higher interest rate environment and market conditions continue to push the likelihood of the next interest rate cut further out. Underwriting can be expected to be tighter with lenders focusing on exit strategies and refinance risk. The good news is there should still be plenty of capital available, and a new year may bring some renewed competitiveness from lenders looking to fill fresh allocations.
Banks and Credit Unions
Banks and credit unions remain the largest holders of CRE mortgages. This group includes multinational banks to local savings and loan institutions. The large money center banks are currently on the sidelines and not actively lending in the CRE marketplace. This is for a host of reasons, including regulatory pressure combined with exposure to consumer credit and warehouse facilities. The most competitive spaces for borrowers are the banks and credit unions who occupy the middle market. Even though the Fed Funds Rate has been aggressively increased to stamp out inflation, this has yet to fully translate into increased capital costs for these lenders. Many of them are in price discovery mode and they can be selectively aggressive for the right opportunity. Some loan requests can be enhanced with a significant deposit relationship or an opportunity that qualifies for Community Reinvestment Act (CRA) credit.
Life Insurance Companies
Institutional lenders can be expected to remain active. While they represent a modest portion of the overall commercial mortgage debt market, they can still offer attractive terms for conservative borrowers seeking long-term fixed-rate capital without personal guarantees. The inverted yield curve is providing some relative value for those who are long-term holders.
Agency Lenders (Fannie Mae, Freddie Mac & FHA)
Multifamily continues to perform well and benefits from the willingness of agency lenders to provide liquidity to this space even during a downturn. Apartment demand will likely persist as higher residential mortgage rates limit the housing market. Owners of properties that provide affordability and meet the mission-driven goals of the agencies can expect to see a discount of thirty to sixty basis points inside of normal market rates.
Alternative Lenders
Private debt funds, mortgage REITs and other sources of alternative capital can be expected to fill some of the voids left by other lenders. There will likely be a need for these lenders to finance some construction loans and for certain assets, which may find difficulty getting done by more traditional lenders. The alternative lending space has certainly grown during the past several years; however, there could be some fall out from those groups lacking a strong balance sheet or who are too reliant on warehouse lines.
A Positive Note
It’s not all doom and gloom out there. Borrowers with make-whole prepayment structures such as SWAPs, defeasance or yield maintenance are finding the higher short-term rates allow them to pay off their existing loans with a minimal penalty or in some cases with a financial benefit. Loans with assumption clauses may be accretive to deals when favorable terms can be passed along to a new borrower. Difficulties for some may lead to opportunities for others.
Northmarq offers commercial real estate investors access to experts in debt, equity, investment sales, and loan servicing to protect and add value to their assets. For capital sources, we offer partnership and financial acumen that support long- and short-term investment goals. Our culture of integrity and innovation is evident in our 60-year history, annual transaction volume of $20 billion, loan servicing portfolio of more than $80 billion and the multi-year tenure of our more than 700 people.
BOSTON, MASSACHUSETTS (September 26, 2022) – Michael Chase, senior vice president/managing director of Northmarq’s Boston debt/equity office, shared his industry insights in a recent article published by ConnectCRE titled “The Fed, Funds and CRE Financing.”
The story highlights the impact Federal Reserve rate hikes, which began in March 2022, have had on commercial real estate financing. It was noted that while the Federal Open Markets Committee’s actions are pushing yields upwards on U.S. Treasuries, short-term rates have been impacted the most.
“This means borrowers seeking short-term floating rate or construction financing are finding it relatively more difficult than those seeking long-term financing,” said Chase.
Nor is it rising rates that are the problem. “Uncertainty leads to volatility, and this impacts transaction volume by making investment decisions difficult, and driving a wedge between buyers and sellers,” Chase said. This, in turn, impacts asset valuations. “Certain types of financing will remain more challenging, until there is a decrease in market volatility,” Chase added.
But all isn’t necessarily gloom and doom. Chase, for one, explained that asset types like multifamily and industrial will probably remain the favorite of lenders and investors due to demand and market rent growth. Furthermore, multifamily can likely count on financing from Freddie Mac, Fannie Mae and FHA , he said.
BOSTON, MASSACHUSETTS (March 31, 2022) – Michael Chase, senior vice president/managing director of Northmarq’s Boston-based regional office, recently shared his expert insights in a feature story, titled “A Cushioning Effect,” in the most recent edition of Wealth Management Real Estate (formally National Real Estate Investor). The focus is on banks, and how they are still likely to offer plenty of liquidity for commercial real estate borrowers, even in a changing environment.
Despite looming interest rate hikes ahead in 2022, banks appear well positioned to continue originating new loans and defending their position as the dominant financing source for commercial real estate.
“Heading into 2022, I do think capital from banks remains available, and they’re going to be aggressive,” said Chase. “There is a lot of capital available across the banking sector from community banks, middle market banks, national money center banks and even international banks. However, their strategies related to commercial real estate lending, the types of deals they are going after, and how they price their debt can be quite varied.”
BOSTON, MASSACHUSETTS (January 19, 2022) – Michael Chase, senior vice president/managing director of Northmarq’s Boston-based regional office, was named 2022 New England CCIM Chapter President. Chase assumes the role from Dave Gambaccini, CCIM, who served as president the last two years. Before taking on this new title, Chase served as a designee of the CCIM institute and an advisory board member for the New England Chapter.
Chase joined Northmarq in 2012 as part of the acquisition of the former Q10 | New England Realty Resources. Since then, he has shared his knowledge of commercial real estate and capital markets with clients to provide custom-tailored capital structures in order to help them meet their investment goals. During his CRE career, Chase has originated more than $2 billion in commercial real estate debt and equity for multifamily, office, retail, industrial, hotel, self-storage, affordable housing, seniors housing, student housing, credit tenant properties, and land.
The New England CCIM Chapter is structured on building success in CRE via ongoing commitment to education. The New England CCIM Chapter fulfills this commitment by bringing CCIM education and programs to the New England Region, which allows members to remain on the cutting edge of the commercial real estate industry while networking with other commercial real estate professionals throughout Massachusetts, New Hampshire, Maine, Rhode Island, and Vermont.
BOSTON, MASSACHUSETTS (November 4, 2021) – Happy new year! It may only be the start of November, but for commercial mortgage practitioners with loan closings that can take between forty-five to sixty days, it might as well already be year-end. With a few rare exceptions, most new loan requests are likely to fund in early 2022.
With the new year approaching fast, here are some items we’ve been keeping an eye on and discussing with our clients.
Opportunity Zones
The general rule is an Opportunity Zone should not be the deciding factor for a transaction, but it can still have the potential to make a good deal better. For investors seeking Qualified Opportunity Zone investments to help defer taxable gains, December 31, 2021 is an important deadline. This is the last date for investors to qualify for a five-year hold and a ten percent step-up in the basis of their initial investment. The last deadline was December 31, 2019, which would have allowed investors to qualify for a seven-year hold and a fifteen percent step up in basis.
Tax Abatements (Massachusetts)
For most communities in Massachusetts, the annual deadline for a First Level Appeal is February 1, with appeals based on the valuation of the previous calendar year. This means February 1, 2022 will be the deadline to file an appeal based on valuations as of January 1, 2021, which were the first property valuations potentially impacted by COVID-19.
Phase I Environmental Site Assessments
The industry standard for reporting environmental due diligence is the ASTM E1527 Standard Practice for Environmental Site Assessment: Phase I Environmental Site Assessment Process. The current version of this standard, E1527-13, is scheduled to sunset on December 31, 2021. Once a new standard is adopted it may be important for property owners to understand how their property may be viewed differently since they last conducted environmental due diligence.
ESG
Environmental, social and corporate governance (ESG) initiatives are continuing to gain momentum and influence amongst commercial real estate stakeholders. Whether it be a developer responding to a request for proposal, an equity fund looking to maximize the value of their portfolio or an investor seeking to raise capital, understanding the challenges and opportunities related to ESG will become ever more important.
Tax Law Changes
Continuing discussions over infrastructure and social spending plans require corresponding plans for how to pay for it all. Looking back over time, many downturns in real estate markets were the direct result of tax law changes. Serious concerns from earlier this year regarding potential changes to tax provisions concerning 1031 exchanges, capital gains and estate planning seem to have quieted down; however, the industry remains vigilant.
These are just a few snippets of topics we’re keeping an eye on, which also include construction costs, crypto for real estate and the LIBOR transition, amongst others. Each one of these could certainly fill an article of its own. While it may effectively be the end of the year for new loan originations, there is still plenty to keep us busy as we help our clients make plans for the rest of year and into 2022.
NorthMarq’s Boston Debt/Equity team recently joined the prestigious company of GlobeSt.com‘s Lender Influencers. The recognition highlights men, women and teams that have navigated the ups and downs of the past year. Winners were chosen based on the publication’s guiding criteria related to the impact these people, teams, and companies have had in their particular niche.
NorthMarq’s Boston Team
As the COVID-19 crisis continues to unfold, Ed Riekstins, Michael Chase, and their Boston-based team build upon their long standing reputation as dependable, creative and knowledgeable lender professionals. Riekstins and Chase are valued for their ability to cultivate and recognize staff across all aspects of the business. Throughout the past three years, this team has grown NorthMarq’s New England portfolio, increased agency business, and addressed COVID-related loan issues with aplomb. The team is well regarded for its aptitude in loan production and loan servicing, as well as its ability to avert black swan risks by financing properties with supportive underwriting, strong sponsorship, good demographics and strong historical performance.
What a difference a year makes! On March 10, 2020 the order was given to shut down all non-essential businesses in Massachusetts. As we approach fourteen months since that fateful day, vaccination roll outs have helped to provide a renewed sense of optimism.
Interest Rates
A primary story line during the first quarter has been the rise of long-term treasury rates. Inflationary and supply side pressures are likely to keep influencing rates at the long end of the US treasury yield curve. The good news for borrowers is global capital remains interested in purchasing US debt. As of this writing, the 10-year German bond is trading at a negative yield, while the UK, France, Italy, Spain and Japan all have 10-year bonds trading from 80 to 150 basis points below 10-year US treasury.
While sovereign debt markets are helping to pump the breaks on rising US Treasuries, corporate bond markets are also helping to keep mortgage spreads tight. Yields on BBB and AA corporate bonds over the 10-year US Treasury are tighter than they were pre-COVID. As long as lenders have limited options for alternative investments, borrowers should continue to reap the benefits.
Capital Sources
Capital for commercial real estate remains plentiful. Commercial banks and thrifts have been able to emerge from processing a mountain of PPP loans and are more actively seeking commercial mortgages. The steepness of the yield curve is benefiting some short-term borrowers; however, those considering a SWAP should keep the upcoming LIBOR expiration in mind. While there has been an extension to the original date of December 31, 2021, LIBOR is still likely to expire during the term of a newly originated loan.
Insurance companies continue to evolve their product offerings as well. They are no longer just a source for long-term, fixed-rate financing. More are now offering bridge, equity and construction financing options as they try to seek out more yield. Insurance companies are off to a strong start in 2021, so it may only be a few months before some have exhausted their allocations for the year.
The Agency Lenders – Fannie Mae, Freddie Mac and FHA – remain dominant players for multifamily financing, and they have begun softening their closing escrow requirements. Transactions which qualify for Affordable or Green programs can benefit from significant pricing breaks. These lenders continue to innovate and add new programs such as the new Sponsor Initiated Affordability (SIA) program from Fannie Mae. An experienced capital intermediary can add significant value by helping to navigate the myriad of available programs.
Since the end of 2020, there has been a growing “risk on” mentality amongst bridge lenders. Spreads in this space have compressed significantly to a point where floating rates under 4 percent are available for certain transactions.
New issuance of CMBS fell by 45 percent in 2020. As delinquency rates continue to decline, the CMBS and CLO markets have re-emerged in 2021.
Other topics influencing commercial real estate finance in 2021 include eviction moratoriums, court backlogs, tax law changes, building material costs, tax abatements, insurance, ASTM standards and much more. It is an exciting time to be in commercial real estate, and we’re all looking forward to the day when COVID-19 is truly behind us.
Massachusetts governor Baker on March 10 gave the order to shut down all non-essential businesses in Massachusetts. The last 20 weeks have certainly presented unprecedented challenges, but also incredible responses in the face of many obstacles. Regulators for the banks, life insurance companies and multifamily housing acted quickly allowing lenders to work with borrowers on existing loans and provide guidelines for closing new loans. Transaction volume declined sharply during much of the second quarter, but creative solutions allowed deals to close even in the midst of the pandemic. Now we look forward to the challenges and opportunities that lie ahead.
Interest Rates
As the COVID-19 pandemic shut down economies around the globe, there was a natural flight to quality and de-risking in the capital markets. Instability in the oil markets exacerbated investor concerns. On March 8th the yield on the 10-year U.S. treasury touched an all-time low of 0.318% during overnight trading. The 10-year U.S. treasury holds great importance as a key benchmark for mortgage rates in the U.S.; however, corresponding volatility in corporate bonds forced many lenders out of the market. Borrowers had to wait until early April before being able to take advantage of a new lower-rate environment.
Commercial mortgage rates are once again near all-time lows. This is likely to be the case for at least the remainder of the year. Consider that a commercial mortgage rate of 3.5% represents a healthy spread of 285 basis points over the current yield on the 10-year U.S. treasury (0.65% as of July 10, 2020). This means there is plenty of room for the benchmark 10-year U.S. treasury yield to rise and for spreads to compress, keeping mortgage rates at their current historically low levels.
Of course we will have to continue to keep an eye on potential market disruptors such as U.S./China relations or a resurgence in COVID-19, which could bring volatility back to the corporate bond market. Borrowers may also want to consider acting sooner rather than later to lock in favorable rates before the November elections.
Preferred Asset Classes
Underwriting is generally more conservative in the current environment. Lenders are taking a close look at in-place rental income for any signs of distress while looking to avoid future disruptions.
Multifamily remains the asset of choice for most lenders. The agency lenders, Fannie Mae and Freddie Mac, continue to lead the way for multifamily financing. They are generally able to provide higher leverage on a non-recourse basis than most banks, and are currently providing borrowers with extremely competitive rates at all leverage points. The agencies are currently quoting 10-year fixed rate financing from around 2.5% to 3.3% with pricing incentives available for properties that qualify for their affordable or green programs. Another agency lender, FHA, is helping to provide liquidity for construction and cash-out financing requests. There is no equivalent capital source to the agency lenders when it comes to other commercial asset types. Their presence in the multifamily space keeps other lenders with their pencils sharpened. Borrowers should strongly consider taking advantage of refinance opportunities before the Agencies exhaust their lending limits, which were set at $100 billion each for the five quarters from the end of 2019 through 2020.
According to the National Multifamily Housing Council (NMHC) apartment rental collections have held up favorably so far through the pandemic. Some of this can be attributed to the enhanced federal unemployment benefit which was part of the CARES Act. This added an extra $600 per week to qualified individuals, but is currently set to expire at the end of July. Meanwhile, here in Boston, approximately 60% of the apartment units typically rollover on September 1st. Much of these units would normally be rented by students or others tied to the several area colleges and universities, many of whom have already made announcements regarding their fall programs. Local apartment landlords and lenders will be looking to see what impact these or other conditions may have on collections in August, September and beyond.
If multifamily assets are 1A, then industrial assets would be 1B when it comes to lender preference. Industrial properties have several advantages including lower tenant replacement costs and they are typically leased on a triple-net basis. The rise of e-commerce and a movement from just-in-time deliveries to just-in-case stockpiling continues to fuel demand in this space. Lenders will be critical of significant near-term roll over, the credit worthiness of major tenants and functional obsolescence. They will also take a conservative underwriting approach to characteristics such as a higher percentage of office build out, freezer cooler space or outside storage which maybe providing revenue that could be difficult to replace. While the industrial market in the Boston area is not to the same breadth and scale as other major distributions hubs the asset class continues to perform well in this region.
Outside of multifamily and industrial, other asset classes are finding more difficulty attracting capital in the current environment. Relationship lending is as important as ever with lenders showing a definite preference to work with existing borrowers. A well located asset with solid leasing, strong sponsorship and a stable track record should be able to attract favorable financing at historically low rates.
Michael Chase, senior vice president/managing director of NorthMarq’s Boston office joined Elena Lau, RE Broker/CEO Union Real Estate for a fifteen minute conversation titled “let’s talk.” The presentation was hosted by UNION Real Estate. The topics of the conversation were: Greater Boston Housing Market Update and Commercial Real Estate Financing Update. Both speakers took a look at how the housing market continues to perform in the Greater Boston area during these challenging times and provided an update on the Commercial Real Estate Financing industry
In recent years, investors and borrowers have enjoyed a low rate environment as the economy has continued to strengthen. Property values have continued to appreciate, causing celebration amongst those who purchased at the peak of the recession and those who believe the economy will sustain growth for the foreseeable future. While the fundamentals continue to remain strong, lenders are starting to consider the possibility of a downturn. How much longer will this growth last? Simple answer: No one knows. What we know is the capital markets landscape is changing along with the industry’s lending approaches.
Across the board, lenders are becoming increasingly selective about the types of assets they are lending on. Retail continues to be a shifting landscape as it proves to be a challenge to some of the more experienced operators. Lenders continue to remain aggressive on grocery-anchored retail properties in strong locations but are mindful of rents for in-line spaces. Office properties remain a volatile asset with many lenders requiring highly seasoned property managers to operate them. Greater Boston’s industrial market lost 20 million sq. ft. to conversions into multifamily and office properties. This helped accelerate rent growth, which we expect will increase loan volume on industrial properties throughout 2020. Multifamily properties continue to be the most sought-after property type given the high demand and rent growth seen around the New England markets. Fannie Mae, Freddie Mac, and FHA are expected to remain the largest capital sources for multifamily going into 2020 and beyond with initiatives focused on affordable and senior housing.
Borrowers who have built up significant equity throughout their ownership may start having trouble tapping into it. Fewer lenders are offering maximum leverage, especially on cash-out refinance loans, in anticipation of a potential drop or flattening in property values. Institutional lenders will still provide cash-out refinance loans around 65 percent but are reluctant to exceed this level unless proceeds are to be re-invested into the property.
Lenders are starting to notice an uptick in construction costs as they focus on decreasing developer profits as a natural barrier to future investments. Subcontractors have been raising their rates due to the multitude of projects underway since 2014. According to CoStar, subcontractor rates have increased 10 percent annually since 2014 and have climbed as high as 20 percent in 2019. The mayor of Boston, Marty Walsh, has vowed to address the shortage in affordable housing by raising $500 million over five years. These funds, which will be raised from a new property transfer tax, will be used to subsidize costs for affordable housing projects in the city.
Rates going into 2020 continue to perform similar to the year prior. The 10-year U.S. Treasury yield opened 2019 at 2.66 percent and dropped as low as 1.47 percent going into September and settled at 1.92 percent at the end of the year. So far in 2020, the 10-year Treasury has dropped 10 bps to its current level of 1.78 percent (as of January 21). Currently, the spread between the 2- and 10-year Treasury yields is approximately 25 bps. While this spread has widened in recent months, longer-term loans continue to be highly sought after in this volatile environment.
We are interested to see how the results from the recent mergers and acquisitions activity will affect the capital market landscape. The Massachusetts Division of Banks approved 12 mergers or acquisitions
in 2019 alone. As the number of banks shrink, the asset bases of the ones remaining will increase. This will likely change loan programs in terms of loan amounts, proposed interest rates, and even property types. The big question is which ones will shift strategies and which will remain the same.
Despite lenders’ growing anxiety over the direction of the real estate market, fundamentals remain strong in New England, especially Boston. It is a good time to be a borrower as local banks compete with national and institutional lenders for new opportunities. Should local lenders start pulling back, borrowers are more likely to shop for a lender who can meet their expectations. According to a new forecast from the Mortgage Bankers Association, U.S. commercial and multifamily mortgage bankers are expected to close a record $683 billion of loans backed by income-producing properties in 2020, a 9 percent increase from 2019’s anticipated record volume of $628 billion.
BOSTON, MASSACHUSETTS (January 2, 2020) – NorthMarq’s Boston regional office recently awarded Sage Housing, Inc. with a $5,000 grant as part of its mission to source public and private funds to build and sustain vibrant, healthy affordable housing communities through resident collaboration and community partnerships.
Sage Housing Inc., a 501© (3) Not For Profit Corporation, is driven by real estate and community development professionals with many years of experience managing, developing and revitalizing affordable housing. The organization provides expertise and support to developers, owners and managers throughout the lifespan of a property to ensure compliance with all federal, state and local funding programs.
“Sage Housing, Inc. was created to provide affordable and supportive services for those in need,” said Michael Chase, managing director of NorthMarq’s Boston office. “Some of those services include sober housing, recovery centers and safe have shelters. We’re happy to help support their mission and the work they do for our communities.”
Recently, the organization secured a property in Greenfield, Massachusetts, and is collaborating with GAAMHA to complete a six-bedroom house for women in early recovery. This project is emblematic of the organizations commitment to work with local advocates and the housing community to identify training opportunities and provide jobs to people in recovery.
The Boston office’s grant is part of NorthMarq’s larger initiative to support organizations addressing homelessness and affordable housing. NorthMarq awarded grants to 12 organizations in 11 different cities across the county. Check out the story here.
On September 25, The New England Real Estate Journal held its Maine State of the Market Summit. The event included two panels, with topics ranging from a discussion on the Rock Row Development to the state of the market in Maine.
Ed Riekstins joined the second panel of the event, held from 10 – 11 a.m. which focused on Maine CRE opportunity zones and a market overview. The panel was moderated by Justin Lamontagne of NAI The Dunham Group. Speakers included: Gary Vogel of Drummond Woodsum; Vincent Veroneau of J.B. Brown & Sons; Kevin French of Landry/French Construction; and Riekstins.
NorthMarq was a Gold level sponsor for the event.
Read the full write-up about the summit here.
NorthMarq’s Michael Chase was featured in NEREJ on October 25, 2019.
2019 has been an active year so far for U.S. commercial and multifamily real estate. There appears to be a consensus among fellow practitioners that this summer lacked the typical seasonal slowdown, particularly here in Boston. Refinance activity remains high, even with limited maturing debt originated during the depth of the last recession in 2009. This is partly due to mortgage rates still being attractive enough to refinance more recently originated loans.
In addition, the inverted yield curve allowed many borrowers to benefit from breaking swaps that were in the money, especially before the Federal Reserve made their first of multiple rate cuts so far this year. The Mortgage Bankers Association (MBA) supported the anecdotal feeling on the street by recently revising their forecast of annual originations by commercial and multifamily mortgage bankers up to $652 billion. According to the MBA, this would be a new record volume and an increase of 14% over last year’s record.
Potential global headwinds seem to dominate economic news reports. A recent headline from Bloomberg Economics read, “U.S. Recession Chances Hit 27% Within Next 12 Months.” Interestingly, they chose not to say that there was still a 73% chance of avoiding recession. While global concerns should not be ignored, it seems one of the biggest risks is talking ourselves into a recession.
The local story does not appear as dire as international headlines might suggest. The Federal Reserve Bank of Boston reports the August unemployment rate is 3% in New England and 2.9% in Massachusetts, both below the national rate of 3.7%. As most seasoned practitioners know, commercial real estate is about jobs, which are still being created here in New England.
The strong local economy is helping to support the 2019 delivery of more than 5,300 multifamily units in Boston, Cambridge, and Newton, according to RentCafé. Additional multifamily units will be mixed with life science space, commercial, and retail uses within major upcoming developments in Somerville, Cambridge, Charlestown, the Seaport District, South Boston, Watertown, and Allston.
Capital Outlook for the Remainder of 2019
Commercial banks and thrifts continue to close the majority of commercial and multifamily loans. This is a function of the large number of banks and thrifts competing in the space; however, it is important not to lump them all together. Large banks can offer an almost unlimited capacity but have to deal with higher regulatory scrutiny. Smaller banks may offer more flexibility, but larger borrowers can quickly find themselves running up against lending limits. Many banks are currently offering competitive fixed rates for five, seven, or ten years, particularly with the use of a SWAP.
Floating rate loans may also be advantageous in the current rate environment for short-term holders. Borrowers entering into either a SWAP or floating rate debt with LIBOR-based pricing will want to pay particular attention to the language on how their loan will be managed with LIBOR set to expire at the end of 2021, which is within the loan term for many loans being originated today.
Life companies and other institutional lenders remain the primary option for borrowers seeking long-term, fixed-rate financing out to as far as 30 years. This is typically the time of year when some life companies become less aggressive as they approach their annual allocation goals for commercial mortgages; however, there are still others with capital to put to work in the fourth quarter. Borrowers can take advantage of the current rate environment with forward commitments to lock in their mortgage rate up to 12 months in advance of a closing.
In mid-September, the Federal Housing Finance Agency (FHFA) made a highly anticipated announcement regarding the multifamily lending caps for Fannie Mae and Freddie Mac. The new structure sets a $100 billion ceiling for each agency and includes a directive requiring 37.5% of their respective business consist of mission-driven affordable housing. The new limits remove exclusions used in prior years. While affordable housing will remain a central focus, the financing of green initiatives will most likely be deemphasized.
Another interesting twist is the lending caps are for five quarters instead of four. Uncertainly leading up to FHFA’s announcement caused spreads from Fannie and Freddie to widen earlier this year. While both groups are now back lending, they are each still working to manage their new lending caps over the next 15 months.
CMBS (Commercial Mortgage Backed Securities) moved aggressively towards the end of the summer to pick up the slack from Fannie and Freddie when they widened spreads. Boosted by a strong third quarter, Commercial Mortgage Alert reported total U.S. CMBS volume through the end of September stood at $56.1 billion. This is still slightly below last year’s pace with total volume for the year expected to fall just short of the volume in 2018 and down further from the post-recession high set in 2017.
While CMBS may not exceed last year’s volume, Kroll Bond Rating Agency expects CLO (Collateralized Loan Obligations) issuance to reach $19.3 billion.
This would be a 40% increase over 2018 volume. Commercial real estate CLO pools are typically made up of floating-rate bridge loans. The strength of the CLO market is indicative of the highly active and competitive bridge lending space. The relative affordability of interest rate caps in the current rate environment is also benefiting this space. One of the recent trends for floating rate loans is lenders attempting to set index floors. It is something Borrowers should be aware of as they are being asked to limit their benefits if rates decline further.
Outlook Going Forward
Few predicted where rates are today. The 10-year U.S. Treasury started the year at 2.69% with many predicting it would not be long before it reached 3% with an upward climb from there. Along the way, global economic concerns and fears of a domestic downturn conspired to hold long-term Treasury rates in check. As of October 15, the 10-year U.S. Treasury sits at 1.71%. For much of the year borrowers have been able to benefit from favorable index rates, without a significant widening of spreads. The lone exception came in August when index rates fell to a point where some lenders set floors to their mortgage rates. It was around this time in 2018 when volatility in the corporate bond market caused spreads to widen even as treasury rates started to decline. Could 2019 end in a similar fashion?
The bottom line: it is still a good time to be a borrower with attractive rates available for either floating or long-term, fixed-rate loans. We don’t know when the music will stop, so be sure to grab your chair now.
Jeffrey Munoz, vice president in NorthMarq’s Boston regional office, authored an article featured in the New England Real Estate Journal titled “Institutional or non-institutional lenders? That is the question?” Read a snippet of the story below and check out the full coverage in NEREJ.
Boston’s residential and commercial real estate market is known for its strong fundamentals. With an expected slowdown in activity nationwide, Boston remains a point of focus for both institutional and non-institutional lenders looking to increase their exposure. Because short-term debt generally comes with a higher interest rate, institutional lenders, such as life insurance companies, start debt funds to offer short-term bridge loans. These will achieve the yield requirements for their investors. But what is the difference between Institutional and Non-Institutional Bridge lenders?
The yield on the 10-Year U.S. Treasury dropped significantly over recent weeks with a decline of about 35 basis points since the end of July. A lower index is good for borrowers, but what about the spread? Many lenders price their mortgage spreads relative to what they can get in alternative investments such as U.S. Corporate Bonds. Corporate bond yields have continued to move in the same direction as Treasuries, which is good news for Borrowers. However, the spread between the 10-Year U.S. Treasury and average BBB corporate bond yields has increased by about 18 basis points since the end of July.
This is part of the reason why some lenders have increased their spreads in a falling rate environment. Between falling treasury yields and widening spreads, borrowers are still seeing a net benefit from commercial mortgage rates which are lower by about 15-20 basis points since the end of July. Still a great time to lock in long term!
The start of 2019 has once again presented borrowers with an opportunity to take advantage of commercial mortgage rates near historic lows. As we make our way towards the end of the first quarter, here are the top reasons borrowers should be looking to lock in rates now.
Treasury Yields Remain Near Historic Lows
After hitting a 52 week high of 3.26 percent on October 9, 2018, the yield on the 10-year United States treasury steadily declined reaching a new 52 week low of 2.53 percent, as of this writing, on March 20, 2019. Remarks from Federal Reserve Chairman, Jerome Powell, help to spur this latest drop. Chairman Powell commented that the Federal Open Markets Committee (FOMC) was unlikely to make further rate increases for the remainder of 2019. His remarks also included confirmation the Federal Reserve would begin reducing efforts to shrink its balance sheet. A dovish stance from the FOMC along with a reduced supply of securities in the market are likely to help keep treasury rates from rising.
10 Yr US Treasury – 12 Month Trailing
Until recently, the Federal Reserve was primarily concerned with inflationary pressures within the United States. As a result, they made four rate increases over the course of 2018. These actions led to a rise in short-term rates with little corresponding movement from long-term rates. This was partially due to market concerns of a future economic downturn, but it was also because yields for competing sovereign debt remained depressed. On March 8, 2019, the 10-year German bond yield reached 0.05 percent, its lowest level since 2016. Meanwhile, the 10-year Japanese bond yield is currently offering a negative 0.035 percent. While yields for United States treasuries remain historically low, they continue to attract demand from foreign capital seeking yields that are relatively high when compared globally.
Reduced Corporate Bond Yields
When trying to determine where commercial mortgage rates are headed, it is helpful to not only look at treasury yields, but also at possible alternative investments for lenders. For commercial mortgages the most common alternative investment is typically BBB corporate bonds. At the end of 2018, volatility in the corporate bond market caused yields to widen. Many borrowers wondered why they were seeing higher commercial mortgage rates even as treasury yields were declining. From early November to January 3rd the spread between treasuries and BBB corporate bonds widened from 150 basis points (bps) to 204 bps. As a result, lenders seeking relative value had to quote higher commercial mortgage rates. As 2019 has progressed, the corporate bond market as settled down, and the spread between corporate bonds and treasuries is back down to around 160 bps. This has allowed lenders to quote tighter mortgage spreads and borrowers to lock in lower commercial mortgage rates.
Opportunity for Reduced Prepayment Penalties
In addition to long-term rates remaining low, the overall yield curve is providing a rare opportunity for borrowers in the current market cycle. As mentioned earlier, the FOMC made four rate increases throughout 2018 pushing up short-term rates while long-term rates remained low. In fact, there is currently an inversion in the yield curve between the 1-year and 7-year treasuries.
US Treasury Yield Curve
Borrowers who may have been stuck with high prepayment penalties in prior market cycles may be able to benefit now. In particular, many borrowers with loans from banks subject to SWAP breakage are now finding themselves “in the money” and able to pay their loans off at a reduced principal balance instead of a prepayment penalty.
Lots of Capital Chasing Deals
There is still plenty of capital chasing after good transactions. The majority of lenders still have availability in their allocations for 2019; however, as the year goes on, some lenders who were successful in achieving their volume goals may become less aggressive. There are several options available for borrowers seeking to lock a rate today even for a closing later this year. Those who act now can still take advantage of a competitive landscape.
How long will the Federal Reserve maintain their dovish stance? What will happen to rates if a trade agreement between China and the United States is finalized, or if Brexit is resolved? How will the corporate bond market react to low treasury yields? How long before lenders fill their volume targets for 2019? Answers to any of these questions will have an impact on mortgage rates going forward. Borrowers who were waiting to time the market currently have a lot going their favor and are in a great position at the start of 2019.
BOSTON (January 7, 2019) – The Boston regional office of NorthMarq announces the promotion of Michael Chase to managing director. In his new role, Chase will collaborate with managing director, Ed Riekstins, to co-lead the 12-person Boston office as it continues to serve the entire New England region, arranging commercial real estate financing for any property type through the company’s nationwide network of lending partners.
“Michael’s promotion represents NorthMarq Capital’s successful succession planning in action,” said William Ross, president. “Michael epitomizes a new class of NorthMarq producer—technologically savvy, knowledgeable of local, regional and national markets and fully integrated into the company’s culture.”
Chase joined NorthMarq Capital in 2012 as part of NorthMarq’s acquisition of the former Q10 | New England Realty Resources. In his nearly 20-years of real estate experience, performing duties in financial analysis and loan production, Chase has been involved in more than $3 billion in CRE debt and equity transactions.
Beyond his strong production figures year after year, NorthMarq benefits from Chase’s thought leadership and contributions to local, regional and national CRE publications. Recent examples of Chase’s thought leadership include: 2018 Commercial Mortgage Outlook: What a Difference a Year Makes; Top Takeaways from the 2018 MBA CREF Convention; How Some Borrowers Can Benefit in Today’s Rising Rate Environment.
“Michael’s assumption of the role of co-managing director is a reflection of the unbelievable job he does for the Boston office,” said Riekstins. “Michael has his fingerprints on everything successful that is happening in the office. He is an example of future leadership of NorthMarq, starting as an analyst, succeeding in the associate producer program, and eventually earning his spot as managing director. Our team and clients alike are lucky to have him with our firm.”
Chase graduated cum-laude from Boston University School of Management with a B.S. in Business Administration with a concentration in Finance. He is a licensed real estate salesperson as well as a registered notary public in the Commonwealth of Massachusetts.
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!”
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.
CMBS
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
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!
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.
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!
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.
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.
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…
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.
