Multifamily still king
A forecasted increase in overall originations for debt and equity in 2017 has led NorthMarq Capital to adopt a bullish approach to multifamily, particularly workforce multifamily. Despite the chance for short-term downward pressure on rental rates, low homeownership rates and a growing population indicates that multifamily is a solid long-term investment.
What happened to 2016’s “wall of maturities”?
From the beginning of 2016, the industry was buzzing with concern over the “wall of maturities.” That wall continues to be managed naturally through the recovery of the real estate market. Properties that could be refinanced or sold have been readily absorbed into the market and financed in a variety of ways with banks, life companies, agencies and debt funds. Remaining properties not ready for the market have been extended for one to two years through loan workouts and agreements with the Special and Master Servicers.
Caution may be in the air with rising interest rates impacting the ability to get maximum proceeds for some properties that are over-leveraged or need more time to season before refinance or sale.
2017 should be more fruitful for CMBS
Overall capital market disruptions in the early part of 2016, combined with ambiguous final loan terms, contributed to the decreased CMBS volume. What’s surprising is that the CMBS markets have not rebounded more strongly. The regulations, unpredictable terms and underwriting factors impacted their ability to get back to the $100+ billion origination levels that people expected the last few years. The banks, life companies and agencies have had plenty of options to fund and fill their allocations, and the CMBS void has mostly been filled by debt funds and non-bank sources that are looking for returns and favor current market fundamentals. In 2017, however, the effects of regulation should be more opaque and CMBS issuance will mostly likely increase.
Looking back on Dodd-Frank: the good, the bad and the ugly
The regulations and capital reserve requirements for banks led to increased borrowing costs and overhead for banks and lending institutions. Some of the provisions may have benefited undisciplined lending institutions, and some will be punitive and result in a contraction in lending capital, costing borrowers. What would help this is clarity, particularly related to risk retention requirements. The unknowns appear to be the biggest negative—a situation that hasn’t yet been calmed by the new administration.
2017 prediction: Banks are looking hot; life companies maintain their course
Banks enjoyed the past few years. They’ve expanded their portfolios, acquired market share and expanded into other areas for fixed-rate debt and additional lines of business beyond traditional bank lending. The expansion of non-bank sources is the most aggressive change occurring now. Debt funds and other sources are looking for yield and using creative financing to enhance yield by providing bridge and mezzanine debt options to borrowers. The life companies will continue to be active as they have larger allocations to fill than the past few years. The banks may taper off if short-term rates continue to rise and the capital requirements become an issue for the loans that may stay on their books longer than anticipated for stabilizing. Also, new construction slowdowns will impact bank volumes.
Looking for a wild card? Higher interest rates and new administration policies are in the deck
The anticipation of future higher interest rates could lead to increased origination volumes as borrowers elect to finance their properties earlier while rates are still competitive. Another wild card is the impact of unanticipated or unintended legislation stemming from the new administration’s policies.