Our Perspective 2/ 19/ 2019

Insight on the state of the capital markets from the MBA CREF/Multifamily Convention and Expo

NorthMarq’s Baltimore team, together with over 100 additional NorthMarq employees from 36 offices across the U.S. attended the Mortgage Bankers Association’s National Commercial Real Estate/Multifamily Finance Conference in San Diego during the week of February 11, 2019.

The Conference attracted over 3,000 attendees for the purpose of networking, relationship building and deal making. Capital providers including life insurance companies, pension funds, CMBS shops, Fannie, Freddie, FHA, banks, mortgage REITs, debt funds, private equity firms and others were well represented allowing NorthMarq to provide clients Equity and Debt capital for nearly every form of real estate at every stage in the development process. NorthMarq represents more CRE capital sources in the Mid Atlantic than any other intermediary.

The market sentiment for commercial real estate investing remains very optimistic. Most capital sources want to deploy an equal or greater amount of dollars compared with 2018. Some additional takeaways:

  • Lenders have prepared for different scenarios given the current economic and political climate. In late January 2019, Fed Chairman Powell signaled a pause in the Fed strategy to increase short term interest rates. This should provide borrowers with another opportunity to take advantage of low rates in the first half of 2019.
  • Life insurance company lenders have become more flexible in response to market demands in an effort to deploy more capital into CRE. Many life companies now offer their own mezzanine funds behind the first mortgage enabling them to offer leverage up to 85 percent LTV. Life companies now offer terms from floating rate deals with very flexible structures to as long as 40 years with a 40 year amortization.
  • The volatility in the bond market during November and December caused spreads to widen over where they were for much of 2018. With the volatility down and the Fed guidance on rate moves, life company spreads have come down to 140 bps or lower for moderate leverage (60-65 percent) deals. Best spread heard at the conference: a sub 100 bps spread over the 10 year UST (secured by a multifamily asset with an LTV under 50 percent)!
  • Life companies trying to differentiate themselves from the pack now offer more liberal terms, prepayment flexibility, the option to forward rate lock for longer periods, and limiting carve-outs to borrower entity only.
  • While banks still dominate construction lending, life companies and debt funds now offer alternatives which may work better for borrowers. A number of life companies now offer conventional construction loans plus construction/perm loans of 12 years and longer allowing the borrower to lock rate in the beginning of the development and completely eliminate the interest rate risk. Debt funds actively chasing construction loans have caused spreads to compress and can offer deals up to 85-90 percent LTC on a non-recourse basis allowing them to win business from traditional bank sources.
  • CMBS lenders want to lend more but have had difficulty finding deals. Total volume for 2018 finished around $80 billion, down from 2017’s total of nearly $88 billion with the consensus for 2019 volume closer to $70 billion. Most CMBS deals in 2018 included substantial or full term IO structures providing better cash flow and correspondingly higher equity returns. To increase volume, CMBS will have to offer higher LTV options for borrowers to offset the negative aspects of the loan documents and particularly the loan servicing.
  • Other capital sources providing fuel to the lending market are the GSEs, represented by Freddie Mac, Fannie Mae, and FHA. Fannie and Freddie loan volume hit all-time highs in 2018. NorthMarq represents both agencies and often sees intense competition between these two behemoths to try and top the other on pricing and other loan terms in a determination to win the deal. Both have lowered spreads in the past two weeks.
  • Money for bridge lending and mezzanine financing from life companies, private equity firms, mortgage REITs and debt funds is more available now than at any time in the past. CMA is now tracking over 150 lending sources who invested $10 million or more in bridge loans in 2018. For high quality, larger “bridge light” transactions, yields have fallen to as low as 250-300 over LIBOR.

In summary, the abundance of capital sources creates a very competitive landscape for an unprecedented number of property types and asset life cycles. Given compressed spreads and lower deal volumes in the market, borrowers with conventional loan opportunities should see strong interest from multiple lenders. Borrowers with more “story” deals will find capital sources more willing than ever to find a structure that makes sense for parties on both sides of the transaction.