The Mortgage Bankers Association’s National Commercial Real Estate/Multifamily Finance Conference (MBA CREF 2020) in February was buzzing with more than 3,000 commercial real estate professionals who were there to network, hear from lenders, and learn more about current industry trends.
Lenders from across the spectrum—life insurance companies, pension funds, banks, mortgage REITs, CMBS lenders, Fannie Mae, Freddie Mac, FHA, debt funds and private equity firms—provided insight into their new programs, preferred property types, and market allocations for 2020.
The conference confirmed that multifamily and commercial real estate investing is strong and lending volumes remain robust. Interest rates are low and are expected to remain low in 2020, making it an opportune time for investors to buy or refinance. Our takeaways from the conference include a persistent competitive lending environment, more activity from life insurance companies, and a continued focus on historically popular property types.
capital, competitive lenders
A tremendous amount of debt and equity capital is available from multiple sources to finance commercial and multifamily properties. Most capital sources indicate they want to deploy more capital in 2020 than in 2019, which was a record or near-record year for many lenders.
Competition among lenders is fierce, which translates to excellent loan terms for borrowers. With the 10-year Treasury yield at near-record lows at 1.32%, most lenders are resistant to going below a 3.0% rate, yet some are now breaking the 3% floor rate by dropping as low as 2.75% or 2.8%, fixed for 10 years.
Capital sources continue to expand throughout the entire capital stack, and some lenders are getting more creative as they chase yield. For example, some life insurance companies that have traditionally been doing 60% or 65% LTV loans now have a “stretch senior” in which they will go up to 70% or 75% of that same stack.
Life insurance companies ramping up
Some life companies are receiving more third-party money, which is driving some of their appetite to do more deals and place more money in commercial real estate. As a means to differentiate themselves, some are offering more prepayment flexibility and the option to lock rates for longer periods.
While debt funds and banks have traditionally done most of the bridge lending, more life companies are exploring bridge lending as a means to help feed their permanent loan business.
Multifamily and industrial remain preferred property types
Multifamily and industrial continue to be the most preferred property types for lenders. Multifamily portfolio transactions will generally command the best loan terms. Construction permanent loans offered by life companies and other lenders are available for multifamily and industrial, allowing borrowers to lock interest rates and manage future rate risk with non-recourse debt.
Workforce housing continues to be a preferred asset class among lenders, including GSEs (represented by Freddie Mac, Fannie Mae, and FHA), life companies, and bridge lenders. While lenders often prefer the underwriting metrics of workforce housing over Class A multifamily product, they also like the ability to market it as providing liquidity to this more mission-driven class of apartments.
One notable change in the market is lenders becoming more cautious in the office sector in this late-cycle stage, although owner-occupied office lending is available.
While lenders are cautious on lifestyle centers and big-box properties, those assets can be financed with more moderate leverage. Meanwhile, grocery-anchored shopping centers and well-located urban-type retail properties remain in favor for retail.
Many lenders are standing their ground on leverage despite having significant capital to deploy. They may go to 65% to 75% loan-to-value on their in-house cap rates, which might be more like 60% or 65% LTV of what is seen in the actual market. (There is a difference between market cap rates and underwriter cap rates.)
What to watch
A trend to watch is the integration of sustainability into commercial real estate lending. There is an increasing focus on ESG (environmental, social, and governance) in the financial services industry. Having a LEED-certified building, for example, is a way to get a lender’s interest and perhaps better rates. This growing movement of green initiatives will create value for the owner and be recognized by the lending community.
Since interest rates are so low, a significant number of loan applications are getting signed in 2020. However, there is no indication that there is a large, pre-loaded pipeline that will spill over from 2019 like has happened in previous years. That being said, 2020 is off to a good start for many of our lenders. Outside forces such as the upcoming election, as well as the coronavirus and its impact on the markets, are driving some lenders to get out of the gate quicker.
The abundance of capital through all types of lenders is bolstering opportunities for commercial real estate investors to grow their portfolios in 2020.Download PDF