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Situs CRE Debt Market Update: Focus on Private Debt and CMBS

In its CRE Debt Market Update for 4Q 2017, Situs RERC reports that the 4Q 2017 lending environment was healthy and paints a bright picture for lending in 2018.

With respect to private debt, banks and insurers are reporting that the CRE market is becoming increasingly crowded, and also noted an evident loosening of underwriting standards.

“Strong property fundamentals are leading to an increase in borrowing and lending across most property types and capital sources, despite how far along we are in the real estate cycle,” says Jennifer Rasmussen, PhD, Assistant Vice President of Situs RERC. “Investors are increasingly moving into the value-add space and branching into the secondary and tertiary markets in the quest for yield.”

Based on information from Commercial Mortgage Alert (CMA) and Mortgage Bankers Association (MBA), Situs RERC provides the following summary of the debt markets:

  • There was a significant jump in hotel and health care originations in 2017; each of these property types reversed a downward trend in originations that had existed since 2014.
  • In the quest for yield, lenders are exploring alternative options such as interest-only structures and floating-rate lending.
  • Investors should keep an eye on the impact that anticipated interest rate hikes will have in the lending market. Demand for fixed-rate loans is expected to dwindle as interest rates rise.
  • Higher interest rates could trigger lower origination activity for Fannie and Freddie products in 2018. Even if multifamily loan purchases decline in 2018, it will still be a very robust market this year for the agencies, with multifamily fundamentals expected to remain strong, and the recent FHFA move to allow the GSEs limited re-entry into the Low Income Housing Tax Credit (LIHTC) market as equity investors.
  • Investors are shying away from retail loans due to the sector’s volatility. Loans for retailers and loans for retail real estate need to undergo a thorough due diligence process.

Based on information from Commercial Mortgage Alert (CMA) and Mortgage Bankers Association (MBA), Situs RERC also provides the following summary of the CMBS markets:

  • Driven by favorable capital market conditions that have lowered the cost of capital for conduits and led to competitive pricing for borrowers, commercial mortgage-backed securities (CMBS issuance) began to increase at the end of 2017.
  • There are headwinds for CMBS issuance in 2018 due to limited refinancing opportunities stemming from the “wall of maturities.”
  • However, increases in other types of loans, such as bridge loans, and strong investor demand for fixed-income assets have led to general optimism for the 2018 CMBS market, barring any sudden and significant jump in interest rates.
  • A year after the risk-retention rule took effect, CMA finds that the majority (62%) of CMBS issuers retain the risk themselves.
  • The jump in CMBS outstanding is significant. Since the peak of the CMBS market in 4Q 2007, CMBS outstanding declined 35 of the last 38 quarters.
  • CMBS spreads are the tightest they have been since the financial crisis amid the increased competition in the market. Average profit margins on conduit deals in 4Q 2017 decreased to 2.53% from 3.31% in 3Q 2017.

To learn more about Situs RERC research, visit our website or call 319-352-1500.

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