Real estate lenders are expecting a strong year ahead for the commercial property business, but looser underwriting standards may cause the market to come under some pressure this year.
“Industry participants see another year of positive growth for commercial real estate debt markets as ample capital and credit should be available to meet borrower demand and pending loan maturities,” Stephen Renna, president and CEO of the Commercial Real Estate Finance Council (CREF), said as the group announced the results of its membership survey.
Survey respondents expect the CRE finance market this year to be “quite healthy, buoyed by strong investor demand, rising loan maturities, relatively low levels of new construction and improving property fundamentals.”
More than six out of 10 respondents to CREF’s survey said they believe the state of the economy will be “somewhat better” this year and another 3 percent believe it will be “much better.” A little more than a third believe it will be the same, while only 1 percent think it will be “somewhat worse.”
While 74 percent of respondents expect interest rates to rise in 2015, they’re confident the Federal Reserve will be able to manage any increases “in a thoughtful manner.”
On the lender side, demand drivers include the potential for attractive risk-adjusted returns and fundamentally sound real estate market conditions, CREF said. On the borrower side, demand drivers include low financing costs and new development.
While there are certainly some good things to look forward to this year, National Mortgage News says most of its “8 Vital Signs for the 2015 CMBS Market” are pointing negative.
Retailer closures are on the rise, for one thing. While the 54 combined stores that J. C. Penney and Macy’s plan to close might not affect the CMBS market in the short run, delinquencies and losses could increase if the trend continues, the paper said.
Other trends bode ill for the market as well. The biggest concern is looser loan underwriting.
“Real estate lenders are expected to be more aggressive in 2015.”
More than three-quarters of the respondents to CREF’s survey said they believe lenders will be “more aggressive” in 2015, mainly due to higher property valuations and greater leverage, with potentially lower credit quality. Renna warned that “it is critical that the industry demonstrate underwriting discipline in the face of abundant capital and heightened competition.”
National Mortgage News said underwriting based on future, rather than actual, cash-flows, indicating loosening underwriting standards, is on the rise. About 15 percent of the loans collateralizing new CMBS in 2014 were underwritten to expected cash-flows 20 percent greater than 2013’s actual cash-flows, the paper said, citing information from The TCW Group.
CREF’s Renna also cautioned the industry to expect a series of new regulations on banks and commercial mortgage lending that take effect in the next few years. These rules ultimately will make commercial real estate lending more costly and potentially dampen the market, he said.
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This year could prove to be a pivotal year for the commercial property business and the economy at large. Having the right management tools will help you navigate your way safely.