Despite a slight decrease in total U.S. commercial real estate lending volume from 2015 to 2016, banks and alternative funding sources continue to lend aggressively. The decrease reflects the fewer number of acquisitions to finance as investors become more cautious. A variety of lenders, however, remain bullish and point to the low loan delinquency rates, which are at the lowest levels in more than a decade.
Coupled with a new administration promising to roll back regulations, the industry continues to be robust, according to several lending professionals who hold the CCIM designation. Commercial Investment Real Estate discussed the challenges of commercial real estate financing with four CCIM designees who are active in the lending industry:
CIRE: Describe the state of commercial real estate lending in your market today, based on your experience and your bank's participation.
Elizabeth Braman: We are a nationwide lender and investor, so we monitor markets nationwide using significant amounts of macro- and micro-level market data. We are seeing that the six gateway cities - New York, Los Angeles, San Francisco, Chicago, Boston, and Washington, D.C. - have recovered above the pre-financial crisis peak levels.
This rate of growth would indicate pricing that is approaching peak, or has peaked, in these major markets. In contrast, asset prices in secondary markets are recovering at a more reasonable rate, consistent with national demand fundamentals.
As a result, we are paying particular attention to small balance product in secondary markets. We are still bullish on assets bought right where the local economy shows population and job growth, as well as other demand drivers.
Heather Olson: Multifamily lending is still strong in 2017 and is expected to continue to grow. The Federal Housing Finance Agency kept the government-sponsored enterprises capped lending amounts at $35 billion each for 2017. Both Fannie Mae and Freddie Mac are staying aggressive in pursuing financing for low-income and affordable multifamily units. These units are considered uncapped business and do not fall under the $35 billion limit. Capital markets remain selective in certain geographic regions and products, particularly market-rate, such as new construction products.
Daniel Matz: The bridge lending market in New York City is very competitive. During the past few years, more investors have turned to the commercial debt space in search of more stable, predictable returns. As banks and other regulated lenders have taken a step back from lending due to regulatory restrictions, borrowers have been driven toward debt funds and other nontraditional, private lenders.
This increased competition in bridge lending has made vying for deals challenging, as it is difficult to compete on pricing for high-quality deals with in-place cash flow in strong markets. As a result, lenders are turning to secondary markets and alternative property types, in search of more yield and less competition.
Darin Davis: The market is still very strong. Like many midsize markets, multiple large and small banks will consider lending, depending on the project size. The challenge in markets such as Albuquerque is if a project is between $15 million and $50 million, finding a lender could be a challenge. A limited number of lenders is available for bigger transactions.
CIRE: What types of CRE loans are most prevalent today for deal structure, size, property type, and loan terms?
Braman: Despite seeing the beginning of a cooling off in the multifamily sector, agency lending can be an attractive product right now. In recent years, the Freddie Mac small balance program has been particularly popular and just increased the loan maximum from $5 million to $6 million and even as much as $7.5 million in primary markets. Rates are still low compared to historic averages, so borrowers can max out on leverage.
We have done many projects where we offer preferred equity to enhance leverage. Another alternative is to provide common equity, alongside attractive multifamily debt.
Davis: It still seems that 75 percent leverage is the key, with amortizations from 20 to 25 years. Terms are from 5 to 10 years, depending on the nature of the project.
I haven't seen much bias against any one property type, but I can say the retail sector is starting to make a few people nervous. I look for retail properties whose tenants are more service- or value-based businesses because it is easier to gain financing. This compares to properties whose tenants tend to be more big boxes, which compete with Amazon or do not have a strong internet-based business model.
Olson: Most common for all multifamily are the seven- and 10-year fixed-rate loans from GSEs. Both offer 30-year amortization and interest-only terms, dependent on deal structure. The Federal Housing Authority and the U.S. Department of Housing and Urban Development offer a 35-year fully amortizing loan for acquisitions and refinances, and a 40-year fully amortizing loan for substantial rehabs and new construction.
Average loan size is $5 million to $30 million, but loans can go up to $100 million or higher. We also offer credit facility structures for large portfolio acquisitions. Green financing has become popular with Fannie Mae and Freddie Mac borrowers, which offers reduced pricing if a property undergoes a green rehabilitation as a condition for the transaction.
Matz: Multifamily is still the favored asset class among lenders, which makes these deals very difficult to win. Industrial is becoming increasingly competitive, as e-commerce has significantly increased demand for distribution and fulfillment centers.
Traditional lenders are being more conservative and typically not lending greater than 65 percent loan-to-value. Retail loans are very challenging, as each new day brings news of more store closures and bankruptcies. However, well-located centers that have strong anchors, such as a grocer or credit tenant, on long-term leases with strong sales, are able to obtain financing at favorable terms.
CIRE: What are the challenges facing borrowers seeking commercial real estate financing in your market?
Braman: We see the biggest challenge as the wave of debt coming due out of the wall of maturities. According to multiple sources, including the Federal Reserve, as much as $430 billion in loans were originated in 2006 and 2007 at a time when underwriting was fairly aggressive. Today many of these loans are coming due, and the CMBS market is not originating to the same levels.
As a result, gap financing is needed to take on the nexus between the outstanding loan amount and the capital available. We are addressing this gap with both preferred equity and mezzanine debt to reach 80 to 85 percent of current value.
Matz: Many properties are overleveraged as a result of 80 percent, interest-only CMBS financing loans, which were originated in 2007. Due to little equity growth since origination, these loans are difficult to refinance without an equity infusion from the borrower. There is an abundance of overleveraged loan requests, which do not have a clear path to stabilization. This, in turn, creates demand for high-yield bridge financing.
Olson: Most of the concern is focused on the government changes and the Trump administration. Discussion revolves around GSE reform and HUD cuts, but there is no consensus as to what the changes would look like. With an impending, albeit slow, tax reform, we are seeing tax credit investors price their equity for affordable housing developments.
These projects qualify for low-income housing tax credits up to 10 to 15 cents less than during 2016. As a result, some investors are pulling out of some markets altogether. Many investors are staying on the sidelines to figure out how the markets will react during the second quarter and even the third quarter of President Donald Trump's first year.
Davis: Equity is still a hot button. With new high-volatility commercial real estate rules, it's important that hard equity is put into a project, especially if it involves ground up construction. I would add the retail market as a lending challenge because of increased store closings.
How has your CCIM education and designation helped you as a lender?
Braman: As a CCIM, I am always using all three of the basic tenets of the organization. I use technology every day to enhance my product offerings and delivery to commercial real estate clients. I use the education to assist in the proper review and analysis of solid real estate opportunities. I rely on networking to reach out to my CCIM connections to provide supporting insight on local markets, as well as to recruit job candidates to work at our company.
Davis: My CCIM education and networking has resulted in my ability to provide customers with swift, efficient responses to their loan requests. It also demonstrates my credibility to the brokerage community and improves my opportunities to gain referrals.
Olson: Participating in CCIM events has given me the opportunity to meet many multifamily developers and investors. I hope to help them achieve their financing goals in 2017 and beyond.
Matz: The CCIM designation has connected me with many mortgage brokers and other market industry participants. The expansive CCIM education curriculum has helped diversify my skill set as a real estate finance professional and helped broaden my knowledge and expertise within the industry.