Market forecast

2013 Midyear Financing Report

Lenders strive to minimize risk and maximize yield.

With an abundance of available capital, the first half of 2013 showed plenty of healthy competition to finance commercial real estate. Will this trend continue?

Unless rising interest rates create significant market turmoil, projections from the Mortgage Bankers Association are optimistic, forecasting commercial mortgage originations growing by 11 percent in 2013, to $254 billion by year’s end. A look at current lenders’ plans for the rest of the year fills in the details.

Market Players

Today’s market reveals a new landscape, replete with opportunistic borrowers, new government regulations, and a strong lender emphasis on limiting risk and maximizing yield.

CMBS. Last year saw a 48 percentincrease in commercial mortgage-backed securities issuances from 2011, with 2013 expected to rise another 40 to 50 percent to $55 billion. While market watchers predict as much as $90 billion this year, recent market volatility has led some to drop their estimates by as much as $15 billion. CMBS origination already hit $19 billion in first quarter 2013, about four times the volume of last year’s first quarter. Ten-year terms offered at 70 to 75 percent loan to value are priced out today from 4.3 to 5.0 percent.

Today’s CMBS lenders are concentrating on a project’s debt yield when making funding decisions. Debt yield is the net operating income divided by the proposed loan amount.To lenders, this figure represents their cash-on-cash return on money lent if the commercial property is foreclosed immediately after funding. A target 9 to 10 percent debt yield is currently standard, but these numbers are dropping in the face of fierce competition. Top CMBS players includeDeutsche Bank, J.P. Morgan, Wells Fargo, Goldman Sachs, UBS, and Bank of America.

Insurance Companies. Life insurance companies closed 18.1 percent of 2012’s commercial real estate loans, according to Marcus & Millichap and Real Capital Analytics reports, and they are expected to increase commercial real estate allocations by 15 percent this year. Life companies offer an average LTV of 65 percent and 10-year fixed pricing in the high 3 percent to low 4 percent range. While maintaining their conservative reputation, many life companies such as StanCorp Financial Group, Symetra Financial, and Ohio National Financial Services are looking to pick up market share by offering smaller loan amounts and becoming more aggressive on overall proceeds.

Banks. Post-credit crisis, the banking community has remained a small group, with local and regional survivors consolidating in part to comply with new regulations. These new rules require larger capital reserves, which may affect the amount of commercial real estate assets banks will choose to hold. National, international, and regional banks accounted for roughly 25.5 percent of all commercial real estate loans last year, according to Marcus & Millichap and RCA.

Despite an increased appetite for commercial real estate loans, banks remain conservative with underwriting criteria: Often, they are more eager for banking relationships and the sale of ancillary services than for stand-alone commercial real estate loan transactions. Some banks now offer nonrecourse financing to strong borrowers, while most stick with three- to five-year fixed terms in anticipation of rising interest rates.

Government-Sponsored Enterprises. Despite huge increases in multifamily acquisitions and record low interest rates, the Federal Housing Finance Agency’s 2013 strategic plan decreases Fannie Mae and Freddie Mac lending. Under the new directive, Fannie and Freddie’s combined multifamily lending will shrink from $63.3 billion in 2012to $56.9 billion in 2013.

While this news may have little impact on existing GSE borrowers, other lenders may see an opportunity to expand market share in the healthy multifamily sector, particularly among new borrowers in secondary and tertiary markets. Fannie Mae lenders such as Arbor Commercial Mortgage, Centerline Capital Group, and Greystone Servicing Corp. offer 10-year loans to 80 percent LTV in the low 4 percent range starting at $1 million.

Small Business Administration. The SBA is expected to remain on pace with 2012 originations this year, with only a slight dip from 2011’s numbers — considered a banner year due to a number of stimulus efforts that reduced fees,expanded loan guarantees, and raised loan amounts. The SBA’s 504 program offers lenders, particularly portfolio lenders, the opportunity to make 50 percent leverage loans, which helps to maintain a low weighted average LTV on their overall portfolio. These first trust deeds, combined with a 40 percent SBA second trust deed, currently a 20-year term fixed at 4.16 percent, offer borrowers a combined LTV of 90 percent with a low blended rate. The SBA’s 7(a) program enables lenders to provide small businesses a 90 percent leveraged first trust deed on real estate up to $5 million with an SBA guarantee to 75 percent of the loan balance. This guarantee is particularly important, as many lenders are selling the guaranteed portions on the secondary market at tremendous premiums, which replenishes the lender’s liquidity, reduces their exposure, and encourages even more small-business lending.

Bridge Loans. Many lenders are entering the bridge financing market with aggressive terms for empty buildings, unseasoned properties, discounted note payoffs, and buildings needing funds for tenant improvements, leasing commissions, and minor or major rehabs. Terms range from two to three years at 65 to 75 percent LTV, with rates at 5 to 6 percent with local banks and 7 to 10 percent with bridge and private lenders. While Fannie Mae lenders like Walker & Dunlop, Wells Fargo, and Berkadia Commercial Mortgage offer aggressive bridge loans for larger balance loans to win the take-out financing, non-bank entrants such as ReadyCap Commercial, A10 Capital, and Emerald Creek Capital are aggressively originating loans of $10 million and less, Crittenden reports.

Finishing Strong?

The financing outlook for the remainder of the year is somewhat mixed. While there is significant capital in the market for the right projects in the right locations, rising interest rates are a wild card, and credit is still tight for those projects that are too small, too weak, or too far away to get the attention of the big players. New entrants should address some of the projects that are currently struggling to find financing over the coming months. If 2012 (and history) is an indicator, financing activity is likely to surge by the end of 2013.

Elizabeth Braman, CCIM, is chief production officer at ReadyCap Commercial in Irvine, Calif. Contact her at


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