Lenders Go After Commercial Real Estate

12/06/2015
Lenders are showing a healthy appetite for financing commercial properties as that market continues to grow, with rents rising and vacancies slipping, leading to tantalizing investment returns.

Optimism about the pace of commercial real estate lending is apparent now that capital is available from a variety of sources including banks, insurance companies, pension funds, private equity and real estate investment trusts.
The commercial lending market is "robust," says Brian Stoffers, global president of debt and structured finance at CBRE Group (CBG), the world's biggest commercial real estate services and investment firm.
"There's ample capital — increased sources of funds both domestic and abroad — and more supply of debt capital than deals to fill the orders," Stoffers told IBD.
"There's lots of equity buying property and an active purchasing market," he said. "That means there's an active lending market.
Commercial real estate mortgages show relatively low delinquency, and risk-adjusted yields for commercial mortgage debt "are quite attractive to many investors," he says.
As for the market's future prospects: "Right now the market is as robust as it's been since the Great Recession," said Stoffers. "There's no sign of it letting up.
Recovering From The Pullback
George Ratiu, director of quantitative and commercial research at the National Association of Realtors, says commercial real estate lending is "recovering" from the lending pullback by a lot of sources, including banks, that began in the financial crisis and ran past the recession.
In 2014 and so far in 2015, funding in the form of equity and debt, including the commercial mortgage-backed security segment of the market, and bank loans, have been "very strong," Ratiu says.
CMBS is a type of fixed-income security collateralized by commercial real estate loans. The originators are banks, which bundle a group of loans, of varying types and terms, on their books to sell in securitized form as a bond series.
"We've seen a very strong broadening of capital sources as well as an increase in capital flows and liquidity," Ratiu told IBD.
What's driving the uptick in commercial real estate lending
A lot of the lending "is being driven by the improvement in commercial asset performance," said Ratiu. "Cash flow in commercial properties has been rising as measured by net operating income and the demand for commercial space on the leasing side has been improving.
As investors look at these improving fundamentals, he said, "they see very attractive assets and are willing to bid on these assets.
The return on commercial real estate investments is "comparatively strong," Ratiu says, adding that capitalization rates, "the main measure of the yield on commercial assets," averaged 6.6% for all types of properties in the 2015 first quarter.
Cap rates gauge return based on the income a property will generate.
Even accounting for inflation, a little below 2%, the "real rate of return" is in excess of 5%, Ratiu adds.
"Compared to bonds and stock dividends, commercial real estate offers comparatively much stronger returns," he said.
Marcia Diaz, managing director and head of originations at Prudential (PRU) Mortgage Capital Co., agrees.
"Commercial mortgages are a good alternative to other fixed-income investments," Diaz told IBD. "Portfolio managers see the risk-return trade-off for commercial mortgages (and see) a little higher return for the perceived risk than would be in a fixed-income alternative. That's what's driving a lot of money into commercial mortgages.
Some panelists at the CRE Finance Council 2015 annual conference in New York from June 8-10 were also upbeat about the commercial real estate lending market.
"This cycle is largely a function of excess liquidity in the bank space," said one panelist. "The deposit-to-loan ratio is below the 70% range, which tells us there's excess liquidity in the system. That's a guidepost for the fact that the banks will continue to be active in this commercial real estate space as they look to deploy excess liquidity.
In a panel at the conference on Tuesday, Diaz said that, generally, most insurance companies "have increased their appetites" for commercial real estate lending over the past five to six years.
"Last year, we were at historic highs in originations, and I think many in our peer group were as well," she added.
"Due to the attractiveness of commercial mortgages in the fixed income space, there's been a lot of movement at the portfolio management level to move money into that area, which has been good for us," Diaz said. "We've been able to deploy a lot more insurance loans, representing primarily the longer-term fixed rate product (on) stabilized properties.
Apartments Rising
Ryan Severino, senior economist and director of research at property data tracker Reis (REIS), says the lending market is "hypercompetitive.
"It seems like there's more capital being supplied in the market right now than there is demand," he told IBD. "Everyone is trying to jump back into commercial lending. But we're not seeing as much development outside of apartments.
The main commercial real estate sectors beyond multifamily housing are office, industrial and retail.
Severino says the commercial-lending push has come as the economy has improved and a lot of lenders "have jumped into the fray.
"I wouldn't characterize the market as being tremendously overheated," he said. "Underwriting standards are still relatively cautious vs. where we were before the downturn. There's relatively more discipline in underwriting today than in 2006 and 2007.
Jim Costello, senior vice president at property data firm Real Capital Analytics, says that in 2014 the top source of debt capital was CMBS lenders, which captured 27% of all commercial real estate lending. Costello says that marks a "turnaround" from 2009, when the CMBS market "shut down.
That market "has steadily come back and added share every year," he said. It "diversifies risk by taking loans and splitting these into different components of risk. Buyers of the highest-rated portion of the loans are the last to suffer any losses from nonpayments and are almost guaranteed a return, and as such they buy them at a lower rate.
Regional and local banks also have gained share. In 2014, they accounted for 14% of all lending, up from 9% in 2010, Costello says.
Insurance companies upped their share of commercial lending to 20% in 2014 from 11% in 2011.
How will interest rates affect commercial real estate development
"The spread between interest rates and cap rates moves quite a lot over time," said Costello via email. "These movements are governed by investor perceptions of the risks of commercial real estate investment. With average commercial cap rates close to 6% now and the 10-year U.S. Treasury close to 2.4%, there is still 360 basis points of spread.
He says if expected interest rate increases occur as a "function of investors increasing their expectations for growth and thereby their expectations for returns, the increases will be a function of increased competition for capital. The impact on the capital side of the pricing equation is mixed, but on the income side conditions will improve."

Fonte:http://finance.yahoo.com/news/lenders-commercial-real-estate-221300889.html

LEGGI GLI ALTRI BLOG

• < Prec
• Succ >