The commercial real estate lending market came off of a record year in 2017, as mortgage originations totaled $530 billion. Fundamentally, rates, property values, credit policies and demand support the continuing strength of the CRE market. Technically, a large block of maturing CMBS loans will leave many CRE owners attempting to sell should they be unable to refinance, which could affect supply and demand. We will explore this further as we break down the current and future CRE lending climate.
Welcome to the Suburbs
The outlook for the commercial lending market in the United States is strong. Property values continue to rise across the country, both in primary urban and emerging gateway markets. While core markets such as New York City still provide tremendous opportunity for borrowers and lenders, emerging gateway markets on the fringes and in the suburbs of these urban centers offer the prospect of value and accelerated growth.
Current trends show that renters and businesses are often priced out of major cities, and thus are moving their lives and operations to suburban areas. My takeaway is that this will drive demand and value as the year unfolds.
Rates Are Rising
The Federal Reserve is gradually raising interest rates as the American economy continues its expansion after the financial crisis of 2008. Despite this, rates remain low and attractive for borrowers. Furthermore, the yield curve, which shows the difference between short and long-term bond yields, remains flat. This indicates that Fed expects the economy to persist on its current path with no major shifts in the near future. Thus, originations of long-term loans are expected to increase in 2018.
Don’t Forget About CMBS
I feel it is important to note that approximately $41.7 billion in CMBS debt (Collateralized Mortgage Backed Securities) issued between 2006 and 2007 is expected to mature between June and November of this year. Many of these CMBS loans are riskier as they were underwritten prior to the financial crisis, and thus were held to a lower standard. This makes them difficult to refinance and nearly impossible to sell. Many of the securities include underlying properties with alarmingly high loan-to-value ratios.
Outlook: Industry Executives Are Optimistic
At the beginning of 2018, the U.S. government enacted sweeping reform to the tax code. While a lower corporate tax rate may be a boon to many companies, real estate lenders in the U.S. and abroad stand to be negatively impacted by the changes due to forced write-downs in the value of tax credits accumulated from previous losses. In some cases, this will cost banks billions of dollars, squeezing their bottom lines and affecting liquidity.
A recent Ackerman report finds that he impact of the tax law and the influx of new technology into the sector are two of the most important trends to watch in 2018. The report points to strong job growth, record amounts of foreign capital, and the continued dominance of private equity and banks as financing sources as reasons that 70% of CRE executives surveyed are far more optimistic about 2018 than the previous two years. Along with the above factors, the markets will look on with a watchful eye as Britain and Europe continue their Brexit negotiations. My feeling is that the result of those talks, along with other political events around the world, will have potential positive impacts on the commercial lending market.
For now, the market is strong, and economic data and fundamentals lead us to expect that to continue in 2018 — and beyond.