10 Takeaways from the MBA CREF 2016 Convention

As the Mortgage Bankers Association’s Commercial Real Estate Finance/Multifamily Housing Convention & Expo 2016 got underway in Orlando this Sunday, some overarching themes about the state of the lending industry emerged from the panel discussions and individual meetings. Here are the biggest takeaways from the conference:

1. MBA’s economists forecast that the Federal Reserve will raise interest rates twice in 2016, and potentially four times in 2017. In spite of uncertainty in the global markets, Fed officials are likely to base their decisions on the strength of the domestic economy, which should grow at an average rate of 2.3 percent this year, according to Michael Fratantoni, chief economist, and Jamie Woodwell, vice president of research and economics with MBA.
2. There’s a general consensus we are seeing the tail end of the commercial real estate up cycle. Conference attendees as disparate as Dennis G. Schuh, managing director with JP Morgan Chase, Jilliene Helman, CEO of Realty Mogul, an online real estate capital marketplace, and David M. Durning, president and CEO of Prudential Mortgage Capital Company, have noted that values in the commercial real estate space don’t have a lot of room to rise further. According to Schuh, “We’re definitely pretty far into this cycle right now and it’s pretty long in the tooth. People are talking about the R word.”
3. The good news is that for the most part, property fundamentals seem to be improving. But many lenders are pulling back on activity in markets that are overly reliant on the oil industry and on multifamily construction loans in markets where supply is starting to overtake demand. In some markets, the issue is more specifically about the wrong kind of supply, with a high volume of luxury multifamily projects and a dearth of new class-B and class-C properties that would generate greater demand. Pat Jackson, CEO of Sabal Financial Group, a diversified financial services firm, brings up San Francisco as an example of a market people erroneously think of as impervious to downturns. “I think we’ve done but maybe one loan in San Francisco in the past year,” for that reason, Jackson notes.
4. Online real estate lending continues to grow, with Jilliene Helman predicting that commercial real estate crowdfunding in the U.S. will grow to more than $1 billion by the end of this year and potentially to $10 billion in five years.
5. Most industry participants admit that underwriting standards have somewhat loosened since the end of the Great Recession, especially in the CMBS space, but note that they are still nowhere near the freewheeling days of 2006 and 2007. “There are signs of sneaky ‘pro forma,’” notes Kim S. Diamond, senior managing director and head of structured finance with Kroll Bond Ratings. “And another thing that won’t show up [right away] is that every single [CMBS] loan that comes through now has some level of complexity that adds another layer of risk.”
6. The sector that is causing the real estate lending community the greatest anxiety right now is CMBS. As overall market volatility has negatively affected spreads, JP Morgan Chase’s Dennis G. Schuh estimates that CMBS issuance has gone down 20 percent this year compared to the year before.
7. With about a 50 percent year-over-year increase in non-bank commercial/multifamily loan maturities in 2016, much of it in the CMBS space, that’s leading some market participants to worry there won’t be enough CMBS issuance to refinance all those loans. Asked about the risks of another real estate bubble like the industry saw in 2007, Howard W. Smith, III, president of Walker & Dunlop, a capital solutions provider, replied that he’s worried about “the opposite.” “I am concerned about not enough money” for all those maturing loans.
8. The hiccups in the CMBS space could provide an opportunity for mezzanine lenders, however. A new report issued by New York City-based research firm Real Capital Analytics (RCA) estimates that 33.7 percent of all CMBS loans maturing this year and the next will require additional capital to refinance and RCA researchers predict that it will be mezzanine lenders and preferred equity partners that will help those borrowers close the gap.
9. Loans on properties in secondary and tertiary markets, loans on retail assets and loans on suburban office buildings will be among those most likely to need additional capital to refinance or face difficulty refinancing at all, according to RCA.
10. The rating agency Standard & Poor’s, which faced a one-year ban by the U.S. Securities & Exchange Commission from rating some commercial mortgage-backed securities in 2015, remains a controversial player, with Kim Diamond noting that “With the rating agencies, there’s the concept of ‘too deeply entrenched to fail.’ They don’t have criteria that work, they have very few people who have the experience that fits [what they do.] The absurdity of the fact that people are willing to give them another chance boggles my mind.”