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Lending is up — again

Loans for health care see greatest increase, while CMBS lags year-ago volume.

It may sound like a broken record, but lending volume was up yet again in the second quarter this year, according to the Mortgage Bankers Association. In spite of blips, such as a 3.3% decline in CMBS lending and a 21.8% drop in FHA multifamily loans, overall volume was up 17.3% from second-quarter 2005. Deals in the pipeline are slowing, industry experts say, but the cyclical push approaching year’s end is expected to counter weaker economic growth to break 2005’s record volume of $345 billion in loans.

“Our pipeline volume is up about 22% from a year ago,” says Ed Padilla. The CEO of Minneapolis-based NorthMarq Capital expects to close the year with a little more than $12 billion in originations, almost 20% ahead of $11 billion in 2005.

Nationwide, second-quarter volume was 23.3% ahead of the first quarter, according to the MBA, which based its report on originations by the its 125 member lending institutions. Year-to-date volume at midyear was 24.3% higher than a year ago.

“Origination activity remains strong and, while the Federal Reserve has been raising short-term rates, long-term rates have actually been falling recently,” MBA Chief Economist Doug Duncan notes in the Aug. 30 report. “Continued low intermediate- and long-term rates, as well as an ample supply of available capital, provide a good backdrop for continued strength in the commercial and multifamily markets.”

Lending increased across all property types, with financing for industrial and hotel properties up 33.7% and 32.4%, respectively, from a year ago. Office volume was up 12.7%; multifamily, 8.8%; and retail, 6.9%. The health care sector stole the spotlight for greatest gains, however, with volume shooting up 177.4% from the second quarter last year.

Some of that increase in health care lending is related to the sector’s small base, which makes any increase or decrease appear more pronounced, says James Woodwell, senior director of commercial/multifamily research at the MBA. Health care loans constituted less than 2% of total lending in 2005. “Regardless, there has been a whole lot more activity in terms of lending on health care facilities,” Woodwell says.

The surge in loans for hospitals, clinics, medical office buildings and related properties reflects increased equity placement in those properties, says John H. Pelusi Jr., executive managing director and managing member in the Pittsburgh office of Houston-based Holliday Fenoglio Fowler (HFF).

Lending also increased among most investor groups, with originations for life insurance companies leading the way with an 18.3% increase over year-ago volume. Originations for commercial banks were up 8.8% in the same period; loans by pension funds climbed 16%; and originations for Fannie Mae and Freddie Mac increased 11.3%. FHA originations decreased 21.8%.

Originations for commercial mortgage-backed securities (CMBS) decreased 3.3% in the second quarter from the second quarter of 2005. Earlier this year experts, including Brian Lancaster, head of structured products research at Wachovia, projected a slower pace of CMBS lending in the second half of 2006 as rising interest rates restrain the demand for new commercial mortgages. Is that slowdown already evident in this second-quarter slip?

Maybe and maybe not. A decline of 3.3% is slight, particularly considering that lending volume in the second quarter of 2005 was up approximately 100% over the same period in 2004, says Woodwell of the MBA. What’s more, CMBS lending typically accelerates in the third and fourth quarters, so 2006 may yet set a new record for volume. “CMBS is still very strong,” Woodwell says. “On a year-to-date basis, it’s up 11% from last year, and the first quarter was up 35%.”

Even if CMBS lending in 2006 fails to top 2005’s record performance, volumes remain staggeringly high, according to John B. Levy, principal of John B. Levy & Co., a real estate investment banking firm in Richmond, Va. “We’ve gotten used to such a Herculean growth spike that when it comes back down to just reasonable, it looks like a disappointment,” Levy says. “Maybe growth is leveling off, but it’s leveling off at an incredibly high number.”

Pelusi agrees, contending the recent decline from a peak is unlikely to portend a weakening conduit industry. “If we take out 2005 as an anomaly, we’re still seeing substantial increases in CMBS on a historical average basis.”

Looking ahead, the MBA projects moderate GDP growth of 2.8% to 3% for 2006 along with continued employment growth. The Fed is expected to hold the overnight fed funds rate at 5.25%, and the 10-year Treasury rate has been declining slowly for weeks, closing at 4.78% on Sept. 5. “All of which I read as meaning that the current environment for borrowing and lending is going to remain pretty stable, certainly into next year,” Woodwell says.

According to Padilla at NorthMarq Capital, that environment should fuel enough loans between now and January to push 2006 volume to yet another record. “The 10-year Treasury yield is still low and attractive, so rates are still very competitive.”


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