The only thing missing from the recent Commercial Real Estate Finance/Multifamily Housing Conference sponsored by the Mortgage Bankers Association was a band striking up "Happy days are here again."
Some 3,000 attendees registered for the three-day conference, appropriately titled, "Our year in the sun!"
Mortgage bankers have good reason to celebrate. In 1995, they created some 300,000 new apartment units and built 2 billion sq. ft. of commercial space in the United States. They hold $500 billion in mortgage assets and made $100 billion in new loans last year.
So what did all of those mortgage bankers talk about in San Diego besides the tricky ninth hole at La Jolla? They talked up a rather rosy outlook for the real estate industry as a whole, and focused much attention on the trends shaping the commercial mortgage-backed securities (CMBS) markets.
Keynoter Tony Pierson, managing director of research and strategy at CIGNA, gave his annual industry forecast before a packed house on opening day. "The outlook is sunny, though there are one or two thunderstorms on the horizon," said Pierson. "1995 was a very good year, and 1996 will continue to be a good year, depending on the strength of the economy. It will be difficult to satisfy investors' appetites for real estate assets."
The loud thunderclap is retail. "It's a big, big exposure to all of us. If retail turns out to be a debacle, the regulators will be back," said Pierson.
"This is not a new storm," said Pierson. "The problem is, we didn't do anything about it. Office construction stopped in 1989 and 1990, but retail construction never stopped, and it's only just beginning to slow down now."
According to Pierson, the factors leading to retail's demise include slow sales growth and flat incomes for retailers, a turn to value pricing by consumers, overbuilding of retail space; and bankruptcies and consolidations by retailers.
Pierson said the major factors driving the health of the overall industry include improving fundamentals; little excess new construction; a slowing economy; healthier players in the market; and renewed investor interest in the industry.
By product type (and these are sweeping generalizations), Pierson says apartments are in equilibrium; hotels show excellent fundamentals; office buildings offer good opportunities; retail is an industry in severe stress; and warehouse (industrial) is still attractive.
Since much of the money flowing into real estate these days is going into multifamily, Pierson highlighted some of the basic demographic shifts that are impacting this segment, such as the declining pool of prime renters aged 25-34 years (dropping from 72.4 million in 1965 to 72.1 million in 1995).
Pierson cited warehouse as "an investor favorite" due to a general economic improvement in recent years and the need for continual quality upgrades.
As for the impact of technology on real estate, Pierson believes change will be evolutionary rather than revolutionary. "Technology won't really impact this generation, but it will the next generation," said Pierson. While there may well be a "virtual everything" attitude (but the joke goes, "If you lead a virtual life, then you're dead), there won't be a dramatic turnaround in the way real estate is used for years to come.
That pretty much set the stage for the rest of the conference. The MBA released its fifth annual investors survey of 38 life insurance companies, which is specifically intended for companies which provide capital for deals of $12 million and less.
"Without question, 1995 was the best producing year for commercial real estate in almost 10 years," said Jeanette Rice, chairwoman of MBA's Commercial Real Estate Finance Statistics, Research, and Management Committee and vice president and director of research at AMRESCO Inc. "The huge portfolio runoff experienced in earlier years has begun to stabilize."
The 38 commercial mortgage portfolios represented in this year's survey total $55.33 billion, a larger servicing volume than the 41 companies included in last year's survey results. In this year's survey, the average commercial mortgage portfolio is $1.46 billion, higher than the average 1994 yearend portfolio size of $1.30 billion.
Among the 35 companies indicating that they would have funds available for commercial mortgages in 1996, the aggregate lending goal is $11.28 billion. This breaks down to an average of $322 million per lender. This same group of companies allocated $10.47 billion in funding for 1995, but actually funded $11.65 billion as of yearend 1995 - more than 11% above the funding level anticipated early last year.
E&Y Kenneth Leventhal Real Estate Group (EYKL) also released its annual CMBS survey, showing that despite the reemergence of traditional mortgage lenders last year, CMBS market volume was down only modestly from the record $20 billion in new issues in 1994, to $18.3 billion in 1995.
"We don't see it as an indicator that this market is going away," said Joe Rubin, national director of capital markets at EYKL. In fact, some $8 billion was issued in fourth quarter 1995 (a record for any quarter) and $4 billion was issued in first quarter 1996.
It's (CMBS) become a permanent component of real estate finance and investment. Rubin also believes the CMBS market will crack through the $100 billion number in outstanding issuance this year, "which will create a viable secondary market."
Speaking of permanent components, Fannie Mae gave its annual report, and the picture was, you guessed it, rosy.
"We had a great year," said Thomas White, senior vice president at Fannie Mae. The corporation funded $6.5 billion deals in 1995, up from the $4.9 billion in 1994.
And it wasn't all plain vanilla stuff, either. "A good deal is a good deal, even if it's out of the box," said White.
Also at the conference, Freddie Mac reported a 75% increase in its multifamily business last year, funding $1.6 billion in multifamily loans, up from $913 million in 1994. And 95% of those loans were on affordable to low- and moderate-income families.
Freddie Mac did $ 1.1 billion through its Conventional Cash Mortgage Purchase program and $360 million through its Structured Transactions (securitization) program. So far this year, the corproation's January 1996 volume was double that of January 1995. The corporation hopes to do about $2 billion in total business this year.
Overall, Thomas Watt, Freddie Mac's senior vice president of multifamily housing, characterized the lending market as having "a surplus of capital chasing multifamily deals. Everyone is in a real horse race out there to build market share."
To better its own offerings, Freddie Mac unveiled two new lending programs, the Multifamily PC One program and the Rate Reset Mortgage.
The PC One program provides an alternative to the conventional cash program since it is available for individual loans that Freddie Mac intends to securitize promptly after purchase. The program will be initiated on a pilot basis with several Program Plus seller/servicers throughout the country.
"The Multifamily PC One program gives borrowers a seamless, profitable outlet for a single multifamily loan," said Charles Olsen, vice president of multifamily production. "Investors place a high value on multifamily mortgage securities because of the call protection advantages they offer."
The new rate reset mortgage offers the ability to lock in a fixed interest rate for the first five years of the loan, with the option to extend the mortgage for another five years.
Also, Freddie Mac changed its structured transactions program to increase the loan-to-value cap to 80% from 75% and to decrease the seasoning requirement to only six months from the previous 24 months.