Lenders have been hungry to do real estate deals this year. But some industry observers question whether their appetites may diminish later in 2015 as they near their target capital allocations.
The big story in the financing arena continues to be the pullback in lending activity by Fannie Mae and Freddie Mac. The two agencies are well ahead of schedule when it comes to hitting their annual lending caps of $30 billion each. Both agencies have raised rates and tightened underwriting as a means to conserve their remaining capital.
The fact that Fannie and Freddie have slowed lending to a trickle is creating opportunities for other lenders, including life companies, banks and CMBS shops, to pick up the slack. The flip side of that is that Fannie and Freddie aren’t the only lenders that are now ahead of their target allocations for the year.
Private sector lenders are by no means handcuffed the same way that Fannie and Freddie are. Lenders could blow through allocations and keep going full steam ahead, says Dan Trebil, senior vice president and managing director with NorthMarq Capital, a provider of commercial real estate debt and equity, in Minneapolis. But lenders that are at or near allocations, particularly near the end of the year, may become increasingly choosy regarding the deals they are willing to do, Trebil adds.
“There are a number of life companies that are on or maybe ahead of pace to hit their allocations before the end of the year,” he says. Yet those targets are not a firm cap as with Fannie and Freddie. If there are still good opportunities, then life companies can certainly increase allocations. The caveat to that is that life companies are not going to reach for deals just to put more money out, he adds.
Transaction activity is up across the board, from acquisitions and refinancing of loan maturities to new construction. The Mortgage Bankers Association (MBA) forecasts that commercial and multifamily mortgage originations will increase 8 percent in 2015 from their prior year level. Overall, there is ample supply of financing to meet that demand from borrowers.
“I think people have been increasing their allocations, and for the most part, all of the lenders that I talk to are still very hungry,” says Eric McGlynn, director, capital markets/equity practice at Cohen Financial, a real estate capital services company, in Miami.
Lender allocations to commercial real estate transactions have been growing in recent years. For example, many life insurance companies have raised allocations for commercial mortgage loans as an alternative to lower yielding bonds. Commercial mortgage loan allocation typically ranges between 8 percent and 12 percent for most insurers, although the larger companies have allocations as high as 15 percent, according to a fourth quarter Market Intelligence Report by EDR.
“There is still a ton of capital out there, regardless of the property type, to fund deals,” says Trebil. Yet given the activity in the market, it appears that many lenders will hit allocations early. “If they hit allocations, which it appears they will, they may pull back a little bit. But I don’t see there being a shortage of capital,” he says.
Portfolio lenders in particular allocate “buckets” of money to commercial real estate, and there are smaller buckets aimed at diversifying those loan portfolios by property type and geographic focus. Some of those buckets are filling up quickly.
Case in point is South Florida where the boom in new multifamily development has already prompted some lenders to rein in lending. Lenders such as banks, debt funds and life insurance companies have been putting out a lot of capital for new apartment development projects.
“Many of them are now pulling back and taking a break on South Florida investment in the development sector,” says McGlynn. Lenders are starting to “cherry pick” the best deals and reserve capital for a marquis deal or existing clients, he adds.
Portfolio lenders such as life companies, banks and private equity funds are more affected by allocations. Essentially, portfolio lenders generally look to spread risk to different buckets such as by property type, loan type or geographic region. In comparison, CMBS lenders are not portfolio lenders. So there are no allocation limits and they will do as much or as little lending as the market will allow.
Ultimately, there is still plenty of capital available, particularly for preferred property types such as multifamily, bulk industrial, Central Business District (CBD) office and grocery-anchored retail. Those types of deals are in demand and will have no trouble accessing capital. As is the case in South Florida, there may be particular pockets that emerge where lenders are at capacity. Deals that are less in demand, such as those involving flex warehouses, unanchored retail centers, suburban office assets in some markets and hotels, may find fewer capital sources later in the year. Likewise, borrowers with credit issues also may find it more difficult to access capital.