Commercial real estate lenders are aiming to build on the momentum of a strong 2011 and increase volumes even further in 2012. Most are aware that external shocks—such as a sovereign default in Europe or a confrontation with Iran in the Middle East that disrupts oil flows—remain a risk. But few see dangers within the internal dynamics of the industry.
That was the mood at this year’s Mortgage Bankers Association’s (MBA) annual Commercial Real Estate Finance/Multifamily Housing Convention and Expo in Atlanta. The MBA’s inaugural forecast of industry volume projects originations of commercial and multifamily mortgages will hit $230 billion in 2012, an increase of 17 percent from 2011 volumes, and continue to rise to $290 billion in 2015.
“We’re in a period of stability. Everyone is talking about increasing volume. Barring a major dislocation in capital markets, it should be a strong year,” said Tom Fish, executive managing director with Jones Lang LaSalle’s Americas Real Estate Investment Banking division.
For example, anecdotally, one attendee pointed out that an informal survey of conduit lenders targets for the year amounted to $60 billion. That’s double the volume the CMBS sector originated in 2011. To be sure, not every firm will likely be achieve its goals, but it does indicate that the CMBS sector—which faced some issues in the late summer of 2011—is functioning again.
Overall, 2,300 attendees were at this year’s conference, according to MBA President and CEO David Stevens, who said the mood at this event, not surprisingly, is much better than at the association’s residential conferences. “It’s got a different feel than housing,” Stevens said. “There’s a lot of business happening. There’s a different demand structure. And [all the types of lenders] are doing well. … The biggest concern is certainty.”
The improvement in capital markets is helping drive investment deal flow.
Randy Evans, a managing director with Eastdil Secured LLC, explained that his firm aggregates all the bids on the assets it has on offer as a proxy for the amount of capital in the market. In 2010, Eastdil counted $88 billion in aggregated capital and in 2011 the number jumped to $114 billion.
“This is representative of a strong investment sales market,” said Evans. “Clearly, the big theme is always going to be yield. Especially in 2012 … the market is craving yield and real estate right now is seen as terrific risk-adjusted investment. … With 10-year Treasuries remaining below two percent, the leveraged yields are very attractive for the market.”
In recent years, the majority of activity has occurred on top assets in core markets and on the some of the distressed opportunities that have emerged (although much fewer of those situations have come to the market than many expected). Today, there are signs that other parts of the market may become active.
“The return of CMBS will open secondary markets and secondary properties that may not have been trading for last couple years,” said Matt McManus, senior director, Marcus & Millichap Capital Corp. “That will push regional lenders and banks to look back at asset classes that they have not paid attention to. I think that will bring more distressed debt openings to more mainstream players.”
Potential shocks
In addition to macro events like a shock emanating from Europe or a confrontation in the Middle East that could send oil prices soaring and slow economic growth, another wild card remains the U.S. political situation and looming possibility of changes in regulation and legislation.
Specifically, legislation was introduced last week, the Stop the Outrageous Pay (STOP) at Fannie Mae and Freddie Mac Act, that would limit executive compensation at the government sponsored entities (GSEs) Fannie Mae and Freddie Mac. Stevens said one consequence of the bill’s passage could be a drain in talent from the multifamily sides of the GSEs that affect the functioning of the multifamily market as a whole. Aside from that, there remain rumblings in Washington of gutting the GSEs entirely, which would be even more disruptive without a plan for how to replace them.
Another concern is potential rules affecting the securitization market by requiring firms to retain a “premium capture cash reserve account” to cover potential losses. The requirements, as being discussed, “would constrain the flow of private capital to the CMBS sector,” said Thomas Kim, a vice president of commercial and multifamily policy with MBA.
Still, the discussion on potential red flags was all about factors external to commercial real estate. That’s a change from recent years when a lot of talk centered on how banks were going to deal with the bad loans on their books and dealing with the ramifications of deals down at the top of the market that were going bad. Some of those problems remain, but lenders and borrowers have been able to work through problems, and the improvement in the commercial real estate market overall means it’s a much better environment today to deal with any remaining issues.