November 14, 2017
Sales continue to lag last year’s volume by approximately 7 percent through the third quarter. With the decline in sales, logic and history would indicate that originations would generally correlate to this trend. However, originations have exceeded last year’s first-half totals and market participants believe that third-quarter volumes will surpass those of the second quarter. While banks have significantly reduced originations in the first half, other lenders have increased their appetites, particularly Agency and CMBS lenders. New supply has come to the market from a variety of sources, including the refinancing of the end of the wall of maturities from 2007 and new construction projects on apartment, industrial, and office buildings that, due to robust leasing and stabilized cash flows, have easily converted to permanent loans. Recent sales have also seen an increase of almost 30 percent in August over July and a slight increase from the second quarter to the third quarter, mostly due to a resurgence of portfolio transactions. This increase in larger transactions can be directly attributed to the continued recovery in the CMBS market, and the ability to efficiently finance these larger transactions. If sales continue to rebound—and they usually do in the fourth quarter—the volume of originations may be closer to last year’s totals than previously anticipated. While overall values may have peaked, lenders continue to be bullish on commercial mortgages due to continued low interest rates, solid economic growth, a significant reduction in new development projects, and continued purchases from foreign investors. We see this as likely to boost fourth-quarter sales and originations.
Sales volumes fell from their peak in 2015, but third-quarter sales have increased over the second quarter, and there are signs that the fourth quarter may see another increase as portfolio sales are starting to pick up.
Source: Real Capital Analytics, Guggenheim Investments. Data as of 9.30.2017.
Cap rates have inched higher from historical lows in all sectors except industrial. However, positive net operating income growth has held valuations steady, and commercial real estate prices posted a soft 1.1 percent increase in the third quarter, according to Green Street Advisor’s U.S. Commercial Property Price index.
With CMBS, Agency, and life company lenders quoting aggressively on 10-year terms, we like five- and seven-year paper, and longer terms up to 15 years where pricing is less competitive. The bridge and mezzanine space is still attractive, especially as Libor has increased significantly from the beginning of the year and borrowers are more willing to look at 4.5–5.5 percent fixed rates for these transactions on three- to five-year terms.
The pace of originations has not declined, despite a slowdown in the volume of sales for 2017. New product, especially for apartments and maturing loans, makes up the difference.
Source: Mortgage Bankers Association: Commercial/Multifamily Quarterly Databook Q2 2017.
—William Bennett, Managing Director; Ted Jung, Vice President
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