May 24, 2016
Turbulence in the CMBS market in the first quarter has been positive for other commercial lenders, as borrowers sought lower pricing volatility and better certainty of execution. Life companies, banks, and the Agency lenders were happy to pick up the additional volume, but there is a finite amount of capital that each of these lending groups will be willing to provide after four years of strong origination. For example, the Office of the Comptroller of the Currency warned banks at the end of last year to be prudent about real estate lending in 2016, and Agencies have capped limits on their market rate transactions at $31 billion. As a result, commercial real estate loan supply is expected to decline this year.
Sales of commercial properties excluding hotels in 2015 surpassed 2007 volumes, which drove commercial real estate loan volume to a near-record total of $504 billion. If the pace of investment sales continues, strong demand for loans in 2016 will create new opportunities for lenders, particularly in the fourth quarter— typically the strongest for sales.
Source: Bloomberg, Real Capital Analytics. Data as of 12.31.2015.
This decrease in the availability of commercial real estate debt comes at a time in the cycle where annual sale transactions are at the highest levels since 2007. Additionally, non-bank loan maturities will peak in 2016 and 2017. Maturities in 2016 are 51 percent higher than they were in 2015, which could continue to drive demand for new loans.
We anticipate demand for commercial real estate loans from borrowers will outstrip supply in the second half of 2016, potentially leading to higher borrowing costs. Spreads have already increased significantly in the CMBS markets, though they have been much more moderate for life companies and Agencies. Spread widening in commercial real estate loans may be even more acute at leverage levels above 65 percent loan to value, given that leverage level’s reliance on takeout from the CMBS market. Strong demand could provide higher-yielding opportunities for those with capital to lend in the second half, if, as we expect, traditional lenders achieve their allocations earlier in the year. While we continue to anticipate that there will be opportunities in long-term fixed-rate product, we also expect to see attractive relative-value opportunities in short-term, slightly higher leverage loans that bridge the gap in transactions where long-term product is not available on acceptable terms.
Just under $200 billion of non-bank commercial real estate loans will mature in 2016, a 51 percent increase from the volume of loans that matured in 2015. This could drive demand for new loans higher than the near-record total in 2015.
Source: Mortgage Bankers Association. Data as of Q4 2015.
—William Bennett, Managing Director; David Cacciapaglia, Director
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