Demand for Loans May Exceed Supply

While commercial real estate fundamentals remain strong, strains on loan supply could cause borrowing costs to tick higher in 2016.

May 24, 2016

This sector report is excerpted from the Second Quarter 2016 Fixed-Income Outlook.

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.

Commercial Real Estate Sales Volumes Surpass 2007

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.

Commercial Real Estate Sales Volumes Surpass 2007

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.

Commercial Real Estate Loan Maturities Are Accelerating in 2016

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.

Commercial Real Estate Loan Maturities Are Accelerating in 2016

Source: Mortgage Bankers Association. Data as of Q4 2015.

—William Bennett, Managing Director; David Cacciapaglia, Director

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.

Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment-grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating-rate senior-secured syndicated bank loans and other floating-rate securities involve special types of risks, including credit risk, interest-rate risk, liquidity risk and prepayment risk.

Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, Transparent Value Advisors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.


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