August 14, 2016

Andrew Little

By Andrew Little

Stephen Stills of rock band Crosby, Stills and Nash released a single in 1970 that implored listeners to get over the anger of being jilted by your true love and “Love the One You’re With.”

The same could be said of many borrowers today who would love to get a loan from a life insurance company, but their property’s quality, location or leverage is only attractive to a conduit lender.

So despite all the pain and angst that goes with borrowing from conduit lenders, conduits are feeling the love from borrowers who are running to them as low rates and higher leverage once again has made the source of capital popular.

While historical patterns are interesting to examine, they don’t necessarily predict the future.

In the case of conduit pricing, let’s hope that history doesn’t repeat itself. Ever summer since the recession, pricing for commercial mortgage-­backed securities has widened and volatility has returned in the later months, making closing a conduit loan in the fall a bumpy ride.

Things are slightly different this year as the commercial mortgage­-backed securities market started off on the wrong foot and has steadily climbed back into relevance. In fact, the latest deal to price, which was issued by Wells Fargo, Bank of America and Morgan Stanley, obtained pricing that was the lowest since June 2015.

The $871 million commercial mortgage­-backed securities offering was the first to abide by risk­retention rules mandated in Dodd­Frank legislation that will take effect in December. According to the rule, issuers must retain a 5 percent interest in their offering for the life of the security.

The idea is that lenders will be more careful about the loans they issue if they have a portion of the loan on their books for its entire term. This test trial has to be characterized as a rousing success given the bond­ buyers’ reaction and the low pricing that came with it.

Pricing for loans continues to be aggressive, according to the John B. Levy & Co. National Mortgage Survey. The most conservative loans of 5­ to 10­years in term are pricing in the 3 percent to 3.45 percent range, and higher leverage conduit loans are pricing in the 4 percent to 4.25 percent range for 10­years. Ironically, 5­year conduit loans price wider.

These low rates have contributed to a re­ignition in the investment sales market both in volume and pricing.
Pricing on a national basis was flat from August 2015 through April, according to the latest Moody’s/RCA Commercial Property Price Indices.

Pricing has changed with a 2.6 percent increase in June from the prior month and an 8.4 percent increase since June 2015.

According to the report, pricing for non­major market apartments has increased the most in the past 12 months with an eye­popping 16 percent year­over­year average increase.

Richmond, considered a non­major market, has witnessed very aggressive pricing on apartments in the past few months, supporting findings from Moody’s/RCA.

Another recent release from Moody’s was its Red­Yellow­Green (RYG) report, which scores markets based on various supply and demand variables and then rates them R, Y or G depending on the outlook for various property types in 80 markets.

It would be wise to avoid hotel investments in Houston and Pittsburgh; retail property investments in Trenton, N.J.; and central business district office plays in Albuquerque, N.M., as each received the absolute lowest score in the survey and were rated “R” with a score of 0, according to the report.

Richmond was scored for multifamily, retail and hotel investments. Each was rated “G” with a score of 78, 70 and 83, respectively.