MARKET INSIGHTS
January 17, 2016

By Andrew Little

David Bowie and Queen could have been referring to the current state of global markets in their 1981 “Under Pressure” collaboration.

With the collapse of oil prices and the devaluation of the Chinese yuan, global markets — and just about anything related to them — are under continuing pressure.

So far, commercial real estate in the United States has side stepped the meltdown.

In fact, commercial real estate sales volume in 2015 will be only slightly below the last peak reached in 2007 and, once fully tallied, end some 28 percent ahead of 2014, according to data through the third quarter from Real Capital Analytics and JP Morgan.

Prices through the third quarter are up 12.5 percent when compared with 2014, the same data show.

Sales volume is soaring and expected to increase in 2016. When combined with the $90 billion in commercial mortgage ­backed securities loans that are expected to mature in 2016, commercial loan volume is expected to be strong.

The question is: Which sources of capital will be in a position to take advantage of the expected demand?

By most accounts, insurance companies and banks are expected to increase their appetites in 2016 compared with 2015.

In addition, mortgage giants Fannie Mae and Freddie Mac have received increased allocations for 2016 and the guidelines for apartment buildings that don’t count toward the allocation or cap have been expanded to allow larger volumes by both entities.

Commercial mortgage­ backed securities lenders also expect to increase their volumes for 2016.

Volume of commercial mortgage­ backed securities for 2015 came in at $101 billion, according to Commercial Mortgage Alert.

This was lower than expected in the beginning of the year, but still an increase of more than 7 percent from 2014 when the volume was $94 billion.

Industry participants in a survey by Commercial Mortgage Alert projected $117 billion in volume for 2016, but those lenders face a lot of headwinds.

All the global jitters and pressure have pushed rates out on commercial mortgage­ backed securities loans in a much more dramatic way than insurance company and bank lenders, who have held rates fairly steady over the past six months.

Interestingly, Fannie Mae and Freddie Mac rates on multi family properties also have widened along with rates for commercial mortgage­ backed securities.

The common theme is that both ultimately are backed by bonds that trade in a global market, and anything trading in global markets has been volatile.

Commercial mortgage rates were steady during the last month. Top quality five­ and 10­ year loans now range from 3.25 to 3.75 percent, respectively, according to the John B. Levy & Co. Mortgage Survey. Full leverage 10­ year conduit loans, however, are pricing closer to 4.85 percent.

Meanwhile, banks continue to compete for business in the 4 to 4.5 percent range. Several banks are now offering 10­ year fixed­rate loans as well.

As global markets continue to come under pressure, rates for commercial mortgages are expected to stay relatively low.

This will continue to fuel the investment sales market. While it isn’t likely to see foreign buyers competing on deals in Richmond, they are ever­present and becoming a larger part of the safe haven markets, such as New York, Boston and the District of Columbia.

As competition has increased in those markets, Richmond has more out­ of­town buyers investing in its backyard.

For instance, the Williams Mullen Center in downtown Richmond recently was sold for $78 million to a subsidiary of Kireland Holdings in Florida. Riverfront Plaza, the twin 20 ­story buildings on East Byrd Street, sold for $147.5 million to a group from Santa Monica, Calif. And the Gateway Plaza building was bought by a New York­based group.

Several other office buildings in play downtown are being pursued by out­of­town investors as well. This trend is expected to continue and should play out in the retail and suburban office markets in the coming year.