March 22, 2017

Andrew Little

By Andrew Little

With enthusiasm high in commercial real estate markets, most attendees at a national mortgage bankers convention last month were expecting a party atmosphere.

But the reality was more like a line from the Talking Heads' song "Life During Wartime": "This ain't no party, this ain't no disco, this ain't no fooling around."

This year had a different feel. Missing were the grandiose loan volume goals that many conduits roll out every February. It was as if someone had flipped a switch in their attitude to make them more conservative.

The best phrase to capture the mood was probably emblazoned on a hat that Cantor Commercial Real Estate handed out, which borrowed one of President Donald Trump's lines. It read: "Make CMBS Great Again."

The half-mocking, self-deprecating phrase encapsulates the conduit lender's dilemma. They have lost what gave them a competitive advantage — higher proceeds on loans and pricing that reflected risk.

None of this is lost on life insurance company lenders. For years, they saw conduits press them on pricing and compete aggressively to win deals.

Now, life insurance companies don't feel pressure and are going back to more conservative underwriting, which means lower proceeds on loans but good pricing for transactions they actually chase.

Rates are currently in the 3.85 to 4.35 percent range for 5- and 10-year mortgages from life insurance companies, according to the John B. Levy National Mortgage Survey. Fuller leverage 10-year loans from Fannie Mae and Freddie Mac or CMBS lenders are pricing 0.50 percent higher, with 5-year bank loans pricing in the 4.25 percent to 4.5 percent range.

John Bogle, founder of The Vanguard Group, once quipped that "the genius of investing is recognizing the direction of a trend, not catching the highs and lows." With regard to investing in commercial real estate today, the trend is caution.

This is particularly obvious with certain property types. Shopping centers anchored by big-box retailers, suburban office properties and hotels are clearly receiving more scrutiny and less debt from lenders.

Overall, with less debt available, prices stagnate and fall.

The counterbalance to less debt, however, is that investors are still pouring money into real estate, making the trend more difficult to recognize.

Again, this is more obvious in some property types than in others.

Capital for multifamily and industrial properties is more abundant. Fannie Mae and Freddie Mac have not lost their ability to aggressively lend, and many investors feel comfortable with the steady cash flows available in multifamily.

Industrial properties also continue to be sought after by both debt and equity providers continuing to make that sector robust.

In the Richmond region, some of those same trends are playing out.

Demand for industrial space has picked up to the point where speculative industrial development has begun.

Good quality, high-bay space is getting snapped up by companies that are positioning themselves to take advantage of long-term e-commerce trends that favor distribution and logistics over storefronts.

At least two sizable speculative projects were underway at the end of the fourth quarter per multiple reports from commercial real estate brokerages Porter Realty and CBRE.

Investors in apartment projects are also taking advantage of the trend toward more urban living.

Downtown Richmond has absorbed some 4,400 apartments in the past five years, and this trend shows no signs of abating, according to Real Data, a Charlotte, N.C.-based research firm that tracks supply and demand for apartment projects.

Historic data and Census Bureau estimates support the trend.

From 2000 to 2010, the population in the city of Richmond was relatively flat, growing 3.3 percent or by approximately 6,600 residents.

During the same period, Chesterfield County grew by about 56,200 residents, or 21.5 percent, and Henrico County grew by about 44,200 residents, or 16.8 percent. The trend supported the suburbs.

In the past five years, the trend has reversed so that Richmond is the fastest-growing of the three localities.

Census Bureau estimates for 2015 indicate Richmond has grown 7.9 percent since 2010 and added more than 16,000 residents, while Chesterfield has grown 6.2 percent and Henrico by 5.9 percent.

Since most new urbanites are going into apartments versus new single-family homes, this eye-opening trend bodes well for apartment developers downtown.