July 31, 2017

Andy Little


BY ANDREW LITTLE, Special correspondent - May 14, 2017

Like the transitional point in “Shout,” the frat-classic song originally recorded by The Isley Brothers in 1959 and made famous by Otis Day and the Knights in the movie “National Lampoon’s Animal House,” the markets were holding their breath the last few months, but seem revived and poised for growth again.

The French election was concluded without a major surprise; positive vibes came out of the Federal Reserve meeting earlier this month; and the April jobs report was upbeat.

Those factors seem to have real estate markets ready to continue shouting.

Prices continued upward for all property types for the month of March, albeit at a much slower pace, according to Moody’s/Real Capital Analytics’ Commercial Property Price Indices earlier this month.

The index is compiled by Moody’s Investors Service and Real Capital Analytics, a New York-based real estate research firm, and tracks price changes in U.S. commercial, multifamily and hotel properties based on completed sales of the same properties over time.

The overall index was up only 0.5 percent in March compared to February, but the trailing 12-month index shows price increases of 7.2 percent when compared to last March.

While apartment prices showed a rare drop in March from February, values are up 8.1 percent from March 2016.

When comparing major markets to non-major markets, the index shows apartment prices in non-major markets have outperformed major markets with value increases of 8.7 percent in non-major markets compared to 7.1 percent in major markets.

Richmond apartment sales certainly would support this conclusion as both activity and pricing have increased significantly in the past year.

First-quarter national investment volume was off 18 percent when compared to 2016, according to Real Capital Analytics data, largely because portfolio deals were off almost 40 percent. This lower volume was the result of less capital available from conduits to finance larger portfolio deals.

While banks, insurance companies and agency lenders put out a record amount of loans, it was not enough to make up for the lack of conduit debt.

Now, conduits are showing signs of life again.

After a slowdown related to regulatory changes implemented at the end of last year, it turns out the market is adjusting well.

Recent transactions have generally been well-received by investors, allowing pricing to stabilize at lower levels than experienced in 2016. In addition, B-piece buyers, who were at risk of going away under the new regulations, have worked through the regulations to a point where the market is functional.

What does all that mean to loan pricing and loan sizing? Some conduits are back to pricing full loans aggressively, and this is likely to push pricing down for other lenders.

Rates are currently in the 3.375 percent to 3.9 percent range for 5- and 10-year mortgages from life insurance companies for lower leverage loans, according to the John B. Levy National Mortgage Survey.

Fuller leverage loans from Fannie Mae and Freddie Mac are pricing 0.5 percent higher, and conduit lenders, meanwhile, are now competing in the 4.5 percent to 4.6 percent range for fuller leverage 10-year deals.

Banks also are continuing to compete aggressively on price, and judging from year-over-year results published recently in Commercial Mortgage Alert, the top 100 banks added significantly to their real estate loans in 2016 despite warnings issued by federal regulators late in 2015 that discouraged aggressive bank lending.

The top 100 banks grew their real estate loan portfolios in 2016 by 10.3 percent compared to the end of 2015, according to the data. The banks overall had real estate holdings of $1.182 trillion as of Dec. 31.

Of the top 20 banks, only three reduced their real estate loan exposure — Bank of America (down 1.4 percent), Santander Holdings USA (down 3.3 percent) and Regions Financial (down 5.7 percent).

Other banks to watch are Bank of the Ozarks, based in Little Rock, Ark., and Cleveland-based KeyCorp.

Bank of the Ozarks, the nation’s 29th-largest real estate lender, grew its portfolio 62 percent in 2016. Bank of the Ozarks also is the eighth-largest construction and land loan lender with a portfolio of $2.9 billion at year’s end, up 84.3 percent.

KeyCorp, the 13th-largest real estate lender, grew its portfolio 94.5 percent in 2016.

Richmond based Union Bank & Trust ranked 83rd on the list of the top 100 real estate lenders with $3.5 billion in real estate loans as of Dec. 31. That was an increase of 9.3 percent from 2015.

Fulton Bank, which is active locally and based in Lancaster, Pa., ranked as the 43rd-largest with a real estate loan portfolio of $6.4 billion at year’s end, an increase of 7.9 percent compared to 2015.

John B. Levy & Co. investment banker Andrew Little can be reached at