The John B. Levy & Company team just returned from the 2018 Mortgage Bankers Association's Commercial Real Estate Finance/Multifamily Housing conference in San Diego (CREF18). We thought it would be appropriate to share some of the over- arching themes that were part of this year and how it will impact borrowers and investors going forward into 2018:
- Spreads are Down, But Interest Rates Trending North - Investors assumed that interest rates would go up at some point and, though tempered by lower spreads, we've reached that point. For comparison, on July 4, 2016, the Treasury hit a low of 1.37%. Today, we are at 2.85%+, a move of 1.48%. Now that we are in an increasing interest rate environment, there will be significant impacts to business models, DSCR computations, and investor returns. Floating rate money in particular is expected to become more expensive which should push sponsors to seek the safety of long-term fixed rates.
- Debt is Readily Available - Lenders continue to seek quality investments. However, as more competition has come into the market, last year's conservatism is being challenge as lenders seek to win deals by increasing proceeds, decreasing spreads and increasing interest-only terms.
- Not 2007 - While leverage points are being pressured to increase, it is a modest amount and not comparable to what was occurring in 2007. Leverage for fully loaded deals will be in the 70 to 75% LTV range (80% on Multifamily).
- CMBS - The CMBS market is stabilizing and, as a result of risk retention, is proving more reliable than prior years. The so-called "wall of maturities" has turned into a lack of maturities, which will force CMBS lenders to fight more aggressively for your business despite their ranks being significantly thinned in the last 2 years.
- Bridge Money - Transitional money is the hot topic right now. Many lenders want to be on the short-end of the curve due to uncertainty around interest rates and overall concerns about the economy. The number of bridge players has drastically increased, and value-add projects can attract very interesting money.
- Equity - As loans get more expensive and debt levels stay in the 65 to 75% range, more sponsors will need to meet their capital stack needs by raising equity. Equity, whether Joint-Venture or Preferred, will continue to be a challenge for properties in secondary and tertiary cities, and deals that require third party equity will have to be compelling on several fronts, including: projected return, a distinct short term business plan, and issues of control.
These six points comprise a number of the themes observed at MBA's CREF18 conference this year. In conclusion, the general sentiment of the Mortgage Bankers Association conveyed that CRE investing and lending is open for business and is looking for deals that make sense and can provide a fair return.
We at John B. Levy & Company look forward to working with you this year. Please let us know how we can help you.