Richmond Times-Dispatch Andrew Little, May 12, 2014 It is counterintuitive to use the word discipline in a market as heated as this one.However, we are seeing a fair amount of discipline from lenders recently, something that was absolutely missing in 2006 and 2007 when the market was peaking.
The control can be seen at the construction level, where some lenders are tightening their underwriting standards and cutting back production. It also can be seen in the conduit markets, where lenders are getting aggressive in pricing and offering interest only periods, but, so far, unwilling to underwrite pro-forma rents or let other standards drop.
A few sectors feel awfully toppy, such as apartments, but apartments continue to deliver and lease up.
Across the country, the average occupancy rate for apartments in the top 50 cities is 96 percent and rental growth has been strong at 3.1 percent when comparing the end of the first quarter of 2014 with the end of the first quarter 2013, according to Reis Inc., the New York-based commercial real estate market research firm.
In the Richmond area, the occupancy rate was 95.5 percent and rental growth was 2.6 percent during the same period, according to the report.
Recent data from the Federal Reserve compiled by Trepp Bank Navigator show that the top 100 banks ended 2013 with 4.5 percent more in real estate loans on their books than at the end of 2012. This increase is the first significant year-over-year increase since the downturn.
In addition, construction lending at the top banks was up about 3.4 percent year-over-year. Several of the largest banks bucked the trend, however, and actually pared down their construction lending.
Among those banks, BB&T backed off the most, but SunTrust, Wells Fargo and Bank of America also pared down. Top 10 banks that added the most loans as a percentage of their portfolios were M&T Bank, Regions Bank, PNC and U.S. Bancorp.
Early May brought almost $5 billion to the commercial mortgage-backed securities market after a month long paucity of new offerings. The good news is that the supply was well-received by the market and pricing actually came in.
Pricing for 5- and 10-year commercial real estate loans now stand at 3.35 percent and 4.35 percent, respectively, for lower leverage, high-quality deals, according to the John B. Levy & Co. Inc. National Mortgage Survey. Conduit pricing for 10-year loans is somewhat higher at 4.60 percent to 5 percent for fully leveraged properties.
Reports show that across the nation, new construction is still muted.
Real estate economists point to these reports and conclude that supply is constrained and that is a real positive for the prospects of commercial real estate (less supply keeps more properties full).
Since all commercial real estate is local, however, the nationwide statistics may not hold for all parts of the country.
In the Richmond area, apartment construction has received all of the focus as an area of concern.
Statistics show that the apartment market is not overbuilt but something to watch closely.
While the number of apartments seems to be in balance with demand, the amount of retail space in some parts of the Richmond region could create a supply-and-demand imbalance.
For instance, retail vacancy in the Midlothian Village corridor in western Chesterfield County is hovering around 12.3 percent and there are plenty of spaces still available at Westchester Commons for restaurants and in-line tenants, according to the latest reports from commercial real estate brokerage Cushman & Wakefield|Thalhimer.
That vacancy level is higher than the overall region. It does not include space coming later this year with the Martin’s Food Markets new larger store coming to the area and Wegmans announcing plans last month to build one of its two stores off Midlothian Turnpike.
Wegmans is a destination grocer that will draw customers from a far-wider radius than a Martin’s or Kroger, so Wegmans is looking at the demographics in an area differently than its competitors.
Shoppers who live in that area off Midlothian Turnpike will have a wide variety of choices for buying groceries, including the existing supersize Kroger, the Martin’s store under construction and eventually Wegmans.
It is likely that prospective tenants will take a long hard look at being close to Wegmans before choosing the other locations.
Andrew Little is an investment banker with John B. Levy & Co. He can be reached at alittle@jblevyco.com.
