Commercial Mortgages: Low rates have led to a surge in loan originations

RICHMOND TIMES-DISPATCH

by Andrew Little, Special Correspondent

Like McFadden and Whitehead’s disco hit in 1979, the commercial real estate market is singing “Ain’t No Stoppin’ Us Now.”With interest rates riding along at historic lows, employment surging and gross domestic product growing, it’s hard to see when the music stops.Even though Treasury yields climbed slightly from their September lows, commercial rates continue to be attractive and are now in the 3.25% to 3.5% range for lower leverage 5- and 10-year mortgages, respectively.Higher leverage 10-year conduit loans are pricing wider and range from 3.75% to 4%, according to the John B. Levy & Co. National Mortgage Survey.

The low rates have led to a surge in loan originations during the past three to four months and, according to various sources, 2019 will end with much higher origination volume than 2018.Nowhere is that more evident than in the conduit market where lenders of commercial mortgage-backed securities are expected originate 20% more volume in 2019 than 2018.In October, $12.4 billion in commercial mortgage-backed securities came to market, which is the highest monthly total since 2007, according to Commercial Mortgage Alert, an industry publication that tracks such offerings.

A large boost in commercial mortgage-backed securities production is the result of multifamily owners turning away from Fannie Mae and Freddie Mac, normally their largest funding sources, and running to conduit lenders. Despite a long history of complaints about conduit lenders, borrowers are attracted to the lower pricing now available at the commercial mortgage-backed security shops.In reviewing the last seven offerings, all of which were priced in November, loans backed by multifamily properties made up between 12.5% and 34.5% of all property types in each offering. That compares to the overall universe of commercial mortgage-backed securities loans, which are about 8.3% backed by multifamily properties, according to information from real estate data provider Trepp LLC.Of course, multifamily loans continue to be the belle of the ball and sought after by all lenders.

Construction loans for new multifamily developments, which have long been an area where banks tended to dominate, are now fully within the capabilities of bridge lenders.Banks’ share of lending originations fell to 24.2% in the third quarter of 2019 from 35.2% in the second quarter of 2019, according to a recent research report by brokerage CBRE. At the same time, other lenders, including bridge lenders, have increased their market share to 30% of new originations in the third quarter of 2019, up from 25.6% in the second quarter.As for multifamily lending in the Richmond area, the Virginia Housing Development Authority and banks are fighting for most of the new construction business, but it appears that Fannie and Freddie still account for most of the stabilized multifamily loans.Of the roughly $876 million in 44 multifamily loans originated so far this year in the Richmond area, only five were done outside of Fannie Mae or Freddie Mac, according to public data provided by Trepp.