Commercial real estate finance has come through the perfect storm of a long recession and finally reached the other side, and 2013 will go down in the books as a strong year for the market. Rates remain at historic lows today, so borrowers with a loan event approaching should begin the financing process early to take advantage. It is uncertain where interest rates will be in the coming months and years.
The span of 2008 to 2011 was very tough in the commercial financing arena. As commercial real estate values fell, lenders battened down the hatches and reduced allocations dramatically, leading to a lack of capital for borrowers. All types of lenders approached loans with extreme caution, opting only to lend on high-quality, well-located properties, which made it challenging for owners in secondary and tertiary markets with Class B or C properties to find financing.
Banks stepped away from lending on commercial properties for the most part, and the commercial mortgage-backed security market all but ground to a halt. Fannie Mae and Freddie Mac were the primary lenders (and most competitive) for multifamily.
With commercial real estate improving significantly around the country, lenders are feeling more confident, and the market is no longer suffering from a shortage of capital. But while the capital is there, lenders of all types remain cautious. They’re still very selective in the loans they make, and underwriting is slowly getting more aggressive.
While 2012 was a fairly strong year for recovery, 2013 looks to be even better. The Mortgage Bankers Association, the national association of the real estate finance industry, reports that originations in the second quarter were up 7 percent year-over-year, and 36 percent from the first quarter.
Life insurance companies increased their allocations in 2013. Some have already loaned all the money they allocated for the year, and are choosing to continue to make loans above and beyond these allocations. While Fannie Mae and Freddie Mac were the go-to sources for apartment funding during the recession, life insurance companies are becoming very competitive in the multifamily market and winning a lot of business, for the first time in years.
But while apartments remain popular, lenders are becoming concerned about the possibility of overbuilding. Life insurance company allocations will likely remain the same or increase modestly in 2014.
Banks have re-entered the lending fray and begun to fund construction loans again. However, they’re still requiring strong preleasing activity and avoiding speculative construction.
The commercial mortgage-backed securities market has recovered significantly and will have a better year in 2013 than in the past few years, but activity in this market is tapering for the year and likely won’t reach the projections many analysts made of $65 billion.
Fannie Mae and Freddie Mac cut allocations by 10 percent from 2012, but are ahead of schedule on lending – so they also will likely slow during the remainder of 2013. Fannie and Freddie remain very selective, and their spreads have gone up.
While there’s a lot of positive to focus on in the commercial finance market today, the specter of increasing interest rates is a concern for investors. The Federal Reserve recently indicated that its current round of bond buying might end sooner than many had expected – purchases could slow at the end of 2013 and perhaps end in mid-2014, contingent on the economy continuing to see consistent growth.
The Fed’s announcement caused the major stock indexes to fall, and interest rates to rise slightly. One would need a crystal ball to accurately predict where interest rates will go in the next 18 months, and they are affected by many factors. This uncertainty is cause for concern for investors.
But rates today, though slightly higher than a few months ago, remain at historic lows, as a chart of interest rates over the past 40 years will show. Those borrowers who have a loan event approaching, such as a refinance or a purchase, should begin exploring their options for financing as soon as possible. Locking in a low long-term rate can take away some uncertainty and stress down the road, when interest rates could be higher and the market could be in a considerably different place.
Overall, there’s a lot to be optimistic about in the commercial real estate financing arena. The improving commercial real estate market and economy, and availability of capital, all bode well for borrowers, and now is the time to refinance a property or seek a new loan.
Ken Griggs is president of Norris, Beggs & Simpson Financial Services. He specializes in arranging financing for commercial properties. Contact him at 503-273-0363 or email@example.com. Paddy Ryan is finance officer of Norris, Beggs & Simpson Financial Services. He specializes in arranging financing for commercial properties. Contact him at 503-273-0389 or firstname.lastname@example.org.