MIAMI—What does 2014 have in store for commercial real estate finance markets. While there are still some bumps in the road that leads to complete recovery, the signposts point increasingly to a clear path ahead. That was the upshot of the recent Commercial Real Estate Finance Council (CREFC) roundtable.
“The market outlook across all lending sectors—CMBS, banks, life insurance companies, private equity and Fannie and Freddie—continues to improve,” said CREFC president and CEO Stephen M. Renna. “Last year was a significant step forward from 2012 levels. The outlook for 2014 is equally optimistic, if not more so. The markets are gaining momentum as evidenced by the increasing number of new players entering the market flush with capital and heightened competition amongst lenders.”
Ed Glickman, executive director of the Center for Real Estate Finance at NYU Stern, said he sees relative stability in the property market for 2014: “I don’t see interest rates rising rapidly, and certainly not rising to the extent that they are going to significantly impact cap rates. It’s still a good opportunity for purchasing properties in 2014 because the financing rates are reasonably low and you can lock in a long-term spread.”
Richard Walsh, managing director at NY Life Real Estate Investors, said prime investment opportunities will lie in secondary markets, given that “primary markets are pretty much overbought.” He pointed to Minneapolis, Miami, and Atlanta as prime recipients of this shift in geographic focus. And this shift should solidify a broader market expansion for CMBS since, as Jon Strain, managing director at JP Morgan, noted, “CMBS has to lend where people want to be. We’ll even go to tertiary markets if the leverage is right.”
Adding fuel to the positive outlook is bank activity, and Walsh reports that insurance companies “saw little [lending] competition from the banks in 2011 and 2012.” But they’ve returned with a vengeance. “Over the past six months banks have not only come back into the market but have compressed pricing substantially,” he said. “If they want a deal, they’re going to win it.”
The rating agencies in recent years have been a topic of concern, and the panelists report that even in this arena, there seems to be a movement toward standardization, at least in terms of information requests. While primarily a servicer issue, Dan Bober, executive vice president at Wells Fargo Bank, noted that the change would have widespread implications.
“As a result of the crisis, there was a doubling of the rating agencies and a lot of variability in the information that they seek from all the master and primary servicers,” he said. “As a result, there were six different opportunities for the agencies to take the same basic information and call it something different.”
Bober reported that agencies and servicers have begun to work together to achieve some commonality among all involved parties. He said, “Ultimately, the outcome should be better transparency.”
On the GSE front, Josh Seiff, director of Multifamily Capital Markets at Fannie Mae, predicted “a very strong year”. In 2012 Fannie and Freddie logged a record combined volume in excess of $60 billion. A regulatory mandated 10% volume reduction trimmed 2013 volume to $55 billion.
The question remains whether regulators will mandate another round of GSE volume reduction for 2014, Seiff reported. Nevertheless, in 2014, he expects “both agencies to be inside 90% of that 2012 number. The total will be in the low $50-billions.”
Other challenges face the lending sector in 2014, and the panelists touched on such potential pitfalls as the ongoing question of credit-quality, Fed tapering of quantitative easing and the expected final outcome of risk-retention regulations. But it was clear from the overall tone of the conversation, that the scales are tipping in favor of optimism. Or, as Walsh concluded, “It will be a good year.”