Where The Liquidity Is Coming From
Mortgage REITs are originating more loans this year while banks have stepped up their pace considerably.
LOS ANGELES–There is at least one group not dismayed by the flattening yield curve: CRE borrowers. Explains Brian Stoffers, CBRE’s Global President of Debt & Structured Finance: “With the flat curve, borrowers can add significantly to loan terms for little additional expense.”
Flat yield curve or no, in general the finance market for CRE borrowers is still favorable and is expected to remain that way for the rest of the year, according to the CBRE Lending Momentum Index, which tracks the pace of US commercial loan closings. For the second quarter loan credit spreads remain tight and underwriting standards are stable, Stoffers said. “While there is some risk to an escalation of trade disputes, this has not yet influenced credit availability or pricing.”
Indeed, in some quarters lending for commercial real estate has accelerated.
A Shift For Banks
Banks were very active for the quarter, accounting for almost half of the non-agency lending volume closed during the quarter, according to the index. The shift toward banks was a departure from most of 2017 and early 2018, when a variety of traditional and alternative lenders issued quotes, CBRE said, adding that banks’ construction and value-added lending should benefit from a recent federal law clarifying the types of real estate collateral that require the highest capital reserve standards.
Mortgage REITs’ Breakout Year
Meanwhile mortgage REITs are having a breakout year in terms of lending.
Blackstone Mortgage Trust, for example, just added approximately $222 million in commercial mortgage loan origination capacity with its recent closing of a public offering of class A common stock.
Last month KKR Real Estate Finance Trust closed two floating-rate senior loan transactions totaling $415.5 million. Year-to-date, KREF has originated ten senior loans totaling $1.6 billion, resulting in a $3.3 billion portfolio.
One of the two loans was a $341 million floating-rate senior loan secured by a 2,640-unit multifamily property portfolio in Atlanta, GA and Tampa, FL. The loan has a two-year initial term with three one-year extension options, carries a coupon of LIBOR+3.2% and has an appraised loan-to-value of approximately 75%. The other was a $74.5 million floating-rate senior loan secured by a 1.1 million square foot, 16-building, class-B+ industrial property in Atlanta, GA. The loan has a three-year initial term with two one-year extension options, carries a coupon of LIBOR+2.7% and has an LTV of approximately 74%.
According to co-CEOs Chris Lee and Matt Salem, for the first seven months of 2018 KREF has originated $1.6 billion of loans bringing its total originations for the last twelve months ended July 31, 2018 to $2.4 billion of senior loans, a 126% increase over the corresponding period in 2017. “We are encouraged by our forward pipeline and the opportunity to continue to make attractive investments throughout the remainder of 2018,” they said.
Apollo Commercial Real Estate Finance has committed to over $1.9 billion of commercial real estate loans in the first six months of 2018, its strongest period of originations to-date and just $100 million shy of its total 2017 originations, according to comments made by CEO and president Stuart Rothstein for its quarterly earnings. “ARI’s loan portfolio totaled $4.9 billion of amortized cost at quarter end, an increase of approximately 36% as compared to the end of the second quarter of 2017,” he said.
CMBS, Life and “Other”
Interestingly, according to the Lending Momentum Index, its “Other” lender category, which includes REITs, finance companies and debt funds, accounted for 16% of loan closings in Q2 2018, down slightly from 19% in Q1 2018 and 21% a year ago.
CBRE also reported that life companies captured just over 21% of the non-agency market in Q2 2018, down from 24% a year ago. Most life companies have ample commercial mortgage allocations for the second half of 2018, but remain selective on underwriting high-quality properties with strong rent rolls.
As for the conduit market, total CMBS issuance for the first half of 2018 was $40.5 billion, up from $37.9 billion a year ago. CMBS conduit originators have increased their market share over the past several quarters, as tightening spreads have allowed them to issue competitive quotes. CMBS accounted for 14.8% of non-agency loan production in Q2 2018, down from 24.4% in Q1 2018.