What to Expect From Finance in Q4

NEWPORT BEACH, CA—Wondering what the last quarter of the year will bring from the real estate finance realm? GlobeSt.com spoke exclusively with Patrick Ward, founder of MetroGroup Realty Finance, about what will drive this market forward in the fourth quarter and emerging trends he's noticing.

GlobeSt.com: Based on the trends you've seen from Q1 to Q3 of this year, what factors do you anticipate will drive the real estate finance market forward in Q4?

Ward: The lending volume from Q1 through Q3 was much slower than many had anticipated, resulting n many lenders finding themselves behind their 2014 production goals. As we approach the fourth quarter, many portfolio and CMBS lenders are now working harder and more diligently than ever as a result in order to reach their allocation goals for the year. This increased lender appetite appears to be creating stiff competition among lenders to close deals, which will result in better terms and increased lending volume in Q4.

GlobeSt.com: There is a great deal of discussion underway surrounding when interest rates will rise. Do you have an opinion on when this will happen? How are you advising your clients to prepare for this?

Ward: Prior to this upcoming quarter, many predicted that interest rates would have increased by the end of Q3. As we've seen, interest rates have instead remained relatively steady throughout 2014. Moving forward, we do anticipate that we will begin to see an increase in interest rates as early as January 2015. Interest rates have remained low for quite some time, and a steady increase can certainly be expected in the coming year. That said, we do not anticipate that the increase in rates will be dramatic enough to affect the flow or volume of capital in the market.

In order to prepare for this slight increase in interest rates, one option borrowers may consider is a future funding commitment. At MetroGroup Realty Finance, we have worked with several of our clients to analyze their portfolios to determine whether a future funding commitment is worth consideration. Through a future funding commitment, an interest rate can be locked in now while interest rates remain low. In doing so, owners and investors are able to mitigate interest-rate risk in anticipation of rising sales.
GlobeSt.com: Are there any emerging finance trends that commercial-property owners, developers, buyers and sellers should be aware of as we enter Q4?

Ward: As we approach Q4, we've seen a slight increase in the loosening in lenders' underwriting structures. Strict underwriting standards were implemented previously as a result of the 2006-2007 downturn, and it wasn't until recently that we've seen a shift in these stricter practices. For example, in recent months, we've begun to see an increase in deals that feature interest-only financing, reductions in cash-management requirements and fewer reserves.

The loosening of these underwriting requirements came as a direct result of the reemergence of the CMBS market and the increased competition among lenders. That said, we do not believe that any of these changes are too aggressive or will be damaging to the underwriting structure.

GlobeSt.com: As a 31-year-old company, MetroGroup Realty Finance has thrived through a number of real estate cycles. What changes to you anticipate for real estate finance as we enter this next cycle?

Ward: In the early 1990s, we experienced a downturn that, in part, coincided with the failure of the savings-and-loan industry. As a result, the Resolution Trust Corp. was created and immediately began to sell troubled assets at heavily discounted prices rather than waiting for the values of these troubled assets to stabilize. The recent credit crisis and value decline that we experienced beginning in early 2007 was quite different. Rather than immediately selling underperforming assets, asset managers, master servicers and portfolio lenders held on to their non-performing assets. Lenders worked with their borrowers or took control of the asset, managing the property until values stabilized, which they eventually did. In this upcoming cycle, we anticipate that lenders and servicers will continue this trend in working with their non-performing assets and waiting for values to stabilize.

GlobeSt.com: Which lenders do you believe will be the strongest or most competitive in the next cycle?

Ward: Portfolio lenders such as large national and international banks and life-insurance companies lending their own or managed funds will continue to be the most reliable source of capital in the market. Additionally, the revived CMBS market has been a tremendous addition to the real estate capital industry.

Despite the CMBS market's current stability, one must keep in mind that the CMBS market can be widely affected by first-loss investors as well as the bond market when it comes to stabilized pricing. We saw this happen firsthand in the recent recession when CMBS volumes went from $231 billion in 2007 to $31 billion in 2008. As a result, CMBS will always be less reliable and predictable than other sources of capital in the market.