CREFC Roundup: Members Bullish on CMBS

MIAMI—The CRE Finance Council (CREFC) January Conference 2015 is underway at the Fontainebleau Miami Beach Hotel this week. This is a time when CREFC releases the results of a survey that measures the sentiments of financial industry players in everything from the US economy, interest rates, liquidity, and property fundamentals to lending, investing, and leverage.

The conclusion: leading commercial real estate lenders and investors see a strong year ahead with ample credit and capital available to meet borrower demand. CREFC members expect loan volumes in 2015 to top those in 2014 as loan maturities rise and property fundamentals improve.

"The mood among the industry experts on the first day of the annual CREFC January conference was heightened by the expectation that 2015 would produce between $100 and $150 billion of new issuance but tempered by concerns over looser underwriting standards caused by fierce competition to place capital in the market and the potential effect of new risk retention rules,” Marjie Nealon, a partner at Bilzin Sumberg, tells GlobeSt.com. “The CMBS market reflects a healthy sense of anxiety with mixed messages from industry participants regarding its continued growth."

According to the survey, new CMBS issues is expected to exceed 2014 volume ($94b) by approximately 25%. Banks and life insurance companies predict more balance sheet loans to be made to commercial real estate owners. And underwriting is expected to be more aggressive with capitalization rates tightening, leverage increasing and credit quality slipping; investors are wary of trend.

“There is a general consensus that the CMBS market will continue to grow in 2015,” Audrey Ellis, a founding member of Bilzin Sumberg and a leader of the firm's Real Estate Capital Markets practice, tells GlobeSt.com. “In addition, there was a divergence of opinion as to whether this was a reflection of continued improvement in the US economy in general and the commercial real estate market in particular, or instead the evidence of a growing bubble, resulting, in part, from too much available capital chasing yield and too little concern for cautious and conservative underwriting analysis.”

Nonbank lenders, including private equity, indicate they will provide more loans, especially first mortgage loans, to commercial real estate. Moderate interest-rate hikes in 2015 not a significant concern. Survey respondents expect the U.S. commercial real estate finance market in 2015 to be quite healthy, buoyed by strong investor demand, rising loan maturities, relatively low levels of new construction and improving property fundamentals.

While 74% of survey respondents expect benchmark interest rates to rise in 2015, in contrast to last year market participants are not as worried about interest rate increases as they are confident in the Federal Reserve's ability to manage any increases in a thoughtful manner. Overall commercial real estate market liquidity is expected to stay the same or expand in 2015. Forty-seven percent believe there will be more liquidity available in the marketplace for commercial real estate in 2015. Underwriting is predicted to be more aggressive based on higher valuations and higher leverage, with potentially somewhat lower credit quality.

On the lender side, demand drivers include the potential for attractive risk-adjusted returns and fundamentally sound real estate market conditions.  On the borrower side, demand drivers include the low cost of financing, economically justifiable real estate market activity including some new development, and the continuing wave of maturing CMBS.

“Concerns were also voiced about the effect that new risk retention regulatory  rules, scheduled for implementation at the end of 2016, might have on the CMBS market,” says Ellis, “particularly in the context of the large number of legacy CMBS loans scheduled to mature during that same time period.”