What Is Happening In Commercial Lending?

LOS ANGELES—Economic volatility has marked the first part of 2016—and it has sparked plenty of questions about the commercial lending space. How are lenders underwriting in light of the economic volatility; how will CMBS maturities affect the market; will Brexit have an impact. The questions are endless, so we sought out the principals at George Smith Partners for answers. The seven partners at the firm—Gary Tenzer, Steve Bram, Jonathan Lee, Gary Mozer, David Rifkind, Shahin Yazdi and Bryan Shaffer, sat down with us for an exclusive interview to give us an inside look at the commercial lending market, how things are changing and the trends dominating the market.

GlobeSt.com: What trends are occurring in lender underwriting? What can borrowers expect in the current market?

Steve Bram: In multifamily, lenders are not underwriting to any future rental increases.  We've found that in most areas of the country, lenders believe that apartments are being overbuilt. In the hotel sector, some lenders believe that RevPar's are expected to decline from their current peaks, and are underwriting off of trailing 24 or 36 month revenues. In general, large banks are being very selective on the new clients they're taking on right now.  Few lenders are underwriting to large future increases in interest rates.  In addition, most banks are using a 5.0% interest rate to stress their underwriting.

GlobeSt.com: With the wall of CMBS loan maturities underway, what future impacts can be expected in the commercial lending market?

Jonathan Lee: While there certainly is a wall of maturities, CMBS tripped out of the gate at the start of 2016. During the first quarter, spreads widened dramatically on loans under application and within the 60-day due diligence period.  Certainty of execution as applied for, and in some cases even the closing of a loan, were in jeopardy. These prior and pending disruptions have opened the door for alternative platforms. Fannie and Freddie continue to buy the multifamily market. Banks and life insurance companies continue to cherry pick their way through ballooning portfolios.  Banks in particular are becoming wary of construction, especially in regards to Basel III criteria, and are shifting to perm product to fill their capital accounts. However, banks and life insurance companies are very particular on which deals they take on, so the B and C assets that CMBS lent so aggressively may not be opportunities for re-finance without a pay down of the principal or additional structure. Therefore, there are options for re-finance of this “wall” — they just need more work than when first originated.

GlobeSt.com: How do you foresee the new CMBS bill impacting lending?

Gary Mozer: The new regulations will make CMBS more expensive.  There is not enough capital for certain types of commercial real estate so CMBS will still have a place in the commercial real capital markets.  The regulations will just make it more expensive for two reasons.  First because only certain lenders will leave the space lowering competition, and secondly, others will need equity capital to cover reserves.  The additional equity needs a return and will add cost to the lender that will be passed along to the borrowers.

GlobeSt.com: What product-specific lending trends are you seeing?  What are the top trends in retail, office, multifamily, and industrial loans?

David Rifkind: Don't let the quiet “dog days” of summer fool you - we are going to have a very busy 3rd and 4th Quarter.

Low interest rates are the theme now, and there is a strong conviction from lenders across the board to lend. The highest degree of competition is for the larger balance, investment grade properties. Multi-family and industrial are still the darlings. Underwriting is more cautious with office and retail.

With office, lease roll is the key component to underwriting and lenders are being conservative in their assumptions.  Supply is beginning to be a concern in a few markets such as Hollywood where there are large blocks of new office space coming on line over the next several years. Creative office continues to be an active category but execution is paramount. There is a huge gap between well adapted creative office and just bad space being branded as creative.

Retail is attractive if the tenant mix is healthy and the roll is measured.  Strong sales and sales trends are key for anchor and junior anchor space.

Industrial in Southern California continues to be highly attractive and is probably the one asset on which most lenders are underweight. Quality industrial near transportation hubs is highly desirable and lenders are stretching on terms and rates to win these loans. Finish your vacations early and get to work, because rates will eventually go up and the market just gave us another opportunity.  Seize the Day!

GlobeSt.com: How do you expect Brexit to affect capital markets in the long-term?

Bryan Shaffer: The common theory is that Brexit will slow down Federal Reserve actions and give us a few additional years of low rates.  Because the process for withdraw is so slow and unknown, coupled with the possibility of considerable international concern over US election outcomes, my view is that the impact will be shorter and that we could see rate outlooks change much more quickly than expected. Therefore, I wouldn't assume that future rates will stay at current levels.  One international event can dramatically shift risk profiles and cause major shifts in rates.  History shows us that common theory is not usually correct, and I would expect rates to be different in January of next year than they are today.

GlobeSt.com: Would you say that credit standards have eased or lightened in recent months? Has this led to any trends, positive or negative, in commercial lending?

Gary Tenzer: Credit standards have clearly tightened in the past few months. Banks are dealing with HVCRE regulations, which render construction and bridge lending more conservative. The CMBS securitized lenders are facing the implementation of Reg AB, which will take effect on December 24, 2016. This regulation will require issuers to retain 5 percent of the securitization for five years and hold the risk of loss. In addition, some lenders are considering certain markets as getting “toppy” and are being a little less aggressive in proceeds. It is important for borrowers to remember that all lenders are different and the market needs to be covered thoroughly to secure effective financing. As millennials step in and baby boomers retire, how is the generational shift in the workforce impacting commercial lending?

GlobeSt.com: As millennials step in and baby boomers retire, how is the generational shift in the workforce impacting commercial lending?

Shahin Yazdi: As millennials step in, we are seeing a transition in all facets of commercial real estate – including office, retail, and multi-family.

Office is transitioning to more open spaces and “work loft” environments.  Office owners also have to prepare for technology that is allowing people to work remotely without a traditional office space. Retail owners must start to prepare for the transition to online sales and the millennials use of on demand services like Amazon Prime and Google Express. Finally, multifamily is shifting because the millennial generation's main priority is location, and they're willing to sacrifice things like square footage to live in downtown areas that are in close proximity to public transportation and popular destinations.

LOS ANGELES—Economic volatility has marked the first part of 2016—and it has sparked plenty of questions about the commercial lending space. How are lenders underwriting in light of the economic volatility; how will CMBS maturities affect the market; will Brexit have an impact. The questions are endless, so we sought out the principals at George Smith Partners for answers. The seven partners at the firm—Gary Tenzer, Steve Bram, Jonathan Lee, Gary Mozer, David Rifkind, Shahin Yazdi and Bryan Shaffer, sat down with us for an exclusive interview to give us an inside look at the commercial lending market, how things are changing and the trends dominating the market.

GlobeSt.com: What trends are occurring in lender underwriting? What can borrowers expect in the current market?

Steve Bram: In multifamily, lenders are not underwriting to any future rental increases.  We've found that in most areas of the country, lenders believe that apartments are being overbuilt. In the hotel sector, some lenders believe that RevPar's are expected to decline from their current peaks, and are underwriting off of trailing 24 or 36 month revenues. In general, large banks are being very selective on the new clients they're taking on right now.  Few lenders are underwriting to large future increases in interest rates.  In addition, most banks are using a 5.0% interest rate to stress their underwriting.

GlobeSt.com: With the wall of CMBS loan maturities underway, what future impacts can be expected in the commercial lending market?

Jonathan Lee: While there certainly is a wall of maturities, CMBS tripped out of the gate at the start of 2016. During the first quarter, spreads widened dramatically on loans under application and within the 60-day due diligence period.  Certainty of execution as applied for, and in some cases even the closing of a loan, were in jeopardy. These prior and pending disruptions have opened the door for alternative platforms. Fannie and Freddie continue to buy the multifamily market. Banks and life insurance companies continue to cherry pick their way through ballooning portfolios.  Banks in particular are becoming wary of construction, especially in regards to Basel III criteria, and are shifting to perm product to fill their capital accounts. However, banks and life insurance companies are very particular on which deals they take on, so the B and C assets that CMBS lent so aggressively may not be opportunities for re-finance without a pay down of the principal or additional structure. Therefore, there are options for re-finance of this “wall” — they just need more work than when first originated.

GlobeSt.com: How do you foresee the new CMBS bill impacting lending?

Gary Mozer: The new regulations will make CMBS more expensive.  There is not enough capital for certain types of commercial real estate so CMBS will still have a place in the commercial real capital markets.  The regulations will just make it more expensive for two reasons.  First because only certain lenders will leave the space lowering competition, and secondly, others will need equity capital to cover reserves.  The additional equity needs a return and will add cost to the lender that will be passed along to the borrowers.

GlobeSt.com: What product-specific lending trends are you seeing?  What are the top trends in retail, office, multifamily, and industrial loans?

David Rifkind: Don't let the quiet “dog days” of summer fool you - we are going to have a very busy 3rd and 4th Quarter.

Low interest rates are the theme now, and there is a strong conviction from lenders across the board to lend. The highest degree of competition is for the larger balance, investment grade properties. Multi-family and industrial are still the darlings. Underwriting is more cautious with office and retail.

With office, lease roll is the key component to underwriting and lenders are being conservative in their assumptions.  Supply is beginning to be a concern in a few markets such as Hollywood where there are large blocks of new office space coming on line over the next several years. Creative office continues to be an active category but execution is paramount. There is a huge gap between well adapted creative office and just bad space being branded as creative.

Retail is attractive if the tenant mix is healthy and the roll is measured.  Strong sales and sales trends are key for anchor and junior anchor space.

Industrial in Southern California continues to be highly attractive and is probably the one asset on which most lenders are underweight. Quality industrial near transportation hubs is highly desirable and lenders are stretching on terms and rates to win these loans. Finish your vacations early and get to work, because rates will eventually go up and the market just gave us another opportunity.  Seize the Day!

GlobeSt.com: How do you expect Brexit to affect capital markets in the long-term?

Bryan Shaffer: The common theory is that Brexit will slow down Federal Reserve actions and give us a few additional years of low rates.  Because the process for withdraw is so slow and unknown, coupled with the possibility of considerable international concern over US election outcomes, my view is that the impact will be shorter and that we could see rate outlooks change much more quickly than expected. Therefore, I wouldn't assume that future rates will stay at current levels.  One international event can dramatically shift risk profiles and cause major shifts in rates.  History shows us that common theory is not usually correct, and I would expect rates to be different in January of next year than they are today.

GlobeSt.com: Would you say that credit standards have eased or lightened in recent months? Has this led to any trends, positive or negative, in commercial lending?

Gary Tenzer: Credit standards have clearly tightened in the past few months. Banks are dealing with HVCRE regulations, which render construction and bridge lending more conservative. The CMBS securitized lenders are facing the implementation of Reg AB, which will take effect on December 24, 2016. This regulation will require issuers to retain 5 percent of the securitization for five years and hold the risk of loss. In addition, some lenders are considering certain markets as getting “toppy” and are being a little less aggressive in proceeds. It is important for borrowers to remember that all lenders are different and the market needs to be covered thoroughly to secure effective financing. As millennials step in and baby boomers retire, how is the generational shift in the workforce impacting commercial lending?

GlobeSt.com: As millennials step in and baby boomers retire, how is the generational shift in the workforce impacting commercial lending?

Shahin Yazdi: As millennials step in, we are seeing a transition in all facets of commercial real estate – including office, retail, and multi-family.

Office is transitioning to more open spaces and “work loft” environments.  Office owners also have to prepare for technology that is allowing people to work remotely without a traditional office space. Retail owners must start to prepare for the transition to online sales and the millennials use of on demand services like Amazon Prime and Google Express. Finally, multifamily is shifting because the millennial generation's main priority is location, and they're willing to sacrifice things like square footage to live in downtown areas that are in close proximity to public transportation and popular destinations.