WASHINGTON, DC–It is with no small coincidence that the same week in which the CRE Finance Council released its 2017 Market Outlook Survey, the new issue market welcomed the first conduit of 2017, which also doubled as the first risk retention deal designed with the hybrid L-shaped structure.
Citi and Deutsche will collectively retain a vertical slice amounting to 1.9% of the face value of each class in the $1.3 billion conduit, according to Trepp, while KKR has signed on to be the B-piece buyer and will take on the horizontal portion comprised of sub-investment grade bonds.
This transaction follows the few conduits come to market conforming to the rule, which went into effect on the last day of 2016. With each deal, fears ease just a little bit more that risk retention won't be the liquidity challenge that many had feared.
Which in a broader sense, was also the message from CREFC's survey of participants attending the annual CREFC January Conference in Miami Beach. Essentially, 2017 will be a continuation of 2016, with the industry — as it typically does — adapting to the challenges of the market and the many layers of government oversight.
“The dynamism of the commercial real estate finance market continues to be impressive, with CMBS issuers adjusting to new risk-retention requirements that took effect on December 24, 2016 and portfolio lenders, private equity and a new generation of other lenders stepping in to fill gaps and enable opportunity in the investment marketplace,” CRE Finance Council Executive Director Lisa Pendergast says in a prepared statement.
Always There Are Challenges
As always, it is important to note there are headwinds and perhaps even disquieting signs of upcoming upheaval.
For instance, the Federal Reserve has voiced concerned about a possible asset price bubble for commercial real estate. So incidentally, did President Trump during his campaign.
Separately, private closed-end real estate funds have been returning record levels of capital to their investors over the last few years — per the 2017 Preqin Global Real Estate Report [PDF] — outpacing the level of capital being raised and deployed. One obvious interpretation of this trend is that good assets for investors are becoming more scarce — or at least properly-priced good assets are.
A Peak Market And Other Concerns
CREFC's survey [PDF] highlighted other concerns.
For instance, 72% of respondents believe that only 50% to 75% of CMBS loans maturing in 2017 will pay off or be refinanced in full and on schedule. And slightly more than one-third of respondents expect to see less liquidity this year compared to last (however 57% do believe secondary market liquidity has stabilized and will be the same in 2017).
Some of the selected comments from the survey also highlight current concerns facing the industry, such as the current market cycle.
One respondent, when asked where the industry was in the current cycle, said that at this point the cycle has achieved maximum pricing. “Any further movements in pricing will have to come through increased performance which might be difficult until we see real growth in the economy.”
Indeed, a majority (55%) of respondents believe the market is at its peak, versus 43% who believe we are in the middle of the current US real estate cycle.
CREFC respondents gauge the current market cycle Another respondent, when asked about the outlook for the availability of CRE debt in 2017 said there was a wildcard to consider — namely, deregulation.
If Dodd Frank is softened, CRE debt could be readily available. Otherwise, banks should be moderately less active, especially in construction lending. Private capital will continue to increase its role in CRE debt finance but won't fill the void left by banks.
A Bullish View of 2017 Overall
But overall, CREFC's respondents are fairly bullish about 2017.
Some 84% of respondents believe CMBS issuance will total between $50 billion and $100 billion in 2017, with a plurality predicting issuance for the year in the $75 billion to $100 billion range and the majority of respondents expect bank balance-sheet lending volume to hold steady in 2017 relative to 2016, with insurers and CMBS conduits increasing their volume over the prior year. Foreign investment in real estate debt is expected to continue at the same rate or accelerate.
And the money stat from the report: that 67% of respondents have a favorable outlook for real estate capital and credit availability.
Preqin, as well, sees predicts there will be many challenges this year — and the market may have to adapt, according to Andrew Moylan, head of Real Estate Products. “It is unlikely that real estate funds will be able to sustain this level of performance in the face of rising valuations and stiffer competition for deal opportunities,” he said.
However, the industry remains capable of providing portfolio diversification, reliable income and uncorrelated returns for investors, and it is unlikely that they will become less committed to the asset class in the long term.
WASHINGTON, DC–It is with no small coincidence that the same week in which the CRE Finance Council released its 2017 Market Outlook Survey, the new issue market welcomed the first conduit of 2017, which also doubled as the first risk retention deal designed with the hybrid L-shaped structure.
Citi and Deutsche will collectively retain a vertical slice amounting to 1.9% of the face value of each class in the $1.3 billion conduit, according to Trepp, while KKR has signed on to be the B-piece buyer and will take on the horizontal portion comprised of sub-investment grade bonds.
This transaction follows the few conduits come to market conforming to the rule, which went into effect on the last day of 2016. With each deal, fears ease just a little bit more that risk retention won't be the liquidity challenge that many had feared.
Which in a broader sense, was also the message from CREFC's survey of participants attending the annual CREFC January Conference in Miami Beach. Essentially, 2017 will be a continuation of 2016, with the industry — as it typically does — adapting to the challenges of the market and the many layers of government oversight.
“The dynamism of the commercial real estate finance market continues to be impressive, with CMBS issuers adjusting to new risk-retention requirements that took effect on December 24, 2016 and portfolio lenders, private equity and a new generation of other lenders stepping in to fill gaps and enable opportunity in the investment marketplace,” CRE Finance Council Executive Director Lisa Pendergast says in a prepared statement.
Always There Are Challenges
As always, it is important to note there are headwinds and perhaps even disquieting signs of upcoming upheaval.
For instance, the Federal Reserve has voiced concerned about a possible asset price bubble for commercial real estate. So incidentally, did President Trump during his campaign.
Separately, private closed-end real estate funds have been returning record levels of capital to their investors over the last few years — per the 2017 Preqin Global Real Estate Report [PDF] — outpacing the level of capital being raised and deployed. One obvious interpretation of this trend is that good assets for investors are becoming more scarce — or at least properly-priced good assets are.
A Peak Market And Other Concerns
CREFC's survey [PDF] highlighted other concerns.
For instance, 72% of respondents believe that only 50% to 75% of CMBS loans maturing in 2017 will pay off or be refinanced in full and on schedule. And slightly more than one-third of respondents expect to see less liquidity this year compared to last (however 57% do believe secondary market liquidity has stabilized and will be the same in 2017).
Some of the selected comments from the survey also highlight current concerns facing the industry, such as the current market cycle.
One respondent, when asked where the industry was in the current cycle, said that at this point the cycle has achieved maximum pricing. “Any further movements in pricing will have to come through increased performance which might be difficult until we see real growth in the economy.”
Indeed, a majority (55%) of respondents believe the market is at its peak, versus 43% who believe we are in the middle of the current US real estate cycle.
CREFC respondents gauge the current market cycle Another respondent, when asked about the outlook for the availability of CRE debt in 2017 said there was a wildcard to consider — namely, deregulation.
If Dodd Frank is softened, CRE debt could be readily available. Otherwise, banks should be moderately less active, especially in construction lending. Private capital will continue to increase its role in CRE debt finance but won't fill the void left by banks.
A Bullish View of 2017 Overall
But overall, CREFC's respondents are fairly bullish about 2017.
Some 84% of respondents believe CMBS issuance will total between $50 billion and $100 billion in 2017, with a plurality predicting issuance for the year in the $75 billion to $100 billion range and the majority of respondents expect bank balance-sheet lending volume to hold steady in 2017 relative to 2016, with insurers and CMBS conduits increasing their volume over the prior year. Foreign investment in real estate debt is expected to continue at the same rate or accelerate.
And the money stat from the report: that 67% of respondents have a favorable outlook for real estate capital and credit availability.
Preqin, as well, sees predicts there will be many challenges this year — and the market may have to adapt, according to Andrew Moylan, head of Real Estate Products. “It is unlikely that real estate funds will be able to sustain this level of performance in the face of rising valuations and stiffer competition for deal opportunities,” he said.
However, the industry remains capable of providing portfolio diversification, reliable income and uncorrelated returns for investors, and it is unlikely that they will become less committed to the asset class in the long term.
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