The current commercial mortgage market
Last week the annual Mortgage Banker’s Association conference was held in Orlando, for what may be the last time (I really enjoy the shorter trip to Florida over the long slog to San Diego where the conference is held on the odd numbered years and now for the next five years, but it appears I am in the minority). Anyway, the conference is always a good barometer of the capital markets and this year was no exception. But the mood was starkly different than the near euphoric tone of last year. A combination of factors including the long-anticipated implementation of recession-era legislation concerning the regulation of financial institutions, both bank and non-bank, disruption in virtually all sectors of financial markets and ongoing concern about the underlying strength of the world’s largest economies have roiled debt markets and caused lenders to take a more cautious stance. In late December three main U.S. regulatory agencies, the Federal Reserve, the FDIC and the OCC issued a joint statement that included a “forceful warning” to banks on “loosening underwriting standards” on commercial real estate and stated that they will “pay special attention” to commercial real estate loans issued by banks in 2016. All of this collective good news has caused mortgage spreads (the premium over treasury bonds that lenders charge to make a loan) to balloon to levels not seen since the real estate recovery began in 2010-2011. Some lenders have decided not to quote loans until further notice and a few have formally exited the market. Meanwhile, many borrowers seem to think that it is 2006 and that capital is everywhere. Currently, anyone who sees that as the case is staring at a mirage that is about to disappear. This perception may be a result of the fact that things were in fact getting pretty loose over the last twelve to eighteen months, but whatever the reason there is a disconnect between current expectations and reality. I predict that by Memorial Day we will see the effects of this divide start to play out in the market. Developers and buyers are going to find out that they cannot get the kind of financing that they thought they could, and the market as a whole is going to be affected. Look for non-banks and life insurance companies to take a bigger role in 2016, while CMBS and bank lenders to write substantially fewer loans than in 2015. Non-bank CMBS lenders are going to be hamstrung by the lines of credit that they rely on to pool loans for sale and the sentiment of the lenders that provide those lines. Look for more CMBS lenders to close their doors this year based on this and their lack of ability (balance sheet) to deal with the regulation requiring them to hold the bottom 5% of each securitization that they issue. To be clear, this is not a prediction of “gloom and doom” but rather a statement that there is going to be a realignment in the CRE lending landscape this year. This type of shift is inevitably going to lead to many promises made that cannot be delivered on by lenders and brokers. Often times, when a borrower does not like what he hears from a trusted source, he or she will talk to more sources until receiving the answer desired. It is a good time to beware of things that sound too good to be true and to seek good advice from someone you trust to guide you through what is sure to be a turbulent year. R. Brenner Green is a 15 year veteran in commercial real estate finance and President of Real Property Capital, Inc., a full service commercial mortgage banking firm based in the Philadelphia suburbs.