The current commercial mortgage market
It seems to me that one third of 2016 has slipped by very quickly, but not without quite a bit of news in the world of commercial real estate finance. A few notable observations so far this year, in no particular order, are as follows:
1.Bank consolidation – 2015 saw a flurry of bank acquisitions in the Delaware Valley market, and the pace has only increased in 2016. Off the top of my head Susquehanna Bank, National Penn Bank, Penn Liberty Bank, East River Bank, Continental Bank, Valley Green Bank, Alliance Bank, Metro Bank, Fox Chase Bank, First Niagara Bank (and many more that I am forgetting) have all gone by the wayside. As a borrower obviously this means that there are fewer options but it also means it will generally be more difficult to get a loan. Fewer banks equals less competition and larger banks are pickier about deal quality than smaller banks, so with fewer smaller banks in the market you can reasonably expect that it will be more difficult to borrow. As an aside, it is hard to imagine what is fueling the consolidation other than the fact that the regulatory environment has become so onerous that the smaller guys have decided they cannot make money with dozens of compliance officers on the payroll (all of whom produce zero revenue to the bank) so they are throwing in the towel. Branches seem to be worth a fraction of what they were worth pre-recession, and in the current interest rate environment deposits are basically worthless, so what exactly is the acquiring bank buying anyway? I can’t figure it out.
2. Construction financing has gotten harder – This has something to do with the above, but it also seems like banks are finally figuring out that making construction loans requires a significant allocation of resources to do it right, and now they want to get paid for the effort, and they want to keep the permanent loans. Exit fees of the sort that last appeared in 2010-11 are popping up in construction loan term sheets, and leverage is gravitating from 80% to 75% for all but the best deals. Personally I feel that the regulators have something to do with this and that they are encouraging banks to try and hang on to the construction loans that they write, as the recent sea change cannot be a coincidence.
3. The CMBS market has been a roller coaster, but not a train wreck like you might have recently read about – Everybody loves to hate CMBS. Without taking a side politically, you could argue that CMBS is an example of what’s wrong with our financial system these days. That said, it is a necessary part of the commercial real estate financial system and without the outlet of securitization there would not be nearly enough capital to support the demand for loans. And if you want the most dollars possible for the longest term possible on a non-recourse basis, it’s still the way to go for a loan on a commercial property. Yes, spreads did explode by 100 basis points early this year, a few lenders quit the business, and many borrowers were re-traded on spread and loan proceeds and the market stumbled. However, by historical standards, most folks would not complain about a rate in the low 5 percent range, which is where coupons peaked as spreads went out, and currently spreads have come all the way back in to a point very close to where they started late last year. So all-in-all CMBS is as viable an option as ever, reports of its demise have been greatly exaggerated.
R. Brenner Green is a 18 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.