Los Angeles – February 28, 2018 – In its CRE Debt Market Update for 4Q 2017, Situs RERC reports that the 4Q 2017 lending environment was healthy and paints a bright picture for lending in 2018. With respect to private debt, banks and insurers are reporting that the CRE market is becoming increasingly crowded, and also noted an evident loosening of underwriting standards. “Strong property fundamentals are leading to an increase in borrowing and lending across most property types and capital sources, despite how far along we are in the real estate cycle,” says Jennifer Rasmussen, PhD, Assistant Vice President of Situs RERC. “Investors are increasingly moving into the value-add space and branching into the secondary and tertiary markets in the quest for yield.” Based on information from Commercial Mortgage Alert (CMA) and Mortgage Bankers Association (MBA), Situs RERC provides the following summary of the debt markets:
- There was a significant jump in hotel and health care originations in 2017; each of these property types reversed a downward trend in originations that had existed since 2014.
- In the quest for yield, lenders are exploring alternative options such as interest-only structures and floating-rate lending.
- Investors should keep an eye on the impact that anticipated interest rate hikes will have in the lending market. Demand for fixed-rate loans is expected to dwindle as interest rates rise.
- Higher interest rates could trigger lower origination activity for Fannie and Freddie products in 2018. Even if multifamily loan purchases decline in 2018, it will still be a very robust market this year for the agencies, with multifamily fundamentals expected to remain strong, and the recent FHFA move to allow the GSEs limited re-entry into the Low Income Housing Tax Credit (LIHTC) market as equity investors.
- Investors are shying away from retail loans due to the sector’s volatility. Loans for retailers and loans for retail real estate need to undergo a thorough due diligence process.
CMBS Issuance was unusually light for February on the conduit side with only 2 deals pricing for a total of $2.55b, bringing the YTD total for 2018 so far to only $5b. The first deal priced much better with a AAA, AA- and A- stack of S+70, 105 and 155, while the second deal priced those same classes at S+77, 135 and 215, illustrating that tiering still very much exists in the new issue conduit space. The SASB space was more active in terms of number of deals, with 9 deals pricing for a total of $2.5b. There were 6 floating rates deals for a total of $2.1b, five of which were backed by hotels, with the remaining deal backed by cold storage. In addition, three fixed rate SASB deals priced for a total of $413mm. Three CRE CLOs priced for a total of $1.9b and Freddie priced several deals, including two traditional fixed rate deals for $2.8b. Secondary spreads widened over the month with the heavy volatility we saw throughout the month on the marco front. AAA LCF bonds widened around 5bps on the month, with AA- 2-3bps wider and A- bonds closer to 5-10bps wider. Overall though, mezz bonds seemed to hold in relatively well, as the lack of supply in that space seems to be more impactful than the general macro volatility that is impacting spreads elsewhere. While spreads retraced some of the January gains in February, bond spreads still ended the month tighter YTD.
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