2013 Mid-Year Financing Report

The most recent edition of Commercial Investment Real Estate included a recap of commercial real estate financing for the first six months of this year.  The Mortgage Bankers Association has an optimistic forecast with commercial mortgage originations growing by 11% in 2013.  The only thing they see that could dampen the growth is a rise in interest rates.  The market today looks quite different than it did several years ago.  In addition to the opportunistic borrowers, new government regulations and a lender emphasis on limiting risk and maximizing yield dominate.  Note that this overview is on a national level and different regions of the US may fare better or worse. 

Commercial Mortgage Backed Securities (CMBS) rose by 48% last year and is expected to rise between 40-50% this year to $55 billion. CMBS have been limiting LTVs to 70-75% and have recently been focusing on a project’s debt yield.  Debt yield is the net operating income divided by the proposed loan amount.  A lender looks at this as a cash-on-cash return on money lent if the commercial property is foreclosed on day 1 of the loan.  The market is targeting an overall debt yield of 9-10%, but these numbers are beginning to drop with competition.  Debt yields will also differ depending on the type and location of the property.  The top CMBS players this year are Deutsche Bank, J.P. Morgan, Wells Fargo, Goldman Scahs, UBS and Bank of America. 

Life Insurance Companies closed 18.1% of the 2012 commercial real estate loans according to Marcus & Millichap.  They are expected to increase their CRE by 15% this year.  Typical LTV maximums are 65% and 10 year fixed pricing can be found in the 3-4% range with yield maintenance clauses.  While they are very conservative, some life companies like StanCorp, Symetra, and Ohio National are looking to pick up market share by offering smaller loan amounts.

Banks have emerged from the credit crisis, but the local and regional banks still fighting to comply with new regulations.  The rules require larger capital reserves, which may affect the amount of CRE banks choose to hold.  Regulators are also watching concentration levels in the portfolio.  National, international and regional banks funded 25.5% of CRE loans last year.  Banks still remain conservative with their underwriting and are often more eager to expand the bank relationship with sale of ancillary services than the stand alone real estate transaction. 

Government-Sponsored Enterprises impact will drop in 2013 by $6.4B to $56.9B under the Federal Housing Finance Agency’s 2013 directive.  This news may have little impact on existing GSE borrowers, and other lenders may see an opportunity to expand market share in the healthy apartment sector, especially in secondary and tertiary markets.

The Small Business Administration (SBA) is expected to remain on pace with its 2012 originations, which were only a small dip from the record year of 2011 that was marked with reduced fees, expanded loan guarantees and raised loan amounts.  The SBA 504 program offers lenders the opportunity to make a 50% leveraged loan.  The SBA makes a second mortgage between 30-40% of the project cost.  These second mortgage rates have remained below 5% for most of this year on a 20 year fixed basis.  The SBA’s 7(a) program enables lenders to provide a small business a 90% leveraged first mortgage on real estate up to $5MM with a guarantee of 75% of the loan balance.  The guarantee is important, as the guaranteed portion can be sold into the secondary market to replenish the lender capital or can be held for earnings and not counted against concentration and cap limits. 

Bridge Loans are being offered by many lenders with somewhat aggressive terms for empty buildings, unseasoned properties, discounted note payoffs, and buildings needing improvements.  Terms typically are for 2-3 years at a 65-75% LTV.  Some large Fannie Mae lenders like Wells Fargo may offer aggressive bridge loans to get the final take out financing. 

In summary, the financing outlook for the remainder of 2013 is mixed.  There is significant capital in the market for projects.  Increasing interest rates may dampen demand.  Credit is still tight for projects that are too small or weak.  Credit will be more open in areas with strong economic growth such as what we experience in the Dakotas. 

A side note:  here at Midwest Business Solutions we are pleased to have Trevor Plett on our team.  Trevor comes to us with a background as a bank examiner and was most recently in credit administration for a large regional bank out east.  Trevor will be writing articles for the Credit Union Association of the Dakota’s Memo on Friday for those of you who receive this email publication.  --Phil Love