Liquidity Is The Strongest It’s Been Since 2006
With the end of 2015 just six weeks away, firms are getting their 2015 forecasts in order. To help, EDR Insight is extremely grateful for the insights of Michael Berman, a leading expert on the capital markets with a long diverse history in the real estate finance industry–not the least of which is former Chairman of the Mortgage Bankers Association. Below are Berman’s answers to our questions about the state of the commercial real estate and capital markets with an eye toward what we can expect next year.
What’s your take on how the overall commercial real estate market is holding up in 2014?
While we all know that commercial real estate is market specific, the general tenor of the market in 2014 is strong, led by the multifamily sector which is experiencing near record low vacancy rates, as well as rent increases in most markets. Rents are also generally trending higher in retail, office and industrial sectors, while hotels are also generally enjoying increases in average daily rates. While new construction is still limited, other than in the multifamily sector (which is back to pre-recession levels), the trend is positive in primary markets.
What’s the current state of liquidity in the debt market? Which types of players are the most active right now?
“Liquidity in the commercial debt market is the strongest that we have seen since 2006, and that is true across the board.”
Both national and regional banks have been aggressive lenders all year and have led the way in providing liquidity to the space. Life insurance companies, which set a record for lending in 2013 with approximately $60 billion of new loans, are expected to come close to the same record in 2014. CMBS appears to be on track for $90-100 billion in new issuance this year – the best year since the crash of the CMBS market. While B-Piece investors in the CMBS arena have been plentiful and competitive, a key factor in enabling the resurgence of CMBS, the new Dodd-Frank risk retention rules may cause some restructuring of that market in the next 24-36 months. In the multifamily arena, Fannie Mae and Freddie Mac are expected to hit their volume caps with $55-60 billion of multifamily financing. The bottom line is that it is a good time to be a CRE borrower as money seems to be chasing deals.
Is multifamily likely to keep its status as a preferred asset class in 2015?
The one word answer is yes. Several factors contribute to this positive picture for multifamily investment in 2015 and beyond. The home ownership rate decrease over the last 7 years from 69.4% to 64.3% is likely to continue its downward trend, in part, due to demographic trends favoring renting vs. owning. Young adults and immigrants are experiencing low wages and limited wage growth along with job insecurity. The Millenials, who have an unprecedented burden of student debt, and the Gen-X’ers, are delaying home purchases. Even though the sentiment favoring home ownership continues to be strong among all segments when compared to other generations, these segments of the market seem to favor the advantages of renting for job mobility and their ability to enjoy the life style in the CBD’s prior to having children of school age. Further, having witnessed the downside of home ownership by seeing their family and friends experience foreclosures and job losses, they are not willing to gamble on the wealth creation of owning a home. And while there is likely to be some easing of the tight single family credit standards in 2015, many potential single family owners will still not be able to qualify for loans.
The FDIC’s latest survey pointed to more relaxed lending standards in the second quarter. What are you seeing in terms of lenders’ underwriting amidst pressure to increase originations?
There is no question that the increase in liquidity has created a more competitive landscape for lending in 2014 than at any other point in the last six years. As one would expect, that competition is resulting in an easing of lending standards. The memory of the underwriting errors of 2005-07 is still sufficiently present that the lending discipline of underwriting real cash flows has stayed intact. However, we are seeing some relaxation of leverage constraints as higher loan-to-value transactions are becoming more acceptable. And we are seeing an easing of underwriting of replacement reserves and interest-only loans, especially for lower leverage transactions. This can all be done within the bounds of reasonably prudent underwriting, but it is clearly the continuation of a directional move away from the extremely conservative underwriting of 2009-2012.
What advice would you give to property assessment professionals seeking business opportunities with commercial real estate lenders and investors? Where should they be focusing their business development efforts?
As competition for financing as well as acquisition of CRE assets continues to increase, margins will be squeezed and efficiency as to time and cost will be of paramount importance to principals who are growing their lending and investment businesses. Likely increases in interest rates over the next year will add more pressure to this scenario. Accordingly, property assessment professionals will be under increasing pressure to perform their work faster and more inexpensively.
“Technology is an important tool for these professionals as well as the nurturing of key relationships, as services to the CRE industry become increasingly commoditized.”
Diversifying business lines to offer multiple services (building wallet share with the same customer) may become increasingly important as consolidation seems inevitable among service providers.
About Michael D. Berman
Michael Berman is currently Principal, Michael Berman Consulting, LLC providing advisory services to best-in-class enterprises in the real estate finance industry. Berman is also a Senior Industry Fellow at the Harvard Joint Center for Housing Studies. From November 2012 to January 2014, Berman served in the Obama Administration as Senior Advisor—Housing Finance for HUD Cabinet Secretary Shaun Donovan— where he focused on developing policies for reforming the government’s role in housing finance. Until September 2012, Berman was the President and CEO of CWCapital (CW), growing the institution’s loan production from $100 million annually to over $4 billion in 2012 when CWCapital was sold to Walker & Dunlop. Berman served as Chairman of the Mortgage Bankers Association in 2010-2011.
Since 1990, Mr. Berman has been an active speaker on multifamily and commercial real estate finance. Berman has testified before the Senate Banking Committee and the House Financial Services Committee regarding the future government role in housing finance and the future of Fannie Mae, Freddie Mac, and FHA. He has been a frequent speaker on these topics, appearing on CNBC’s Squawk Box, Bloomberg’s Street Smart and Fox Business News. His views have also been quoted by several trade periodicals as well as the Wall Street Journal and the NY Times. In 2013, he was designated one of the thirty most influential people in real estate by Commercial Property Executive.