“Players in the commercial real estate business are on pins and needles.” ~CRE Direct Mid-Year magazine
First quarter commercial property sales declined as property prices level out. There have been dramatic shifts in market share among lending sources. New opportunities are opening up as demand for certain asset classes grows while others wane. Technology is driving disruptive change in how properties are used. Interest rates are creeping up, and of course, investors are growing increasingly concerned about the timing of the next cyclical downturn and the potential impact of future federal policies. It is a uniquely uncertain time for our industry—and a difficult one to forecast.
To field the tough questions about what the second half of 2017 may hold, I had the pleasure of moderating a track of top economists at yesterday’s MBA of NY’s Annual Real Estate conference in Manhattan. If you’re scratching your head about what the rest of 2017 holds for commercial real estate lending, here are the highlights:
Annemarie DiCola, CEO of Trepp, a name that is practically synonymous with CRE Finance, led the track with an overview of capital markets.
On CRE finance: “We have a very interesting mix of lenders. A healthy mix and a good mix.”
On the promise of the NYC metro: “Technology, talent and tourists. This is why Manhattan attracts investment capital. New York continues to be the best story in the U.S.”
On the lending forecast: “A lot more loans are coming up that need refinancing—and not all through CMBS.”
A word of caution as the market shifts: “An office building that you lend on today may not be an office building in ten years. A mall may be repurposed into a data center.”
On CMBS: “CMBS got off to a slow start, but is now at virtually the same levels as it was at this time last year. This is very impressive for the first year under risk retention. No one predicted that.”
On the timing of the downturn: “We will see shifts in the use of commercial real estate first. My advice is to look at every property in your portfolio and ask: ‘Do I truly believe that this property will best be utilized in its current use?’ You might see a property’s value change in respone to shifts. You might see that it will cost less to repurpose a property into a more valuable use as the market changes.”
On Wednesday’s news that the Fed was raising interest rates and allowing their book of mortgage securities to run off:
“I expect a muted impact on CMBS, at least in the near term. If the Fed’s past actions are a guide, the runoff will likely be very managed and slow. Also, the report states that the Fed will sell off the Treasury book first so we do not expect a sell off of CMBS for some time, and we expect it to take some time to execute when it does take place.” ~Annemarie DiCola, Trepp CEO
Heidi Learner, Savills Studley’s Chief Economist took a broad look at key economic barometers.
On bank lending: “The market is coming off high levels of growth so although volumes are up and healthy, the pace is moderating.”On NYC’s office sector: “There’s a densification going on with employers doing more with less space so as office employment is rising, occupied space is not. That’s one factor that’s dramatically different this cycle as this construction wave is coming. All told, total new and proposed office space could rise by more than 32 million square feet in the next decade…that’s more than all of the new construction delivered between 1990-2010, and the new space could create some road bumps for the market down the road.”
Ryan Severino, Chief Eonomist at JLL covered the latest on the debt market:
On lending: “Commercial real estate debt is at record-high levels on a nominal basis. Banks and agencies have dominated lending, but alternative sources continue to grow.”
On GSEs: “GSEs have seen a big rise in lending share, but the jury is still out on their ultimate fate. I think they’ll have some role, if not slightly modified.”
On CMBS: “I’m a little less sanguine on the future of CMBS than DiCola. They might have a de-emphasized role, but a still-important one, if used appropriately.”
On risk: “Lending is in a more disciplined environment today, so even though debt levels are high, volume expressed as a percentage of GDP, shows that the market is more disciplined than before the recession. Lenders are still being circumspect with their underwriting.”
Rebecca Rockey, Head of America Forecasting with Cushman & Wakefield characterized the property deal-making climate.
On CRE trends: “2016 was the third strongest year for deal activity in the U.S. The high was back in 2007 pre-recession, and 2015 shaped up at the current cyclical peak.”
On capital availability: “Sales are declining not because there’s not an appetite for commercial properties. A record-high amount of global capital—about $430-$440 billion—is currently targeting commercial real estate, and U.S. fundraising is at an all-time high.”
On new opportunities: “We have seen movement from central business districts to non-central business districts, as well as changes in the nominal size of deals. I expect to see more opportunities emerge in secondary and tertiary markets, suburban office/apartment and value-add projects as we move into the mature phase of the cycle.”
I asked each panelist to share their thoughts on the “Trump effect” and what the new Administration could mean for the commercial real estate market. The audience was reassured to hear that the big talk coming out of DC is, thus far, talk, and has not yet resulted in any material effects on the market. We still don’t know the future of infrastructure spending or Dodd-Frank reform or other policies. Topics to watch moving forward that could impact the lending and investment world include tax reform and a decision on whether Janet Yellen continues as Chair of the Federal Reserve or whether the new Administrator appoints a successor.
In these uncertain times, a period of greater selectivity is on the market as buyers tap the brakes and sellers consider holding onto their properties. Despite all of the unknowns, the experts point to continued strong fundamentals and a healthy mix of capital sources to fuel lending and investment in the second half of 2017.