The forecasts for 2015 are in. Based on EDR Insight’s own research and industry outreach, below are capsule summaries of select markets that will drive opportunities for property due diligence in the new year.
1. CMBS: Another Strong Year Ahead
Although 2014’s CMBS issuance fell short of heady 30% growth predictions, it still came in at a healthy 12%, thanks to a strong second half, and ended the year at its highest level since 2007. There are strong reasons to be optimistic about more business opportunities in 2015:
- Annual issuance has almost tripled in the past three years.
- Momentum and demand are strong going into 2015, according to the latest research from our sister company, Trepp.
- More than 2,500 CMBS loans will mature this year, many of which were aggressively underwritten, driving demand for refi options.
- The number of players is expanding. In 2014, there were about 35 active lenders that contributed to CMBS deals, according to Commercial Mortgage Alert, compared to just 18 three years ago.
-2015 Forecast: 15 to 25% growth, driven partly by a growing investment market and partly by the $300 billion in CMBS loans set to mature over the next three years (double the 2012-2014 maturities).
-ALERT: There are early signs that risk aversion is waning and that underwriting standards will only get worse in 2015.
2. Property Investment Poised for Continued Growth
Increased investor confidence and improving fundamentals drove demand for commercial space to its fifth year of increasing volume and another post-recession high in 2014. Sales of commercial properties totaled $424 billion in 2014, up 17% over 2013 with very few metros posting declines. Portfolio deals, however, grew at a much slower pace. Looking ahead, the market for transaction-drive due diligence should see continued growth:
- 2015 Forecast: modest 10-15% growth
- Moderate increases in interest rates this year are not expected to interrupt this year’s investment activity.
- 4Q14 transactions were much slower than the previous three quarters as investors pulled back to slowest growth in 10 quarters, a sign of increased caution in the market.
- REITs and pension funds are among the most active client sectors. The top five buyers in 2014 by number of properties were: ARCP, Blackstone, NorthStar Realty Finance, American Realty Capital and Colony Capital.
- Foreign investors will continue to be the key players in the primary metros.
- ALERT: Prices in major markets are approaching peak, so be alert for this year’s hot spots in the secondary and tertiary markets based on variables like job growth, new development/construction, property prices and competition.
3. Property Lending: Moderate Growth, Intense Competition
The story in the world of commercial real estate lending is one of intense competition amid pressure to grow originations. In 2014, lending levels benefitted from more investor activity in metros across the U.S., increasing by 16% year on year in 3Q14.
- 2015 Forecast: 5-8%
- Interest rates are expected to stay low in the first half of the year, driving an appetite for closing new loans, refis while rates are still at historic lows.
- Continued strength in property investment, coupled with the demand from borrowers associated with the “wall of maturities” of 10-year loans from pre-recession, will drive activity this year.
- Lenders should get use to the intense competition as it is unlikely to abate anytime soon. Mezzanine lenders are playing an increasingly important role, especially in primary metros.
- ALERT: Low risk tolerance could ease in the face of competitive pressures.
4. SBA FY 1Q15 Loan Approvals Spike
If the first quarter of federal fiscal year 2015 (Oct-Dec) is any indication, the 7(a) program, a driver of demand for Record Searches with Risk Assessments (RSRAs) and Phase I environmental site assessments, is poised for a strong year.
- Loan approvals under 7(a) were up a significant 32% over the first quarter of FY14 (which was impacted by the 2013 government shutdown) and up 28% above the same period of FY13.
- Nearly 14,000 loans were approved under the 7(a) program in the Oct.-Dec. timeframe.
2015 Forecast: 15-20% growth
2015 is shaping up to be a year of moderate growth in key investment and lending markets as investors look to a growing universe of metros for attractive yields. All eyes will be on the horizon for an uptick in interest rates, which could bode well for near-term refinancing and origination activity. The outlook calls for continued slow, steady improvement in commercial real estate as businesses embrace expansion plans, job growth continues to set records and construction starts ramp up. Key strategic efforts should focus the most active players in property investment and lending, as well as in the metros and states attracting the most interest in today’s market: