At last week’s MBA CREF show in Orlando, I heard some overarching themes emerging for the coming year in commercial real estate and multifamily lending. The general feeling is while things are picking up, there is increased caution and responsible risk taking.
“Everyone is trying to do more”
As the economy has improved, lenders are trying to lend more and with that comes increased competition. No matter the type, increased lending should help to support economic growth through the year.
Responsible Risk Taking
Caution from the recession still exists. Lenders are taking on risks responsibly by employing stricter underwriting standards and pursuing loans with higher loan to value (LTV) ratios, higher leverage and better spreads.
Nerves Mount on ’15-’17 Maturities
As the loans from ‘05-‘07 are due to mature in the next few years, there is concern about what will happen. It is expected that there may be some less desirable loans in the bunch. As these loans mature and need to be refinanced, lenders are nervous about what the loans consist of, what interest rates will be like and their ability to refinance the large number of loans at their institution under stricter underwriting standards.
Lenders are stress testing interest rate risk by taking into account cash flow, projected interest rates, underwriting rates and market performance. However, even with all the models, determining whether to loan is more of an art than a science. While interest rate risk is important to look at, lenders should also use their judgment to determine when to loan.
Relationship Model to Lend
More so than market share, relationships are playing a large role in loan originations. Lenders are doing what they can to continue to loan to clients that they have existing relationships with and are favoring refinancing current clients over originating new loans with new clients.
The economy saw definite signs of improvement in 2013 (increased home purchase prices, decreased debt, increases to single family construction). In the commercial sector, vacancy rates have been slowly decreasing while property prices and rental rates are increasing. Origination in Q4 2013 was the highest since 2007 and in the coming year, the MBA has forecasted origination to increase 7%. As of now, it appears we can expect slow but steady growth as 2014 continues.
For more from MBA, check out these summaries that were just released:
MBA’s Q4 Commercial/Multifamily Mortgage Bankers Originations Index
MBA’s Year-end 2013 Commercial/Multifamily Loan Maturity Volumes Report
MBA’s Third Annual Commercial/Multifamily Real Estate Finance Forecast
MBA’s Year-End 2013 Commercial/Multifamily Servicer Rankings