Commercial Investment Real Estate May/June 2017 - Page 39
about oversupply or a mature phase of the cycle in a par-
ticular market. That does not mean those deals cannot get
ﬁ nanced, but lenders are underwriting risk more cautiously,
which may affect terms.
For example, a permanent loan on a hotel property may
have been ﬁ nanced at a 70 percent loan-to-value ratio two
years ago, and that same deal would be ﬁ nanced at 65 per-
cent today with spreads that are a little wider if the lender is
worried about the outlook, says Sean Deson, CCIM, senior
managing director at Deson & Co. in Las Vegas, a boutique
investment, mortgage, and merchant bank providing value-
add bridge ﬁ nancing and permanent lending.
Slowing Construction Loans
Many borrowers are ﬁ nding a more challenging climate
for construction loans. Regulations requiring banks to
hold more assets on their balance sheets to account for
high volatility commercial real estate loans are impeding
banks’ ability to lend on construction loans and also on
some more stabilized assets, according to Deson.
Rates are still very good, but banks have pulled back on
loan to values and recourse is a must. Some banks have “shut
down” new construction and redevelopment ﬁ nancing activi-
ties other than for the best-of-the-best developers, he says.
Strong projects and sponsors are still ﬁ nding access to
capital, but most lenders are very cautious now, Bell notes.
“Whatever they are doing or whatever they are lending on,
they are going to scrutinize things a lot more than they did
a year or two ago,” he says.
Another positive trend for the investment market is that
there is still strong demand from foreign investors. “That
pool keeps getting deeper and deeper in terms of the inter-
national buyers,” Bell says.
One of the wild cards ahead for commercial real estate
is policy changes introduced by the Trump administration
that could have both a direct and indirect effect on capital
markets. President Trump has been very vocal on his intent
to reduce regulations that are negatively affecting ﬁ nance
and business in general. That sentiment has been viewed
favorably by capital markets, even though the details of
those plans are still in the works.
The list of agenda items will include potential reforms
to Dodd-Frank, as well as possible restructuring of Fannie
Mae and Freddie Mac. Current legislation only provides
funding for the two agencies through the end of 2017.
There has been speculation on what steps might be taken
to keep funding in place or restructure those two agencies.
Ultimately, the Trump administration has the potential to
drive a lot of change in capital markets this year, according
to Deson. “Good or bad, a lot of it is related to the admin-
istration and how it pushes certain agenda items,” he adds.
CMBS: The Force Awakens
by Beth Mattson-Teig
There have been so many stops and starts to the new post-
ﬁnancial crisis CMBS market that versions 2.0 and 3.0 have
already fallen by the wayside, and the market is now starting a
whole new trilogy.
Last year was a big transition year for CMBS. The market was
battered by volatility that resulted in wider spreads and a busy
year of preparation for risk-retention rules that went into effect
Dec. 31, 2016. The combined result was a decline in issuance
volume to $76 billion — the lowest level in four years and a
notable drop compared to the $101 billion in issuance in 2015,
according to Commercial Mortgage Alert.
However, that volume may reﬂect more of the “new normal”
of what’s ahead. CMBS is never going to go back to the highs
of $240 billion that the market saw during its heyday prior to the
Great Recession. Most experts feel that CMBS issuance ranging
from $75 billion to $100 billion is a good solid level, says Lisa A.
Pendergast, executive director of the CRE Finance Council.
The CMBS market has adjusted to the new risk-retention
rules now in place, which is evident in lower spreads. The bigger
problem still looming is the remaining wall of maturities, which
includes legacy, high-leverage CMBS loans that were done at the
peak of the market. In fact, there is more than $37 billion in CMBS
loans that will mature in May, June, and July of 2017, according to
“Many of the deals that are being reﬁnanced coming into
2017 and 2018 are over-leveraged relative to what can be done
today, says Sean Deson, CCIM, senior managing director at
Deson & Co. in Las Vegas, a boutique investment, mortgage,
and merchant bank. “That is going to be the biggest issue is that
the leverage available today is not nearly what was available
in 2006 or 2007.”
Some borrowers might need to come to the table with new
equity or new preferred equity or mezzanine ﬁnancing. That will
drive up the overall cost of capital — if borrowers can even obtain
ﬁnancing. Some owners are not going to commit substantially
more equity to a deal and instead may walk away from it,
According to Trepp, the percentage of delinquent CMBS loans
did inch higher in 2016, with a delinquency rate of 5.18 percent as
of January 2017.
On a more positive note, the mountain of loan maturities has
shrunk considerably over the past three years. More borrowers
took advantage of low interest rates and improving real estate
values and defeased loans early. “There are going to be loans that
go into special servicing and need to be worked out, but I don’t
think it is going to be a catastrophic situation,” Pendergast says.
Beth Mattson-Teig is a business writer based in Minneapolis.
May | June 2017