Commercial Investment Real Estate May/June 2017

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 Trepp Research. “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, Deson says. 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. CCIM.COM May | June 2017 37

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