Lenders Will Be ‘More Aggressive’ in 2015, Commercial Real Estate Finance Council Survey Shows

by John Nelson

WASHINGTON, D.C. — Leading commercial real estate lenders see a strong year ahead with ample credit and capital available to meet borrower demand, according to a newly released survey of Commercial Real Estate Finance Council (CREFC) members. Survey participants expect loan volume in 2015 to top 2014 levels as loan maturities rise and property fundamentals improve.

The CRE Finance Council 2015 Market Outlook Survey was released on Monday, Jan. 5, in advance of CREFC’s Annual January Conference, which is Jan. 7-9. More than 1,600 industry participants are slated to attend the event at the Fontainebleau Hotel in Miami Beach.

Survey respondents expect the U.S. commercial real estate finance market in 2015 to be quite healthy, buoyed by strong investor demand, rising loan maturities, relatively low levels of new construction and improving property fundamentals.

While 74 percent of survey respondents expect benchmark interest rates to rise in 2015, in contrast to last year market participants are not as worried about interest rate increases as they are confident in the Federal Reserve’s ability to manage any increases in a thoughtful manner.

Overall commercial real estate market liquidity is expected to stay the same or expand in 2015. Some 47 percent of respondents believe there will be more liquidity available in the marketplace for commercial real estate in 2015.

Underwriting is expected to be more aggressive based on higher valuations and higher leverage, with potentially somewhat lower credit quality.

On the lender side, demand drivers include the potential for attractive risk-adjusted returns and fundamentally sound real estate market conditions. On the borrower side, demand drivers include the low cost of financing, economically justifiable real estate market activity including some new development, and the continuing wave of maturing CMBS.

“Industry participants see another year of positive growth for commercial real estate debt markets as ample capital and credit should be available to meet borrower demand and pending loan maturities,” says CREFC President and CEO Stephen Renna.

“This [outlook] is buoyed by stronger overall economic growth and a trend of improving property fundamentals. However, for growth to be sustained it is critical that the industry demonstrate underwriting discipline in the face of abundant capital and heightened competition.”

Renna also cautions that the industry will see a series of new regulations on banks and commercial mortgage lending come into effect in the next few years. These rules ultimately will make commercial real estate lending more costly and potentially dampen the market.

In the near term, Congress’s inability to extend the Terrorism Risk Insurance Act (TRIA) beyond Dec. 31, 2014 surprised the industry and could chill transactions if not resolved early in 2015, according to Renna. TRIA provides a federal backstop against potential losses from terrorist attacks.

Other key survey findings

* based on the expectations of underwriting valuations, 76 percent of survey respondents believe lenders will be “more aggressive” in 2015.

* 70 percent of survey respondents expect new CMBS issuance in 2015 to be in the range of $100 million to $125 million.

* 89 percent of survey respondents expect balance-sheet lenders to originate more loans in 2015 than in 2014.

* 69 percent of survey respondents expect private capital (nonbank) sources to originate more loans in 2015 than in 2014.

The CRE Finance Council, the trade association for the commercial real estate finance industry globally, serves participants in all aspects of the commercial and multifamily real estate finance market, including conduit lenders, investors and servicers of commercial mortgage-backed securities (CMBS), bank and life insurance company lenders, private equity lenders and investors, and government-sponsored enterprise (GSE) lenders. The U.S. market for commercial real estate debt is $3.3 trillion.

— Matt Valley

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