June 24, 2016

View from CREFC Annual Conference in New York

I attended the CREFC Annual Conference in Manhattan last week from June 13 – 15. Almost 1,300 attendees gathered to discuss all forms of commercial real estate finance. Annual Conference Chairs included: Kevin Donahue, Senior Managing Director, C-III Capital Partners, Michael Moran, Managing Director & Vice President, Allstate Investments, Nilesh Patel, Managing Director, Prima Capital Advisors LLC, and Christine Patterson, Principal, Real Estate Debt Strategies from The Blackstone Group. Keynote speaker George F. Will, one of today’s most widely read columnists, was Opening Session Keynote Speaker.

The general tone of the conference reflected cautious optimism as capital providers discussed how looming regulatory changes known as “risk retention” will affect the commercial mortgage–backed securities (CMBS) market.

Many participants commented on increased community and regional bank, insurance company and alternative lender market share as CMBS origination has accounted for only 7% of CRE loan volume year-to-date, compared to its traditional 20% share.

CRE Fundamentals

Most agreed that overall CRE fundamentals are stable, and credit quality has improved since the market disruption earlier this year. While the volatility that plagued CMBS during 1Q16 has abated, pundits acknowledged concerns around older malls and retail centers, the lodging sector and overbuilding of luxury apartments and condos in certain markets.

Other secular trends that warrant consideration by property market investors include urbanization and other millennial lifestyle preferences. Companies like WeWork and Airbnb are turning traditional office leasing and the lodging business models on their heads. WeWork offers small offices within a shared community on a monthly basis. Airbnb is an online marketplace for vacation rentals that enables people to list, find, and rent vacation homes.

On Interest Rates

When the Fed is likely to continue raising its benchmark Federal Funds rate is anyone’s guess. However, while an increase in rates is inevitable, the current spread between the 10-year Treasury yield and CRE cap rates should allow room for further compression, suggesting CRE values are not immediately threatened by rising interest rates.

Bank Lending to CRE

While traditional CMBS market participants struggle with risk retention implementation, banks and other non-bank lenders including mortgage REITs, private equity firms, and credit funds have been aggressively adding to their CRE loan books.

Interestingly, many of these lenders use bank leverage to finance their lending activity, exacerbating banks’ exposure to CRE. As banks take share from CMBS lenders, they will inevitably become overweight CRE, which could cause regulators to encourage them to tap the brakes.

The Final Word

The markets for CRE lending are dynamic. Different types of lenders enter and exit the market based on a broad range of factors. Modern Funding has relationships with many types of lenders with a variety of loan products across the credit spectrum, so we always have lenders who are actively seeking good projects to finance.

–David Roover