Market Update – Sept. 2016
Market Update
As we get deep into the second half of 2016, it is important to keep updated on what is happening in the ever-changing CREF (Commercial Real Estate Finance) market. The following is an update summarizing the four major lending categories:
Most life insurance companies are “asset allocation” lenders. In other words, life companies invest a percentage of their overall investment portfolio into commercial real estate loans. They tend to be more conservative than other lending sources because they traditionally hold loans (assets) in their portfolios long term as a source of income to match up to paying their policyholders (liabilities). Life Companies can offer fixed-rate loans from 3-25 years in duration. Benchmark 10 year fixed rate loans are currently being placed in the 3.25%-4.50% range.
During the fourth quarter of 2015 and first two quarters of 2016, the CMBS markets were experiencing extreme volatility. There is still a significant concern about how the CMBS market will digest the Dodd-Frank related risk reduction rule. It is expected that by the end of 2016 all CMBS lenders will be required to retain a 5% interest in all transactions to be held on their books long term. However, this segment of the market has settled down and lenders are now transacting in a fluid and competitive manner. 10 year fixed rates currently range from 3.5%-4.5%. Interest only terms are available in most cases.
Due to Dodd-Frank laws, banks are continuing to be more conservative in their compliance departments and consequently in their underwriting. Banks typically offer short-term fixed rate loans (0-5 years) and transitional loans (bridge and construction). The market for these loans is still liquid, but has become more conservative. Banks will continue to pump the breaks by increasing or decreasing interest rate spreads based on their risk appetite and ability to implement regulatory compliance.
For several years the agency lenders, Fannie Mae and Freddie Mac, have operated under regulatory lending volume limits for their multifamily programs. In previous years the lending caps resulted in higher interest rates in the 4th quarter to slow loan volume and avoid violating lending limits. This year under revised rules, regulators may now adjust loan caps in response to market conditions. In 2016 with this greater flexibility, the agency lenders are remaining open and eager for business through the end of the year.
Both Fannie and Freddie are actively pursuing small balance loans in the $1 million to $5 million range for properties of 5 to 50 units. Also of special interest to both agencies are properties with in-place rents at affordable levels, based on area median income for that location. Pricing concessions may be available for properties with rents considered affordable for the area. Rates on 10-year loans are currently ranging from 3.60% to 4.50% depending on leverage and debt service coverage.
by:
Daniel Friedeberg
President
danf@slatt.com