Market Update: State of the Union
Changes are afoot in the 2013 lending environment, marking a dramatic shift in the commercial space. Liquidity has significantly increased, causing a major uptick in the number of active lenders, as well as a wider breadth of market players. Subsequently the dynamic of the landscape has also evolved. What was once characterized as a foothold for lenders, where underwriting standards were very conservative and rigid, can now be defined by borrowers’ myriad options for capital sources. This is a product of several factors.
Insurance companies have increased their allocations over the past several years, primarily because they can achieve a significantly higher yield by investing in commercial mortgage loans than in high grade bonds. Insurance companies typically prefer the liquidity that bond investments provide over commercial mortgages, but in today’s climate the yield generated on a commercial mortgage is 1-2% higher than bond yields.
CMBS lenders have experienced an enormous jump in volume over the past year. According to Commercial Mortgage Alert, “First half volume is on track to reach $42 billion—almost matching the full year 2012 total of $48.4 billion and well ahead of a pace that would achieve the $65 billion annual volume forecast by a panel of CMBS pros at the start of this year.” Competing CMBS lenders have loosened their underwriting standards—higher loan to values, lower interest rates, and interest only loans are now back in vogue with this segment.
At the same time insurance companies and CMBS lenders are actively expanding, commercial banks have also gained momentum. Interim and construction loans have become available at a competitive level, and some banks are even competing with the other sectors for long-term fixed rate debt. All of this adds up to a more viable yet crowded commercial space, marked by an increased complexity and frenetic pace. The increase in capital sources gives rise to healthy competition, but borrowers now need to be more discerning and educated with their decisions.