CREFC 2014 Outlook Survey: As Fundamentals Improve, All Eyes on Underwriting

CRE Finance World, Winter 2014

CREFC 2014 Outlook Survey: As Fundamentals Improve, All Eyes on Underwriting Nicoletta Kotsianas he US commercial real estate market continued its steady recovery in 2013, buoyed by improving fundamentals in core markets and dearth of new construction supply for most property types. The positive macroeconomic backdrop helped increase lending activity, in turn boosting CMBS issuance As the calendar turns to 2014, the market is increasingly focused on the ever-looming questions of how far rates will rise and underwriting trends. These and other issues were included in the Commercial Real Estate Finance Council’s inaugural 2014 Outlook survey. Constituents across CREFC’s membership were queried, with respondents comprised of a cross-section of investors, CMBS conduit lenders, balance sheet lenders, private capital lenders, and servicers. Select results are included herein and full survey results can be found on CREFC’s website. In terms of 2014 projections, respondents largely expect that issuance will fall between $75 billion and $100 billion, with both $80 billion and $100 billion serving as popular choices. Conduit CMBS projections ranged from $60 billion to $75 billion. Ultimately, issuance will depend to a large extent on the refinancing market. Respondents are mixed on what percentage of loans maturing in 2014 will be able to refinance, with expectations ranging from half of the potential refinancing supply, all the way up to 97%. Acquisition financing is also expected to grow as a percentage of lending totals, with 71.4% of respondents believing that 25–35% of CMBS loans will come from acquisition financing with the rest evenly split between 35-40% and 40-50%. Outside of the confines of the fixed-rate market, investors overwhelmingly believe that floating-rate deals will grab a larger share of issuance. Two-thirds of respondents expect that floatingrate deals will see the largest increase in volume, followed by CRE CDOs. CRE Finance World Winter 2014 26 One thing is for sure — respondents expect competition between conduit lenders will increase in 2014, with 71.4% of respondents noting that increased competition is very likely. The most concerning trends voted by investors are an increase in interest-only loans (39.1%) and lower debt yields (34.8%). Although competition between B-piece buyers increased in 2013, with up to two dozen new entrants reportedly in the field, the survey indicates that market players believe the sector will remain fairly exclusive. Half of respondents expect that 7-10 active B-piece buyers will remain standing in 2014, and 30% expect only 5-7 — both notably less than the number rumored to be bidding on deals in 2013. Opinions on property market fundamentals were well split, with bulls lining up behind multifamily, industrial and office. Respondents expect the office sector to lead the market in terms of returns (27.3% of respondents) followed by multifamily and industrial, with 22.7% each. A majority of respondents expect office and industrial to notch the largest vacancy decreases nationally. Respondents were equally split on which sector will see the largest increase in rental growth, with the multifamily, office and hotel sectors each registering 26.1% of respondents. Interestingly, the most clear-cut response relates to mall underwriting, which 93.8% of respondents said is not adequate to prevent against binary default situations. The most concerning trends in the retail landscape are older malls losing foot traffic, the struggles of some large anchor tenants and the competition from online shopping. The majority of respondents, 59.1%, expect that the largest increase in conduit collateral will come from multifamily, followed by office at 18.2%. The conduit market should gain market share as the government-sponsored agencies reduce their lending footprint. Respondents also expect that oversupply may become a problem in the near future, with 35.3% citing 2015 and 29.4% citing 2016 as the year when a tipping point is reached. T Associate Director Kroll Bond Rating Agency, Inc Co-Editor CREFC World


CRE Finance World, Winter 2014
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