Keith Wentzel, Fantini & Gorga2016 was another strong year for commercial real estate activity in greater Boston and New England. Development activity, especially in the Seaport area, remains robust and selling prices for almost all asset classes remain near record levels. Real estate properties here continue to attract national and international buyers who are attracted to the region’s mix of job generating growth industries, strong market fundamentals and coastal location. Cap rates remain low and access to capital for real estate loans continues to be plentiful.
2017 begins with a lot of question marks as a new administration takes office in Washington. Will tax law changes and eased regulations on businesses stimulate economic growth? Will changes be made to Dodd-Frank legislation that will result in more aggressive lending? Will increases in economic growth lead to more real estate development as businesses expand? Since the election, loan rates in general have increased about 75 bps as Treasury and Swap rates have climbed. These pricing increases have not yet affected selling cap rates to any great extent but that could change over the coming months.
Regional and local banks remain very active in providing construction, acquisition and refinancing loans throughout New England. Competition is fierce among the banks as they compete for quality deals and market share. However, we are now starting to see lenders becoming a bit more cautious as their real estate loan portfolios have grown over the past few years and new development projects, especially apartments and condos, have increased market supply. The banks are starting to require more equity for new projects and tightening loan terms/amortizations. Appetite for real estate loans seem to differ among individual banks as portfolios grow in varying degrees and potential regulatory changes are looked at in different ways.
Insurance company lenders have always been attracted to the real estate fundamentals of the New England market (especially metro Boston) and continue to be so. Over the past several years, banks have taken the largest share of real estate loans in New England but as they tighten their underwriting criteria, we can expect the insurance company lenders to be more competitive. They have always been the market leaders for borrowers seeking longer fixed rate loan terms (10-25 years) with the most aggressive rates. If banks start to stiffen their LTV requirements, look for insurance company loan offerings to become more attractive to borrowers. Another advantage for these lenders is that they do not have a significant concentration of loans in New England and are hungry to increase their market exposure here.
CMBS lenders are also seeking to increase their presence in New England. For the past few years they have been largely kept out of this market due to loan pricing (up to 100 bps wider than insurance companies and banks) and aggressive structures offered by banks. However, within the last few months, CMBS spreads have tightened by as much as 75bps in some cases. They are going to successfully compete on deals where a borrower is seeking maximum leverage without personal recourse for a property and location that may be considered “B” or “C”. Please keep in mind that this funding source is very dependent on the current state of events on Wall St. and national/international markets. With many question marks arising about the new administration in Washington and its effect on the economy, it’s very much up in the air whether the CMBS market could see pricing get much more aggressive or have economic turmoil widen spreads considerably. It could be an interesting roller coaster ride for this lending sector in the next 12 months.
Equity and mezz sources from around the country also see Boston as a desirable place to invest or lend. Most of these dollars are going to development projects primarily for apartments and, to a lesser extent, retail. Deals requiring equity/mezz funds in excess of $5 million for projects in the city (and close in suburbs) are attracting plenty of interested investors. However, once you get outside the 128 belt, it becomes more challenging to access funding.
The real estate financing outlook for New England in the coming year looks bright; however, there may be some bumps in the road along the way. These include how the new administration will affect economic growth, changes in banking regulations and the possibility of additional rate increases. Banks, insurance companies and CMBS lenders are all eager to make loans and equity sources are plentiful for well-conceived projects in (or close to) Boston. You may not see lenders as willing to “stretch” as they become increasingly conservative with their underwriting criteria but unless there is a major shift in the markets, capital for commercial real estate loans will remain plentiful.
Keith Wentzel is a managing director with Fantini & Gorga, Boston.
