Michael Chase - NorthMarq Capital

At this time last year, the regulatory environment was shaping the commercial and multifamily debt market. The GSE’s were the first to pump the breaks in the second quarter of 2015, but quickly recovered after new rules allowed for exclusions from their lending caps. As the year went along CMBS lenders had to work through new disclosure requirements implemented under Regulation AB while also planning for upcoming risk retention to be implemented by the end of 2016.  Meanwhile, commercial banks sorted through their own risk retention requirements under Basel III, and High Volatility Commercial Real Estate, (HVCRE) became the Rubik’s Cube to be solved for those seeking development financing.

In 2016, even in the midst of regulatory headwinds, the commercial and multifamily market is once again off to another strong start. According to the Mortgage Bankers Association, total commercial and multifamily mortgage debt outstanding finished the first quarter at $2.86 trillion, an increase of 1.2% over year-end 2015. Three of the four primary lending groups - commercial banks, GSE’s and life insurers – have all started the year off with an increase of their debt outstanding.  Thus far, the only group to lag behind has been the CMBS market. Through the second quarter CMBS originations are down 59% year-over-year according to data compiled by Commercial Mortgage Alert. However, the deals the CMBS market is not doing this year are being absorbed by the other market participants and by other capital sources such as private debt funds and mortgage REITs.

The primary catalyst for the strong debt market in 2016 has been continued low interest rates.  On December 15, 2016, the Federal Reserve raised their key interest rate for the first time in a decade, and the market was left to ponder the prospect of entering a rising rate environment. As we all know, this didn’t happen. On the date the Fed Funds rate was increased 0.25%, the 10-year U.S. Treasury was trading at 2.28% and by July 5 hit an all-time low of 1.37%. With the sovereign debt of several nations, including Germany, recently trading at or below zero percent, an all-time low for U.S. treasuries still appears relatively high. Not only have long-term rates fallen, but the spread between short-term and long-term rates has narrowed. The flattening yield curve has made fixing in long-term even more attractive.

With last year’s lending cap issues behind them, the GSE’s are off and running in 2016. In May, the Federal Housing Finance Agency announced an increase to the lending caps for both Fannie Mae and Freddie Mac from $31 billion to $35 billion each. The increase came with additional changes to the excluded categories allowing the GSE’s to aggressively go after affordable and green properties.  Through June, Fannie has reported year-to-date originations of $22.8 billion with 33% of their 2016 volume excluded from the cap.

Commercial banks have generally eased up on construction lending, due in part to the HVCRE risk retention requirements. They still remain a strong player, however, for permanent fixed and floating rate financing with an ability to offer clients the most flexibility over the term of the loan. According to the MBA, commercial banks saw a 44% year-over-year increase in their commercial and multifamily origination activity. This has not gone unnoticed with recent remarks by the Office of the Comptroller of the Currency concerned with increased credit risk from an easing of underwriting standards.

Life insurers still remain the go-to for high-quality low-leverage executions. Fitch Ratings recently reported almost 80% of life companies experienced some degree of growth in their mortgage portfolios in 2015. A lack of alternative investments, low treasury rates, high levels of competition and a limited pool of opportunities have created a perfect storm for borrowers to take advantage. More flexibility is being offered and rates for both long-term and short-term requests are at historic lows.

Even CBMS has begun to pick up momentum after their slow start. It is unlikely they will match their production volume from 2015; however, new strategies from market participants and the recent narrowing of bond yields should allow CMBS to compete through the remainder of the year.

Currently, 2016 remains a borrower’s market with plenty of capital still available seeking the right opportunities.

Michael Chase is a senior vice president with NorthMarq Capital, Boston, Mass.