- THE MAGAZINE
Commercial property investors and lenders today have a new attitude about the economy, and it seems they are just as confident as the peak market days.
“In the last three years, commercial property lending has continued to gain momentum and it is fundamentally strong, while still maintaining disciplined underwriting standards. The fundamentals of the real estate markets also are improving via the growth in the housing markets, construction, industrial production and the further strengthening of the consumer psyche. The convergence of these factors leads us to an optimistic 2014 forecast for the real estate lending markets,” said Tom Fish, executive managing director for Jones Lang LaSalle.
Property Sector Financing
- Multifamily: The potential winding down of the GSEs did not have an impact on 2013’s record breaking sales volumes. The agencies continued to dominate multifamily lending activity and likely maintained close to their 2012 market share of 40 percent, offering as much as 80 percent leverage, with tier-3 spreads averaging 225 basis points in the fourth quarter. While the agencies have maintained a dominant foothold in higher leveraged transactions, Life Insurance Companies’ floating rate programs in particular have been very attractive to borrowers. JLL expects multifamily lending to remain strong as economic expansion fuels household formation and helps mitigate the threat of oversupply.
- Retail: There is plenty of debt capital at spreads in the 150 to 200 bps over swaps for 10-year fixed rate deals. With the recent pullback in treasuries, trophy assets and those with long-term credit in rent rolls may be able to achieve financing in the low to mid-4 percent range for 10 years. For smaller deals and those in transition, debt funds are filling a nice void in the debt markets with floating rate pricing in the 6 percent range. The net lease market is pricing incredibly strong from life companies with cap rates of sub-5 percent and debt yields at 7 percent for 15 to 20 year full amortized, investment-grade deals
- Hotels: Hospitality lending contributed to a disproportionate share of the lending volume increase as it went from 15.7 percent of all CMBS originations in 2012 to 23 percent of all CMBS origination in 2013. Hospitality origination increased from $7.6 billion in 2012 to $20.3 billion in 2013, a 167 percent increase, which included floating and fixed-rate loans executed in either pooled conduit transactions or stand-alone securitizations. This activity signaled the important re-emergence of the floating rate CMBS market, which had been largely muted since the credit crisis.
- Industrial: Industrial markets across the U.S. have been quietly recovering for more than two years, demonstrated by 15 consecutive quarters of positive net absorption. Widespread demand across size segments has resulted in the U.S. vacancy rate falling to 8 percent inching closer to its prior cyclical low of 7.5 percent. Life companies will continue to aggressively pursue high-quality industrial offerings, especially portfolio opportunities where a large amount of capital can be deployed quickly. With increasing liquidity in the CMBS market, life companies have acknowledged the competitive landscape and will be more active in the Class B space (both single assets and portfolios) and in secondary and some tertiary markets. Accordingly, banks will be looking to replace loans that are rolling earlier than anticipated due to both the active investment sales market and attractive permanent debt market. Five to 10-year fixed financing can expect pricing in the low 3’s to high 4’s depending on term and advance rate.
Investment Sale Surge
The abundance of equity capital and a strong and growing debt market will create an attractive environment for acquisitions and financings throughout 2014.
“We forecast a 20 percent rise in transaction volume from $200 to $295 billion across the Americas for the year. This would mark the third-highest level of transactions on record, following 2007 and 2006 respectively,” added Jay Koster, JLL’s Americas capital markets president.
Deals already in the pipeline also point to further growth in global investment activity during 2014. JLL’s initial forecasts indicate volumes of $650 billion, a15 percent uplift on 2013 levels and representing the fifth consecutive year of growth.