As we are moving into the 3rd quarter of 2017, it is important to keep updated on what is happening in the ever-changing CREF (Commercial Real Estate Finance) market. The following is an update summarizing the four major lending categories:
Life insurance companies are typically “asset allocation” lenders. In other words, life companies invest a percentage of their overall investment portfolio into commercial real estate loans. Commercial real estate loans are held as long-term investments in addition to other investments such as investment grade bonds. Life Companies can offer fixed-rate loans from 3-30 years in duration. Most benchmark 10 year fixed rate loans are currently being placed in the 3.50%-4.75% range depending on the risk profile of the deal.
2016 was slow for CMBS due to market volatility early in the year and concerns over the Dodd-Frank risk retention rules late in the year. Now, in 2017, there have been multiple successful securitizations under the new risk retention rules. Additionally, the market appetite appears to be quite strong for this product and has seemed to stabilize. Ten year fixed rates range from 4.00%-5.00%. High leverage and interest only loans are generally available in this section. CMBS has also emerged as an alternate resource for lower leverage space with spreads dipping into the 150-200 range for select transactions that meet certain LTV and DSCR metrics.
Banks are continuing to be more conservative in their compliance departments and consequently in their underwriting. Banks typically offer short-term fixed rate loans (0-5 years) and transitional loans (bridge and construction). The market for these loans is still liquid, but has become more conservative. Banks will continue to pump the breaks by increasing or decreasing interest rate spreads based on their risk appetite and ability to implement regulatory compliance. Expect volatility within this segment in the near future.
We are seeing the agency lenders continue to be aggressive with their production. In particular there is a push for transactions in the affordable housing space where pricing waivers and full term interest only is readily available. Fannie’s long term 12 and 15 year fixed rate options at only slightly wider rates than their 10-year term appear to be attracting more borrowers. Fixed interest rates range from low 4% to 5% depending on length of term and leverage, while we still are seeing high 2% to high 3% money for floating rate options.
Bridge loans are another area of emphasis for the agency lenders and we expect that to continue through the balance of the year as Fannie continues to roll out their Fixed Rate Rehab program.
Last, there is additional focus on “going green”. The agencies, specifically Fannie, are aggressively pushing their green incentive program for all property ages as long as you can demonstrate that the additional savings in energy or water can be realized. Freddie is also focused on pushing similar “green” products for properties constructed 2002 and after.
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