Commercial Loan Market Update
The commercial loan market is a diverse and ever-changing landscape. Each lending segment functions differently and is motivated by disparate financial factors, which creates a diverse set of loan offerings and terms to the consumer. Recent economic developments have affected lenders’ balance sheets, their yearly targets, and how they currently conduct business. Here’s a quick summary of what to expect from each kind of lender.
Commercial mortgage backed securities lenders offer loans for the sole purpose of packaging and reselling in bond securitizations. The CMBS market has completely stabilized from the fallout of 2008-2010, and these lenders are currently pricing deals competitively and reliably. We can attribute the recovery and stabilization in this sector to a high demand for CMBS bonds. According to Commercial Mortgage Alert, “Steady or tightening spreads help CMBS lenders set rates and warehouse mortgages for securitization. That in turn encourages issuance, and investors are looking for an increase in offerings in the coming months after lower than expected volume in the first half.”
These loans are more restrictive than insurance company or bank loans, but can offer higher leverage and interest only. Right now CMBS lenders are underwriting debt yields at the 8% mark for most property types and are below that watermark for multifamily and other high quality properties. Interest only is becoming standard on many deals, with 10-year interest only at 65% leverage.
Life companies are asset allocation lenders, which means they designate a specific percentage of their overall invested assets for commercial real estate loans. Most life companies are portfolio lenders, lending for the purpose of holding the loan and generating profits from the collected interest. Because the interest rate yields they can get on commercial real estate loans are currently 1-2% greater than alternative bond investments, most life companies are aggressively securing high quality loans right now.
Insurance company lenders are offering fixed rate terms from 3-25 years. As competition in the market has increased, spreads on these deals are ranging from 1.00-3.00% over the corresponding Treasury rate.
Banks are portfolio lenders that realize profit from collected fees and interest. Most players in this space have cleaned up their problematic loans from 2008-2010, and need to generate new underwriting to fill the void. With deposit pay rates at historic lows and the ability to borrow from the Fed at 0%, banks currently have the ability to offer increasingly competitive terms. They have been very aggressive in this economic cycle, targeting borrowers who want to mitigate interest rate risk and lock in long term.
As a rule banks generally focus on shorter term fixed rate (up to 5 year), bridge, and construction loans, which match up best with their fund sources; namely deposits. Interest rates in this sector vary greatly depending on the lender’s perceived risk. Borrowers are thoroughly underwritten and most of these loans require personal guarantees.