For CRE Bankers, 2017 Looks a Lot Like 2016
SAN DIEGO–Commercial real estate is setting precedents in several ways–and banks could benefit from that, said Angela Mago, Executive Vice President with KeyBank Real Estate Capital, Cleveland.
Speaking here at the Mortgage Bankers Association’s Commercial Real Estate Finance/Multifamily Housing Convention & Expo 2017, Mago noted “historic low mortgage rates, historic net operating incomes and historic property prices.”
MBA research shows most originators expect no change in 2017 from last year’s solid figures and some predict a slightly better year in 2017. “Looking at origination activity, very few feel that they’ll do less this year,” Mago said.
Gregg Gerken, Executive Vice President with TD Bank, Cherry Hill, N.J., said he also looks at 2017 much like 2016. “I see tremendous activity in multifamily–because there is no other new game in town,” he said. He noted that some markets may see an apartment oversupply. “But on the other hand, there could be a shortage as more Millennials return to the housing market.”
But so far, the multifamily market is acting as its own “governor” as rent growth starts to slow, Gerken noted. “Clients are telling us it’s harder to find a deal that makes sense as rent growth begins to slow,” he said. “Borrowers don’t want to make a mistake.”
Gerken added that multifamily developers tend to focus on Class A product to make deals pencil out due to high land and construction costs. “But our thesis is that if you pick the right spot, transit-oriented development has proven to be a really great space to be in,” he said. “We’ve not seen one project that hasn’t blown away its pro-forma.” He said a good portion of TD Bank’s portfolio is currently in affordable and Class B and repositioning multifamily loans. “We feel a lot of upside there and the depth of that market is still very, very good,” he said.
Daniel Mullinger, Western Region Executive Vice President with PNC Real Estate, Pittsburgh, said he sees “plenty of opportunity” for banks this year. “But it’s getting tougher to find,” he said. “For example, the industrial sector has been great but that market is tight and it’s hard to see how long that trend will continue. And it’s getting late in the game for hotels.”
Gerkin said most of the borrowers he sees are “being much more disciplined” this cycle than during the last real estate cycle. “Looking at loan-to-values, we’re not even coming close to any loan that’s remotely close to loan-to-value limits,” he said. “From what we’re seeing getting done, none of our clients are pushing the edge of anything, which is frankly quite refreshing.”
Gerkin noted that clients spend a lot of time and money to get a project going, “and over-leveraged projects are the ones that get into trouble,” he said. “So our views and theirs are in alignment. If you’re doing business with the right people, frankly it’s not that hard.”
