Bubble or Expansion: ‘Depends on Your Point of Departure’

ORLANDO–Business for commercial real estate lenders is good, but new capital sources and an abundance of capital entering the sector could have negative consequences, analysts say.

“You’re starting to hear discussion in the media about whether there is a bubble, or are we looking at another two or three years of expansion,” said Thomas Dennard, Chairman and CEO of Grandbridge Real Estate Capital LLC, Charlotte, N.C., here at the MBA Commercial Real Estate Finance/Multifamily Housing Convention & Expo.

Dennard said real estate received its own Global Industry Classification Standard in August, elevating it to a distinct category from its former place under financials, which will likely bring more investors into commercial real estate but could affect loan quality.

Howard Smith, President of Walker & Dunlop, Bethesda, Md., said too little money available to refinance maturing loans presents a bigger problem for the sector than too much money. “Look at MBA’s prediction for multifamily originations in 2016,” he said. “It’s a $220 billion business.”

Smith said Fannie Mae and Freddie Mac will likely originate $45 to $50 billion each, while FHA and insurance companies might originate $15 billion and $20 billion, respectively.

“Banks are feeling pressured,” Smith said. “You keep hearing that banks are under a lot of regulatory pressure–a banker recently told me the only headcount increase he’s seen is more compliance personnel.” He noted, however, that commercial mortgage-backed securities lenders expect to issue only $100 billion this year while $180 billion in CMBS loans will mature. “So, no, I don’t see a problem,” he said.

Smith said although more people attended CREF this year, “there’s not more money. I’m concerned about there being not enough money.”

David Durning, President and CEO of Prudential Mortgage Capital Co., Newark, N.J., said as some lenders “lean in,” others show more introspection about the market. “So it depends on your point of departure,” he said.

But Durning noted that he has seen borrowers’ appetite for leverage decrease. “There’s more self-regulation for borrowers wanting to have right debt mixture, not just getting the extra dollar,” he said. “Maybe you can have reasons why you want to be a little more careful than you’ve been, but on a historical basis, real estate is still a pretty nice place to be.”

Dennard said the U.S. could experience a “sea change” very soon, depending on the outcome of the 2016 presidential elections. “There’s a lot of uncertainty there,” he said. “Who will be commander in chief, and how will that play into CRE?”

Angela Mago, Executive Vice President with KeyBank Real Estate Capital, Cleveland, said no one can predict the next president at this early stage, or how he or she might affect commercial real estate. “We’re not going to be able to control who becomes the next commander in chief, so we just need to stay focused on supporting our clients, on figuring out where we are in the cycle and on making good decisions every day,” she said.