Analysts See Pause, But Continued Strength in New CRE Loan Production

MIAMI–Investment sales volume has moderated since 2015, as have cap rates for most property sectors, but new loan production remains strong, senior industry executives say.

“We’re seeing a little bit of a pause, but absolute production is still very good,” Grandbridge Real Estate Capital Chairman and CEO Thomas Dennard said here at the MBA Commercial/Multifamily Servicing and Technology Conference 2018.

Dennard noted middle-market activity, “which is what drives most domestic funds and mortgage bankers who live off of transactional activity,” slowed down between fourth-quarter 2017 and first-quarter 2018. Though momentum generally picks up in the second half of the year, he said he is not sure it will this year.

Thomas D. Wood & Co. President Thomas Wood Jr. said cap rates could become an issue going forward. “They are going up,” he said. “Sellers always want the cap rate that was yesterday, while buyers always want today’s cap rate.”

Panelist Mark Fisher, CMB, agreed there is a “disconnect” between buyers and sellers regarding cap rates. “We’re seeing a lot of transactions contingent on finding something else for a 1031 exchange,” he said.

Looking ahead, Dennard called Fannie Mae and Freddie Mac a “weather vane” indicating the multifamily marketplace’s direction. “They dominate multifamily financing and multifamily has been dominating the major classifications for some time now,” he said. “But Fannie Mae and Freddie Mac production is down. Coming off two record years for the agencies, it’s not too bad for that to cool down. I think the agencies would agree with that.”

But one X-factor that could change the multifamily marketplace’s direction is the expiration of Federal Housing Finance Agency Director Mel Watt’s term in January 2019. Watt has served in that role since 2014. Dennard listed several options at that point: “Either he will continue to operate or the administration will appoint an interim replacement or appoint a new person. I don’t think there will be a major disruption in housing finance reform and I don’t think there will be major changes to Fannie Mae and Freddie Mac. I see them continuing to be a major player.”

Wood said it was “too soon to know” how the new tax law will affect real estate. But the larger economy is very well positioned for growth, he said. “If we can get the middle class moving up, it’s off to the races. The unemployment rate is so low and we have not really built a lot in this country recently. With money coming in from overseas, I think we will likely have a two- to four-year run in the commercial real estate space and then I think we’ll see a soft landing. That’s assuming we stay disciplined.”

Fisher agreed. “I think this time will be different compared to how recessions hit commercial real estate in the past, which was fast and hard,” he said. “Today it is so hard to entitle and construct new assets that buildings are worth more than ever from a net operating income standpoint. CRE is on a pretty good path for a good period of time. Entitlements and permits are more expensive than ever, so I don’t think we’ll see overbuilding.”

If the economy does fall into recession, it would likely be due to a “trigger” event, Fisher said. “Something that causes people to stop spending, to be afraid. We’re now seeing a lot of office demand shrinking because of productivity increases. But a real hit to the economy will take some kind of a trigger event in my view.”

Dennard said energy costs remain a wildcard that could possibly trigger a recession. “We are now really good energy suppliers; we can help ourselves by allowing that to free flow. It’s good to have natural gas and oil and be an exporter, not an importer, so as a country we are not reliant on spot pricing. There is a delicate balance in the world. We have to get used to that.”