The latest report from the Mortgage Bankers Association shows that there is a lot of mortgage debt available to commercial real estate investors, and lenders are plentiful. According to the National Real Estate Investor, "The mortgage markets have been helped by low interest rates, improving property prices and strengthening fundamentals." This environment has led to more borrowers qualifying for loans and more lenders making capital available.
As we approach the end of 2013, commercial real estate lenders are eager to find out whether they have reached or exceeded their goals in providing funding for real estate transactions. According to the Commercial Observer, one thing is certain: CMBS investment bankers have exceeded last year’s output, yet it is not certain if the Wall Street shops will reach a $100 billion in gross lending. There are also the traditional savings and commercial banks, mortgage REITs, private equity funds and insurance companies, as well as new players in town who joined and/or increased their volume of financing this year.
Commercial real estate investors seeking higher returns are turning to smaller markets and buying suburban properties. According to Bloomberg, demand for office buildings, retail centers and warehouses in cities such as Reno, Nevada; Greensboro, North Carolina; and Louisville, Kentucky, is surging as yields shrink for real estate on the coasts and in larger cities. Properties on the outskirts of major metropolitan areas also are attracting interest, with prices for suburban offices rising faster than downtown real estate.
The commercial real estate market is on the rise this year, especially for office properties. As the demand for mortgage loans has increased, banks have also lowered lending standards. The Federal Reserve Board reported that 21.9 percent of banks surveyed last month said they reduced credit standards for commercial real estate loans in the third quarter this year, while only 2.7 percent reported tighter standards, according to The New York Times. The net loosening figure of 19.9 percent was down a bit from the second quarter but otherwise the highest such figure since 2005, when the real estate bubble was inflating. At the same time, more banks reported rising demand for commercial real estate loans than at any time since 1998.
The rise in interest rates over the past several weeks is threatening to halt the four year gains in commercial real estate values. According to The Wall Street Journal, until recently, the low-rate environment had been fueling the rise in property values, even while rents and occupancies generally remained below peak levels amid sluggish growth. The recent higher rates, however, are likely to put negative pressure on prices and demand, even in a recovering economy.
Commercial and multi-family mortgage debt outstanding increased in the third quarter of 2012 by $6.6 billion, or roughly 0.3%. According to RealEstateRama, for the fourth quarter in a row, the net increases in lending by investor groups has outpaced a decline in the balance of commercial and multi-family mortgages held in commercial mortgage backed securities. Commercial banks continue to hold the largest share of the total outstanding debt at $819 billion, or 34% of the total.
Over the course of 2012, the commercial mortgage market has improved greatly as deals once thought impossible to refinance are actually being pushed through. According to The Wall Street Journal, strong investor demand for yield in a low-interest rate world has unleashed a lending boom in commercial mortgages, producing the most favorable conditions for borrowers since 2008. There is expected to be $46 billion in new CMBS issues in 2012 and as much as $65 billion in 2013.
The forecast for U.S. commercial real estate sales has been cut by 12% to $748 billion through 2014 by the Urban Land Institute due to economic growth projections being down considerably. According to BloombergBusinessweek, commercial real estate deals are predicted to be $223 billion this year, $250 billion next year, and $275 billion in 2014, down from the $250 billion, $290 billion and $312 billion reported back in March.
In the Q2 2012 Bank CRE Default and Lending Report released by Chandan Economics, recent data is pointing to continued improvements in the commercial real estate market. According to the report, the default rate on commercial mortgages held by banks in the second quarter of 2012 had fallen to its lowest level since the middle of 2009 to 3.11%, a drop of 34 basis points when compared to the first quarter of 2012.
The CMBS delinquency rate hit an all-time high of 10.36% during the month of July, marking the fifth straight month it has increased. According to the New Mexico Business Weekly, the increasing delinquency level was driven by a wave of 2007 loans that reached balloon payment dates but could not be refinanced. With the majority of these loans occurring in the first half of 2012, it is expected that the delinquency rate will begin to slow in the second half.