By Scott Lynn
As the end of 2013 quickly approaches what better time to take a “Perspective Snapshot” of the commercial real estate capital markets? The past year has witnessed an amazing recovery in terms of the number of available capital sources in all strata of the capital stack, from local and regional banks, bridge lenders, fixed-rate term providers such as credit unions and CMBS to the more exotic strands of capital, including mezzanine, preferred equity, and pure equity providers. Indeed, everyone is back to the point that the market seems as active now as it did right before the Great Recession.
But, five years is still five years, and this recovery has been slow, long, and hard coming by any historic measure. Thank God, recovery for commercial real estate has arrived, as evidenced by the quantity and quality of available capital.
Commercial Mortgage Alert estimates new CMBS issuance of over $70 Billion for 2013 and most likely exceeding $100 Billion in 2014. Coming from a near-zero new securitization issuance in 2009, this is a miraculous recovery that has a positive ripple effect in terms of stabilizing CRE markets and asset pricing. A steady and stable new CMBS issuance that supplies the CRE markets with non-recourse debt alternatives at attractive rates with reasonable leverage has been one of the key factors driving the return of so many other types of capital providers, including the local and regional banks. And CMBS players are not just lending on the traditional food group of commercial real estate but are also willing to provide term loans on non-core asset types: self-storage, senior living, hotels, manufactured housing, and single tenant buildings.
On the equity side, plentiful low-cost debt alternatives along with positive real estate fundamentals are driving stiff competition for the acquisition of all types of income properties. As a result, many real estate sponsors have moved from buying stabilized assets at a discount (the prevalent strategy during the recession) to a revamped mode of acquiring existing assets at a favorable basis with a “Value-Add” renovation/lease up strategy.
Moreover, even development deals have become En Vogue, especially in urban infill multifamily arena. Office and retail development is already on fire in Houston, and there are pockets of the same type of new development taking off in Dallas and Austin driven by the favorable Texas economy. Most certainly other US markets are experiencing the same type of recovery albeit maybe not at the pace of the Texas markets.
These value-add and development transactions have primarily been funded by local and regional banks along with equity providers that are seeking better risk-adjusted returns versus competing for existing income properties.
During 2013 Metropolitan Capital Advisors expects to complete approximately $500,000,000 of new debt and equity transactions. To the point, over $160 mm of this transaction volume has been funded by local and regional banks, most of which was targeted at value-add and new development projects. Simply stated, most of the deals completed by MCA in 2013 came from property types that capital providers had practically no interest in financing as little as two years ago. Now that is change for the positive and a change that should continue to gain traction well into 2014 and beyond.
So what do we think is coming for 2014? Answer: More Capital, More Players providing a wider variety of capital, and a willingness to look at a diverse group of asset and property types. Disciplined underwriting will remain the “watchword” while deal structures will seem aggressive versus what we’ve seen during the recession years. The wild cards are Fed policy on interest rates, the effects of deadlock in Washington, and the ability of the seemingly anemic economy to sustain positive job growth. But when has any of this type of background noise gotten in the way of a commercial real estate entrepreneur?
The Real Estate Finance Brokerage business is similar to baseball… great play gets boiled to a short list of statistics. For MCA, 2013 has been another productive year, having completed over 90 assignments that were placed with 50 different capital providers. Placements included Acquisition Debt, Construction Loans, Programmatic Lines of Credit, Joint Venture Equity, Preferred Equity, and Permanent Fixed-Rate Debt. Multi-Family, Retail, and Office were the majority of the product types that were placed; however, our firm also closed transactions that included senior living/healthcare, land development, hotel/hospitality, and even some specialty properties such as restaurant buildings and a carwash.
Metropolitan Capital Advisors welcomes 2014 staffed with a veteran Team that is poised for growth with the addition of Justin Laub as a Senior Director in MCA’s Dallas office and the opening of MCA’s Denver office led by Charley Babb. MCA is also a proud member of the Real Estate Capital Alliance (“RECA”), an association of fourteen real estate finance firms across the U.S. that expands our access to capital and increases our ability to execute assignments nationwide.
We thank our Clients and Capital Providers for a successful 2013, and we also thank our many friends who read our MCA blogs. We plan to continue to provide meaningful intel and feedback on the status of the commercial real estate capital markets via our social media efforts, newsletter, and website, www.metcapital.com.
Have a Happy Holiday Season and a Healthy 2014!