By Todd McNeill
The annual Mortgage Bankers Commercial Real Estate Finance (CREF) Conference held in Orlando last week does not need an introduction. After three days, 30 meetings and two sore feet, here are my top 5 takeaways from the gathering:
- Turmoil, Turmoil, Turmoil was the buzzword when discussing the CMBS market. There are a number of securitizations currently in the market that are getting kicked around by the B-Piece Buyers, causing some conduit shops to have their stomachs tied in knots. The new rules pertaining to “risk retention” have all of the CMBS forecasters predicting many of the current players will exit the market. Some believe the new risk retention policies will have a significant impact on the industry while others believe it will only move pricing slightly higher (say 5 – 10 bps)! It will be interesting to see how this unfolds; however, one consensus amongst almost all the CMBS shops was that a flurry of securitization activity is expected during the 3rd and 4th Quarter to allow as much production as possible before the risk retention rules take effect in December 2016. Moreover, “Balance Sheet” or “On-Book” lenders are seeing a spike in loan requests as Borrowers decide not to subject themselves to the uncertainty of the current CMBS market.
- Oil Prices – Most all lenders expressed concern over areas in the country whose fundamentals are driven by oil and gas. Houston office is a taboo topic to bring up to traditional lenders, which made for some interesting “pitches” by private lenders willing to finance these deals at higher rates or less leverage. Midland/Odessa, the Dakota’s and Oklahoma are all showing up on the radar screen as areas to proceed with caution or avoid altogether. FNMA has recently listed Oklahoma City and Tulsa as “pre-review” markets, which constrains the max LTV to 65% unless FNMA provides a waiver, which is done on a case by case basis. Houston seems to have the most draconian perception of all the “oil patch” markets from the lending community. The ramp up of office construction over this latest cycle has caused worries; however, this Texan’s view of Houston is that while there will be stress on some projects and in some areas, Houston is not about to fall off the cliff; the fundamentals will stabilize.
- Maturities Galore – During 2006, the CMBS market enjoyed a banner year securitizing just over $200 Billion of mortgages, with 10-year maturities. Each CMBS shop wants to get their hands on these opportunities. Many CMBS shops are promoting some type of mezzanine product to go along with their senior loan products to deal with the wave of expected refinances that may not size in today’s world where the debt yield has become a mainstay in the underwriting criteria (debt yield wasn’t even a word back in 2006). In addition, there are several mezzanine shops that are seeking these opportunities as well and they are promoting the ability to do a 10-year mezzanine product tailor-made to go behind a new conduit mortgage. There should be no shortage of mezzanine and/or “gap” financing available in 2016 to work through all the refinances that may still be slightly underwater when the loan matures.
- Secondary Markets – With cap rates in major markets at all-time lows, we are seeing both buyers and lenders willing look at deals in secondary and tertiary markets. To substantiate this, MCA just received an aggressive cash-out loan application on a retail center in a tertiary market that has JC Penny as one of the main tenants. Several CMBS lenders and balance sheet lenders expressed interest in seeing more deals in these markets as the cap rates and yields provided more favorable underwriting, debt yields, and loan per square foot metrics.
- Office Fundamentals – Setting aside the Houston market and other “oil patch” related submarkets, the general perception is that the office is poised for a huge run similar to what the multi-family markets have witnessed over the past four years. In many CBD’s across the country, office markets are tightening and vacancy rates are low. This is a result of significant leasing momentum along with older obsolete buildings being converted to alternate uses of either hotels or multi-family. We met with a variety of capital sources that are focused on office acquisition, redevelopment, permanent debt and even development in special situations.
Indeed, the MBA/CREF was well-attended, there is plenty of capital in the market and providers are willing to look at a variety of opportunities. As usual, it is just a matter of price and structure. See you next year in San Diego!