Rising rates do have an impact on most commercial real estate lending, said someone who structured deals at the commercial mortgage banking firm of
“Interest rates drive returns, which drives value and that is consistent for any investor in any asset class,” whether it is a multifamily loan as opposed to a loan on retail, industrial, office or other kinds of commercial properties, said James Cope, who is senior vice president.
If a loan is coming due right now, the borrower has to address the issue, he said. However, commercial property has fewer outlets than multifamily loans do.
Borrowers are sensitive to rates, for such reasons as their leverage on the property.
Still, the government-sponsored enterprises, which provide funding for multifamily transactions, have pulled back because of the cap placed against them requiring them to reduce their asset size while they are in conservatorship. Their pricing is higher than the market, Cope noted, because they can only have the capacity for a certain number of transactions and have to remain within that ceiling.
Other sources of capital in the CRE space are more competitive in pricing right now, with banks and life companies stepping up activity. This is especially true of banks right now, he said.
Cope noted that while he doesn’t typically place a lot deals with the banks (normally his sources are conduits, life companies, and for multifamily, the GSEs), but right now the banks are being more competitive in the commercial space. They have become more aggressive in pricing and structure; and they have been limiting recourse more frequently, he said. This is especially true of the regional banks more so than the big national banks.
The life companies have also been aggressive on pricing and, he said, they have traditionally been nonrecourse lenders. A difference between the banks and the life insurers is that the latter typically lends for longer terms because of their needs. Life companies will do floating rate loans as well as 30-year fixed-rate loans, but they need to match the long-term liabilities (their policies, annuities, etc.) on their books.
Banks tend to be shorter term, typically five year or seven year terms, although sometimes they will go as long as 10 year, he pointed out.
The conduit market had been doing well competitively until May, but the rising interest rates have impacted that business, Cope said, with spreads “blowing out significantly. That market’s gotten pretty quiet. It is starting to come back,” with spreads starting to settle, although they are not back at the same point they were at when the widening started.
Rates for loans attached to CMBS are now 100 basis points higher and borrowers have to decide if they want to pull the trigger on the deal.
Cope pointed out that rates are still relatively low, but people had expected them to be lower. Thus, some are pausing about going ahead with the deal, while others are facing a maturity date coming up and they need to refinance their old loan and take what is available.
He believes CMBS production in 3Q13 will be significantly lower than prior quarters as a result. The banking business is a spread business and “at some point they’ve got to get their money working and generate a return,” Cope said. So they are seeing opportunities in the current market and more money is flowing back into CRE.
But the bank’s presence in the CRE business will be more measured than it was prior to the downturn.
Plus given the nature of bank lending, some borrowers might decide to go for the shorter term loan and hope rates will again turn around.
