By Sanyu Kyeyune
At $549 billion, the Mortgage Bankers Association’s projection of 2018 loan origination volume represents a 3 percent decline from 2017. Still, industry experts expressed their optimism toward the market at the organization’s CREF/Multifamily Housing Convention & Expo in San Diego last week. One such authority—Jeffrey Erxleben, executive vice president of NorthMarq Capital—offered his perspective on which trends are most likely to affect the commercial real estate lending landscape in 2018.
What is your take on MBA’s 2018 outlook?
Erxleben: There is still very strong volume, and there are great opportunities across the landscape, even with a downward projection. From 2009-2017, there have been upward growth projections every year. To (continue to) have year-over-year growth like we’ve had forever is not going to happen. MBA’s projection from 2017, which was a record year, is still very robust.
Which trends in policy, demographics and economics will have the greatest impact on the commercial real estate lending market in 2018?
Erxleben: The biggest story on the economic front is the rise in long-term interest rates and how that will impact the overall financing market as the underlying rates of loans go up. We’ve already seen that at the beginning of 2018, and I think it will continue. The biggest story will be how the market adapts, especially on the acquisition front, and the underlying financing that we can put on those assets.
Tax reform has been a net positive for our clients. That policy change is overall very positive for the industry and the financing (sector), as well.
Certain financing subtypes—such as senior housing—are impacted more by demographics. Addressing whether the product that is coming (online) is meeting demographic needs is top of mind.
What shifts are you paying close attention to within the property types that NorthMarq finances?
Erxleben: We’ve gone through a long period of this cycle where there has been some pretty strong rent growth and fundamentals within the multifamily market. We’re focused on whether that rent growth will continue in select markets and if other markets may see a downward trend. When you drill down into the data, you need to take a look at the markets where a lot of the activity has been new, Class A construction. When you analyze the job growth within those markets and compare it to how many units are being put on the ground at a certain rent level, those are markets where the total construction supply is appropriate.
Retail is a less favorable product type for lenders. When we look at the lending landscape for big-box retail, the number of available lenders that we can provide a borrower is generally low.
Industrial product is very much in demand. Lenders have a strong appetite for industrial (assets), throughout the quality classes. Vacancy rates have remained pretty low. There are a lot of institutional players who remain unleveraged, so the opportunity to put leverage on an industrial office is pretty favorable.
Multifamily and industrial are probably the two top (sectors) from a lending perspective.
Describe the nature of competition among capital providers and how you anticipate it changing.
Erxleben: There is a wide range of capital providers, no matter what type of deal you’re financing. There are a number of options to consider: It’s a competitive landscape with new entrants to the market each time. We’ve seen a lot more floating-rate players come in, and I think throughout 2018 you’ll see more of that activity.
Life companies have gotten into the bridge lending space, along with traditional balance sheet lenders and debt funds. There is ample liquidity there to meet requests.
Trends we’ve seen thus far are spread compression. As there are more providers coming in, spreads between 2017 and 2018 have trended down as much as 200 basis points on any given transaction.
How would you characterize the performance of agency and non-agency CMBS loans?
Erxleben: Agency CMBS continues to perform well. Delinquency rates are low, and agency product continues to be in high demand. (The agencies) both had record years (in 2017). Looking forward, I think they will (perform) equally—if not, slightly better—in 2018.
Non-agency CMBS seems to be improving as a market and is a bit more reliable than it used to be, from a borrower’s perspective.
What other trends are taking shape in 2018?
Erxleben: With long-term rates jumping up at the beginning of the year, we do see a more borrowers electing to do longer-term, fixed-rate loans, as opposed to having a balance. It’s a reaction to some of the disruption in the market.
There are a number of players looking to do value-add multifamily, which has definitely been a search yield, and it’s something that I think is alive and well in the market. One of the big challenges is the disconnect between buyers and sellers. Most of the sellers want to go ahead and price that value-add (component) into the transaction, while, of course, the buyers want to find those opportunities where there is still some meat on the bone to generate some value.
How does NorthMarq leverage technology in its operations?
Erxleben: The way we’ve done business in the finance industry is very similar to the way we did business 20-30 years ago. But, going forward, I think technology is going to play a major role in our industry. From a borrower’s perspective, technology could reduce redundancy, friction and cost, as well as provide some process improvement. At the end of the day, I don’t think technology will replace investment professionals, but I think it will enhance the borrower’s experience.
There is still very strong volume, and there are great opportunities across the landscape, even with a flat projection. From 2009-2017, there have been upward growth projections every year. To (continue to) have year-over-year growth like we’ve had forever is not going to happen. A flat projection from 2017, which was a record year, is still very robust.