Trends Impacting the Real Estate Market – Key Concerns for Investors, Developers and Owners (Volume 2)
What trends are impacting the commercial real estate market? In Part 2 of this video series, Aaron Kaiser of EisnerAmper continues his interview with Tom Fink, a recognized national expert on the commercial mortgage-backed security markets. Some of the topics discussed are the trends in the various lending classes within real estate, the state of interest rates, and the New York metropolitan real estate investment market.
Trends in the Various Lending Classes within Real Estate
In terms of safety and risk, what trends can be seen in the different lending classes? How are we comparing today with the relatively profligate times that we saw in 2006 and 2007? Tom Fink stated that he thinks credit standards have loosened over the last two to three years. As more money becomes available, one of the ways to be competitive is to give the borrower better terms and conditions. In a low interest rate environment like this, projects continue to be performed fairly well once underwritten.
Overall, Mr. Fink thinks across the board people are being cautious. In terms of the different property sectors, office is still suggesting a certain amount of challenge as companies continue to restructure. Retail still has to address the challenge of the internet and amazon. Large malls, particularly in mid-tier markets, are experiencing a lot of stress. In the hotel sector, he thinks the market is coming back very strong.
The bottom line is construction is taking place and there’s more competition for tenants; but, the fact of the matter is the balance of supply and demand. Landlords are still getting decent rents.
Higher Interest Rates
Would a rise in interest rates affect the coming wall of maturities? Tom Fink states that if interest rates were to go up substantially (anywhere from 4 to 6 percent), that would provide an issue for the marketplace in general because of the uncertainty of the volatility. With regard to the loans that are maturing in 2016 and 2017, they are being refinanced at rates that are comparable or lower than they were financed with originally in 2006 and 2007.
Where interest rates are today and where they are probably going to be in 2016 is a “wild card” depending on what happens in the 2016 election. How is the real estate market going to read whatever happens in that election, the overall level of interest rates and the prospects going forward? The fact of the matter is that there’s still a large surplus of capital in the market. People are looking for investment options, and real estate appears to be a safe investment.
NY Delinquency Rate Performance
How is the New York metropolitan real estate investment market doing? Tom Fink discusses the tri-state area commercial mortgage-backed security delinquency rates. It shows that New York State is outperforming its cohorts in NJ and PA. He commented that a lot of the positive performance in NY is concentrated in New York City, particularly in Manhattan. He thinks that’s the market that is driving all of NY State.
“We still see problems outside of the metropolitan area, particularly as you get upstate.” Fink acknowledges what NY State is doing to try to draw businesses upstate with the development and the tax forgiveness plans. In conclusion, it appears that NY has a long way to go before the upstate real estate market is as healthy as the NY City area.
Non Performing Debt
What is the change in the level of non-performing debt and which way is the trend going? As Fink discusses the delinquency severity breakdown, he says “we’ve seen a real decline in the overall level of delinquencies in terms of the volume of the loans that are considered delinquent in the market.” He states that it’s encouraging that the 30 day rate is currently really low.
“We have very few loans that are going delinquent today. The flip side is that in the REO space we’re still trying to resolve some of these very troubled assets.” He acknowledges that some of these have already generated big losses for the commercial mortgage-backed security market and they will continue to generate losses. Even though the market as a whole is active and has healed, there is still going to be a tail wind or “drag” of REO properties as also seen in the residential market.
Government Sponsored Organizations
What role are government-sponsored organizations playing in the real estate market today, and does that represent more of the same or a change in what’s been going on? Tom Fink stresses that government-sponsored agencies are still very important factors in today’s real estate marketplace, and the multifamily market, Freddie Mac and Fannie Mae, are still the primary source of capital. “We continue to see a lot more of private capital from insurance companies, equity funds trying to buy and invest in the multifamily space,” he says, “but they still provide a huge chunk of the capital.”
Government-sponsored organizations still continue to issue a lot of securities. In fact, government-sponsored entity multifamily securities are now a new asset class in the Barclays performance indices, which are used to track the fixed income market. So, they are around to stay for a while.
- Current State of the Market
- Future Trends in the Real Estate Market
- Emerging Technology
- Domestic Findings
- International Question