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.
Aaron Kaiser: Hello, I'm Aaron Kaiser, partner at EisnerAmper and Co-chair of our firm's Real Estate Practice. It's my pleasure today to introduce Tom Fink, Senior Vice President and Managing Director of Trepp LLC. Trepp was founded in 1979 and is the leading provider of information analytics and technology to the commercial mortgage backed securities, commercial real estate and banking markets. Welcome. Tom, in terms of safety and risk, what are we seeing amongst the different blending classes in terms of loan to value by type of property and the debt service coverage ratios as requirements of the lenders today. How do we see that trending and how are we comparing today would be a relatively profligate times that we saw in 2006-2007.
Tom Fink: I think it's safe to say, Aaron, the credit standards have loosened over the last two, three years and as more money, becomes available and is competing for debt.
One of the ways you compete for projects as you give the borrower better terms and conditions. We're nowhere near where we were in 06' or 07'. We haven't gotten back to the crazy world we had back then. We are seeing deterioration, easing of loan covenants. That being said in a low interest rate environment like this, projects continue to be performed fairly well once underwritten. I think there's still a certain amount of discipline in addition to what we track in the CMBS market. We do track quotes and lending rates in the insurance company market and I was looking at the data the other day and they have not pushed the LTV envelope in the insurance company space and they're still being fairly conservative as to how much that they're willing to put on properties, but I think across the board people are being cautious in terms of the different property sectors. I think office is still suggested a certain amount of challenges. Companies continue to restructure though, you know, the idea that people are starting to hire again is probably good for office. I think retail still has to address the challenge of what's the future in the world of the Internet and Amazon. That's a challenge for retail. We continue to see large balls, particularly in mid-tier markets experience, a lot of stress. In the lodging sector, hotel sector, I think you know from the depths of the market and 06' and 07' and 08'. I think the hotel markets come back very strong. We can see a lot of construction and the multifamily market. Some markets are getting overbuilt, but I still think there's a high demand for that, so I don't see. Again, construction is taking place. There's more competition for tenants, but fact of the matter is the balance of supply and demand is such that landlords are still getting decent rents.
What role are government-sponsored organizations playing in the real estate market today? Tom Fink stresses that government-sponsored agencies are still very important factors in today’s real estate marketplace.
What is the change in the level of non-performing debt and which way is the trend going? Tom Fink discusses the delinquency severity breakdown, saying “we’ve seen a real decline in the overall level of delinquencies in the market.”
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.
Would a rise in interest rates affect the coming wall of maturities? Tom Fink states that if interest rates were to go up substantially that would provide an issue for the marketplace because of the uncertainty of the volatility.
After discussing New York, Tom Fink discusses markets around the world from an equity perspective and how there's an awful lot of money is still available for pursuing equity investments in real estates around the globe in terms of debt.
The New York real estate market is doing relatively well. How is New York doing compared to the country as a whole? Tom Fink illustrates by showing the nation sectioned into regions and shows the delinquency rate in each region.
When asked about the important emerging technologies in the marketplace, Tom Fink replies, “I think we still have a long way to go before technology is really a factor in the commercial real estate market space. But, I think it’s still an exciting time”.
Tom Fink discusses the estimated upcoming commercial real estate debt maturities with annual maturities by lender type. The last 3 years have shown a continued erosion of the amount that’s due in 2016 and 2017 as people pre-pay loans.
The real estate industry has made a strong rebound since 2009 – it’s healthy, back on its feet and active. Rates continue to be at a historic low and there is still a huge amount of stimulus outstanding.