Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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32 March | April | 2016 Commercial Investment Real Estate national lenders who choose not to operate in those smaller areas. Interest Rates. As we closed out 2015, the Federal Reserve began its f rst steps in increasing short-term interest rates and predicted future increases throughout the new year. Because real estate pricing is more heavily tied to long-term rates, we anticipate that this initial move by the Fed to increase short-term interest rates may not have a signif - cant impact on com- mercial and investment real estate lending. In fact, when the Fed announced the short- term rate increase in December 2015, t he 10-year Treasury bill was at 2.30 percent. As of January 25, it was at 2.01 percent. T e long- term Treasur ys have become a global option that is of en inf uenced by many factors unre- lated to U.S. short-term rates. With this in mind, the recent increase in short-term rates or a slight increase in short- terms rates throughout the course of the year will not have a signif cant ef ect on capital markets in 2016. Cost of Capital. Spreads that previ- ously increased or widened in the third and fourth quarters of 2015 have subsequently decreased, leading to a lower all-in rate or total cost of a mortgage in 2016. For example, large life insurance compa- nies providing f nancing on large low-lever- age loans at the end of 2015 were originated at prices with a 1.90 percent spread over a 2.30 percent 10-year T-bill for an all-in rate of 4.20 percent. As of late January, the pricing is 1.65 Who's Lending? Outstanding commercial/multifamily mortgage debt by lender class, 3Q15 Source: Mortgage Bankers Association percent spread over a 2.01 percent 10-year T-bill for an all-in rate of 3.66 percent. T is supports the thought that we should be careful assuming the cost of capital will definitely increase in 2016. That being said, the stricter risk retention legislation and regulations af ecting the commercial mortgage-backed securities market will add cost to the CMBS pro- cess, potentially af ect- ing the cost of capital in 2016. To what extent t he s e c ha nge s may impact the cost of capi- tal is yet to be seen, but it is important to keep in mind when deter- mining the anticipated cost of capital this year. Investor Sentiment and Focus. A Decem- ber 2015 survey of the 60 top commercial and multifamily mortgage origination f irms by the Mortgage Bank- ers Association found that 97 percent of respondents expect lenders to have a strong or very strong appetite for loans in 2016. In addition, 67 percent of these respondents anticipate volume to increase by approximately 5 percent over 2015 levels. T is sentiment by the top commercial and multifamily origination f rms is con- sistent with 10 institutions we surveyed directly. Each of the f rms surveyed further 2015 LENDING ENDS ON AN UPSWING "We saw strong volumes of borrowing and lending for commercial real estate in 2015 and in particular in the fourth quarter," said Jamie Woodwell, vice president of commercial real estate research for the Mortgage Bankers Association. "In fact, 4Q15 was the fourth highest quarter for borrowing and lending on record. Banks, life insurance companies, and Fannie Mae and Freddie Mac saw their highest originations volumes on record. Of the major investor groups, only the CMBS market didn't break a record for originations. In terms of overall borrowing and lending volumes, 2015 as a whole was likely second only to 2007." th to i over 2 T is and mult si st en t w urse f cant 16. that previ- th e th ir d an d m rt- u rs CMBS, CDOs, and other ABS issues 18.8% Life insurance companies 13.8% Agency and GSE portfolios and MBS 16% Others 13.8% Banks and thrifts 37.5%