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.
Issue link: http://cire.epubxp.com/i/700533
July | August | 2016 Commercial Investment Real Estate CAPITAL SPIGOT REMAINS OPEN by Beth Mattson-Teig Borrowers continue to revel in a financing market where capital is both cheap and plentiful. Yet, as the same time, debt and equity sources are more disciplined when it comes to deploying that capital compared to the previous cycle. Even as lenders have become more aggressive on rates or terms to win deals in a competitive lending marketplace, they are still sticking to underwriting requirements. "All of the regulation has really put a big governor on them, which has resulted in lenders not getting ahead of themselves," says Ken Riggs, CCIM, CRE, MAI, executive managing director and president at Situs RERC in Houston. Volatility in commercial mortgage-backed securities spreads in 2015 and into early 2016 did create some uncertainty in that market in late 2015 and into 2016. Specific to U.S. issuance, first quarter 2016 volume was down 30 percent compared to the prior year at $19.0 billion, according to Commercial Mortgage Alert. Although that may create some concerns for borrowers that are more dependent on CMBS financing, such as deals in tertiary markets, other lenders have been stepping in to fill the gap. That liquidity is good news for borrowers looking to finance new acquisitions and development projects, as well as refinance existing loans made at the peak of the market in 2006 and 2007. Commercial loan maturities are expected to surpass $400 billion annually in both 2016 and 2017 — approximately $100 billion more than 2015 maturities, according to a CBRE 2016 capital markets report. Although there is ample debt and equity capital available to support refinancing this year, the report noted that maturing loans with credit quality issues could be a bigger problem in 2017. The consensus is that financing rates will continue to hover at near historically low levels in the near term. Even though it is likely "one of the great mistakes in history," the Federal Reserve will likely keep the short- term rate at 0.75 to 1.00 percent for the remainder of the year, says Peter Linneman, NAI global chief economist. Although the Fed only has direct control on setting the short-term lending rate, some of the global uncertainty related to slowing growth in China, lower oil prices, and Britain's possible exit from the European Union will keep demand higher for U.S. bonds, which likely means that the 10-year Treasury also will remain low. "Our forecast for the long-term rate is that they will stay low longer, and that is what we have seen," says Riggs. "I think that is going to continue, mainly because of the global pressures." a favorite, because of the strong demand and demographics, given that homeownership is at its lowest level in nearly 50 years. Industrial assets still have good upside, and buyers con- tinue to pursue retail properties that are well- located or have a good tenant mix. One question is how comfortable inves- tors are going into smaller metros in order to capture higher yields. "Are they willing to go into secondary and tertiary markets where cap rates haven't come down as much as one might expect? I don't know that there is one blanket answer, because it is becom- ing more nuanced," says Jeffrey Havsy, chief economist at Americas Research and man- aging director at Econometric Advisors at CBRE. Investors are digging deeper to figure out where there is potential rent and value growth, as well as what the risks might be in certain markets. It makes it a little trickier and takes a little longer to work through that analysis, Havsy says. Property Sector Outlook The ULI Consensus Forecast anticipates continued commercial price appreciation and positive returns, but at more subdued and decelerating rates; above-average but lower rent growth rates in all property sec- tors; and better than average vacancy rates in all sectors, except for retail. Real estate owners and investors are still seeing growth moving at a healthy clip that is well ahead of the rate of inflation. One of the factors that could be dragging down those numbers is that, up to this point, the market has been improving amid very low construc- tion numbers. Now that development activ- ity is picking up, new supply is hampering growth in every sector except for retail, says Peter Linneman, NAI global chief economist. Retail. Economists see retail as a bit of an exception in the broader industry forecast. Vacancies have been improving since peak- ing in 2011 at 13.1 percent and are expected to decline to 10.9 percent this year. However, those vacancies remain elevated, which is expected to produce below-average rent growth, according to ULI's forecast. Retail also remains a bifurcated market. "Some of the best centers are full with great rent growth and they are just crushing it," Havsy says. Meanwhile, there are other cen- ters that are really struggling. "In retail, it really depends on location, physical struc- ture, and tenant mix," he adds. "But you have more winners than losers that are really separated than you do with some of the other property types.". Also, demand for brick-and-mortar space is growing even while the internet is chipping away at retail sales, notes Linneman. "e real blessing for retail is that there is virtually no new supply," he says. In fact, the total amount of retail space is actually shrinking. A small amount of new space is coming online, but at the same time old and obsolete retail prop- erties are being redeveloped or converted to nonretail uses, according to Linneman. Industrial. e industrial sector has been holding its ground against headwinds that