Browse Category: Finance

National Refinance Roundup

Quarter to quarter, week to week, day to day, the price of capital fluctuates. The changing cost of money has a lot of say in what’s possible for any given commercial real estate development, so getting indebtedness exactly right is an essential, foundational job. Who’s refinancing commercial properties and where? Let’s take a quick look at the recent national scene.

Fed Beige Book: General Increase In CRE Activity

Yesterday, the latest edition of the eight-times-annually published Federal Reserve Beige Book arrived (or, as the kids say, dropped). What lies within its muted brown pages and cream-tone cover*?  Good news for the state of the commercial real estate industry.

Construction and Real Estate

Construction and real estate activity generally expanded in late February and March, and contacts across Districts maintained a positive outlook for the rest of the year. Residential real estate activity strengthened, on balance, with robust growth in San Francisco, Cleveland, and Boston, but more mixed reports from Dallas, Kansas City, and Atlanta. Several Districts credited a mild winter for stronger home sales, and the pace of home price increases picked up in a number of Districts. Multi-family construction remained strong in most Districts. Chicago, Cleveland, and St. Louis also noted some improvement in demand for single-family home construction, and a contact in San Francisco reported backlogs of more than six months for new single-family units. Commercial real estate activity generally increased, with leasing activity and rents rising in many Districts: particularly strong leasing was noted in retailing in Chicago and in the industrial sector in Dallas. Vacancy rates either moved lower or were unchanged in most Districts. Most Districts reporting on nonresidential construction said that demand increased. Contacts in Boston said the education, health care, hospitality, retail, and office sectors all contributed to its recent construction boom. Nonresidential contractors in Cleveland cited broad-based demand, with particular strength in education and healthcare projects, where several builders expressed concern about their capacity to take on additional projects. In contrast, Chicago noted continued weak demand for industrial construction, and Philadelphia reported fewer starts of new nonresidential projects.

The Federal Reserve Beige Book gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector. An overall summary of the twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis.

Read the entire Beige Book April, 2016 report here.

* The Beige Book is not colored beige, nor is it a book.

The Big Payback: 2016’s Non-Bank Commercial Debt Maturity Spike

English: Mortgage debt

The Mortgage Bankers Association’s combined national numbers for commercial mortgage debt held by non-banks tell an interesting tale. The total dollar amount of maturities has risen a sharp 51% from 2015, meaning more debt will mature – yet the bottom line is that principal balances are increasingly prepaid and paid-down. Michael Gerrity’s piece in World Property Journal spells it out:

“More commercial and multifamily mortgages are maturing in 2016 and 2017 than have the last few years, but early refinancings and pay-downs are chipping away at those totals. The bottom line is that the ‘wall of maturities’ that has been the focus of concern the last many years is receding,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research.  “Last year’s survey tracked $225 billion of commercial and multifamily mortgages that were set to mature in 2016.  This year’s survey found that 2016 maturities had dropped by 18 percent, to $183 billion as loans prepaid and paid-down.  That’s roughly the same amount that matured in the year 2010.”

The “wave of maturities” in the space — approximately $350B worth set for the three years 2015-2017 — do suggest that a whole lot of refinancing is expected for those loans needing it.  The specter of rising interest rates means the price of financing may be set on a collision course with the demands of of extra commercial borrowers feeling the pinch.

Are There Warning Signs For A Hot CRE Market?

Coming off its second-strongest January ever, the national market in commercial real estate looks as robust and promising as it ever has. But are signs of a downturn hidden in all the good news?

Real Capital Analytics SVP Jim Costello thinks there are.  Costello has identified a series of warning signs in the national CRE market that he believes foretell bad news for national commercial property as an engine of profitability.  They include:

  • Deal volume year-over-year is lower (-7%), despite big gains in the total number of dollars changing hands (+12%). Costello cites the momentum in the lost volume, making it harder to perform the comps that ultimately inform and inspire so many new deals in CRE.
  • The transaction types lend to the alarm, according to Costello.  He cites a significant 42% of the market was taken up last year with transactions at the “portfolio-level” or “entity level”, where aggregations of properties hit the market together. He cites the sale of individual buildings as the “bedrock” of the CRE market, and points to such a large portion taken up with stratospheric marriages of big capital and big portfolios as a negative for ongoing growth.   He further cites that individual building transactions were down 18% from the previous year.
  •  CCAR testing regulations for banks servicing secondary and tertiary markets made Costello’s list of negative indicators, where capital adequacy testing imposed by Dodd-Frank could add to the worry of creditors contemplating financing of commercial transactions and projects in these smaller markets.

Not a doomsayer roaming the land in sackcloth and ashes, Costello cites the US commercial property market as the fastest growing and most stable in the world and predicts the markets will perform as a “bond equivalent,” attracting capital from around the world seeking safety and performance.  But with numbers as high as they are, Costello’s cautious* voice could find validation in a market that shows any signs of getting away from its fundamentals.

*EDITOR’S NOTE: While Jim’s findings do sound a note of worry, calling his perspective “bearish” is overstating it. We’ve changed the description to “cautionary.”

Latest Fed Beige Book: A Mixed Bag Nationally For CRE

Last week saw the publication of the latest Beige Book, the six-times-annually published economic activity report from the Federal Reserve Bank that looks at the whole country divided by Federal Reserve Districts.  You can read the entire Fed Beige Book after the link. Below find the key takeaways for commercial real estate nationally:

Real Estate and Construction (Nationwide)

Most reporting Districts characterized nonresidential real estate activity as modest to moderate; Boston and New York indicated little change. Rental rates rose in more than half of the reporting Districts, and vacancy rates were mixed. Most Districts reported modest or moderate growth in commercial construction, and the Dallas District noted high levels of industrial construction in Dallas-Fort Worth. Contacts in the Atlanta District expect construction activity to increase slightly, while contacts in the Philadelphia, St. Louis, Minneapolis, and Richmond Districts expect overall commercial real estate activity to continue to strengthen at least modestly.

[…]

Banking and Finance (Nationwide)

Lending activity appears to have improved on net. Loan demand grew on balance in the Philadelphia, St. Louis, and San Francisco Districts. Cleveland, Richmond, and Kansas City reported stable credit demand, on balance, while Dallas noted some recent softening. Philadelphia reported the strongest loan growth for autos, commercial real estate, and commercial and industrial deals, while residential lending was flat to down.

[…]

Banking and Finance (Chicago District)
Financial conditions tightened slightly on balance over the reporting period. Financial market contacts noted greater illiquidity in the bond market. In addition, a contact in commercial real estate financing reported a decline in interest from institutional investors amid concern that the commercial real estate market was overheated.

[…]

Construction and Real Estate (Minneapolis District)

Commercial real estate activity was moderate to strong since the last report. Retail, office, and industrial vacancies in Minneapolis-St. Paul have been falling and rents have been rising, according to multiple industry reports. In northwestern Montana, commercial vacancies “have mostly disappeared,” with rates stabilizing at about 5 percent, said a local source, while the Rapid City market “has been extremely active these last couple of weeks of the year.” […]

Video Gallery: The Fed Has Raised Rates, But Is More Coming?

The cost of money has come up for the first time in more than nine years: the Federal Reserve Bank announced a raise in its short-term interest rate of a quarter point. For a quick look at various takes on the move, check out the following video gallery:

 

NAR: NAR Chief Economist Lawrence Yun Analyzes Fed Rate Hike

 

Bloomberg video: Fed Raised Rates Without A Hitch And It Only Took $105 Billion.

Bloomberg Video: Fed’s Lockhart Suggests Pace Of Four Raises Over A Year 

 

Bloomberg Video: Don’t Expect Big Profits At Banks In Wake Of Rate Raise

 

NPR: The Fed Raised Interest Rates: So What Happens Next?

 

 

Risk & Finance Survey: Grocery Anchors Worth Avg 35 Basis Points

In the commercial property finance ecosystem, the cost of money is tied to widely used benchmarks such as the federal funds rate. Ongoing rumblings from watchers of the Fed are that the cost of money — aka the Fed’s funds rate — are soon on their way up for the first time in nine years. Remarks from Fed Chair Janet Yellen leading into he December 15-16 Fed meeting seem to support the idea that a boost in rate is on its way.

Ripple Effects

Anticipation of a hike in the cost of money means that spread risk is coming to a commercial property near you.  Spread risk is the risk of change in an interest rate that puts a lender or investor into less favorable terms than when the investment or loan was made.  Spread in this sense usually means the difference in interest rate between that given by effectively nondefaulting securities such as US Treasuries and rates negotiated in the field – rates that govern financing and refinancing for properties in every sector of commercial real estate.

Checking Out Risk Pricing

A fascinating study in rate spread risk was undertaken by Integra Realty Resources, covered by Paul Bubny in GlobeSt.  In “Where The Spread Risks Are,” we get a nice overview of the prices of risk, put into the context of various commercial property development types and loan-to-value ratios.

In the office sector, the widest average spreads can be found in single-tenant non-credit properties in three of the four LTV ranges. For the highest LTV category, 76% to 85%, that distinction falls to multi-tenant suburban properties, with spreads averaging 321 bps compared to 292 for single-tenant non-credit. Conversely, multi-tenant CBD office property loans were financed with lower spreads across all LTV ranges except on deals with an LTV of 76% to 85%.

[…]

For retail, IRR’s survey found that unanchored properties were financed with interest rate spreads averaging 35 bps higher than grocery-anchored properties during Q3. Financing of unanchored retail properties had a median interest rate spread of 264 bps during the quarter.

Read the entire Where The Spread Risks Are article here.

 

Can Having The Wrong Facebook Friends Interfere With Your Financing?

In commercial real estate, as with most commercial financing, a borrower’s personal credit rating looms large in the eyes of “A” list lenders offering the most attractive interest rates.

A recent patent filed by Facebook has raised eyebrows, suggesting that the credit ratings of your Facebook friends could possibly affect decisions made by lenders about you — or by extension, about any entity doing any borrowing where your personal liability is a factor.

As reported in The Atlantic by Robinson Meyer, the online giant Facebook recently made a patent filing totaling many pages, saving the best for last. Nestled toward the tail of Facebook’s US Patent And Trademark Office filing, under a heading “Summary Of The Invention,” (a list containing technologies they seek to patent) Facebook included the following paragraph:

When an individual applies for a loan, the lender examines the credit ratings of members of the individual’s social network who are connected to the individual […]. If the average credit rating of these members is at least a minimum credit score, the lender continues to process the loan application. Otherwise, the loan application is rejected.

The suggestion is that Facebook seeks a patent on the ability to speak to your creditworthiness by allowing analysis of the creditworthiness of your Facebook friends.  Conspicuously missing from the above wording: any mention of a fair analysis of your own hard-earned credit rating.

A Return Of Redlining?

Critics of the practice of amassing Big Data from every corner of the lives of consumers, tenants, or users of a social media platform like Facebook have warned for years about future unintended consequences. It doesn’t take much imagination to see Facebook’s proposal as one such problem. What’s more, the future isn’t the only place where data about borrower’s surroundings have been unethically treated as conclusions about a borrower’s creditworthiness. In the context of the real estate industry, the notion of making credit decisions based upon one’s “neighborhood” has a specific and sad social-legal history, called redlining.

Decades-Old Legal Framing

The recent shifting picture of technology innovation having its way with the credit scoring industry — itself worth its own post — runs up against the legal barriers set down in 1970 under the Fair Credit Reporting Act and, in the case of any loans issued on the basis of such reporting, the Equal Credit Opportunity Act of 1974.  Any classification of Facebook as a credit reporting agency akin to TransUnion or Experian would be a application of laws written decades before social media information began to voluntarily flow from all of us, a troublesome and awkward legal situation to say the least.

While this patent application is preliminary and comes with no evidence Facebook is actually using or marketing credit data on its users, at least one overseas company is claiming to aggregate Facebook and other social media data to provide lending decision support.  From the Atlantic piece:

Which isn’t to say that social-network-based credit is an irreparably bad idea. In countries that do not have America’s financial system, friend scores can help extend credit to those who need it. In Mexico, Columbia, and the Philippines, a company called Lenddo already analyzes someone’s Facebook, LinkedIn, and Twitter to gauge their creditworthiness.

Newest Warning From The East

As if on cue, we find a very recent announcement by China’s government, saying that it will be holding certain online actions of its citizens and their social media friends in bad light credit rating-wise. This news, taken seriously by the ACLU  serves as yet another warning among many:

These days, it’s worth keeping in mind that online, we’re all a small part of Big Data.

The SBA Loan Market: Financing In Greater Demand Than Ever

Nationally speaking, the finance of owner-occupied commercial real estate seems to never get significantly easier. Our current national economic conditions of recovery have not yet heated up the average enthusiasm of bankers for financing sub-$2M expansions in most real estate sectors, which ensures a more or less permanent lending gap affecting small business that Congress has recognized and addressed with the creation of the Small Business Administration.

Dating back to the Herbert Hoover administration, what eventually became the SBA was established by Congress to help businesses hurt by the Great Depression of 1929-39.  Shepherded along by Franklin Roosevelt, the program evolved during World War II to assist smaller suppliers with loans in competing against huge corporations for manufacture of war materiel.  The SBA we know today was created in 1952 by Congress and signed into law the next year by Dwight Eisenhower, spinning it off from the US Department of Commerce into the standalone agency “under the general direction and supervision of the President”.

7(a) – The SBA’s Keystone Loan Program

SBA’s lending and programs are many, but the biggest and most used is called 7(a) Loan Guaranty, where loans up to $5M are available to business for a wide range of purposes including real estate financing.  Terms can reach as long as 25 years while most loan repayments are shorter than that.

Fixed-rate 504 loans

While SBA offerings under its 7(a) program are fairly well known, less widely known is the 504 Certified Development Company loan program. Offering long-term fixed-rate loans for purchases of real estate or equipment, 504 is lauded for lower costs because the fixed interest rates tend to be below-market.

Intermediaries called Certified Development Companies commonly secure 40% of such loans, with 10% coming from borrowers and the remaining 50% coming from a private lender under SBA guarantee. According to the most recently published SBA Quarterly Lending Bulletin, the aggregated number of small business loans outstanding reached almost $600 billion, reflecting a rise year-over-year of 1.7%.

Both commercial industrial (C&I) and commercial real estate (CRE) loans make up small business loans.1 A careful look at these loans shows that they continue to indicate progress in capital availability for small businesses. For example, C&I continues to maintain a positive uneven growth (Figure 2). In addition, the decline in the small business share of CRE loans has slowed. C&I loan standards changed little in the first quarter of 2015, but bankers reported easing standards and terms on loans secured by nonfarm nonresidential borrowing (Federal Reserve’s Board Senior Loan Officer Opinion Survey). While there was not a significant change in demand for C&I loans, respondents reported that the demand was stronger for all CRE loan size categories.

The reminder is that SBA financing is a heavily-used option for the commercial real estate deals that are in the reach of professionals in secondary and tertiary markets.  As the recovery struggles to spread itself evenly across all the scales of local market in the US, 7(a) and 504 programs are there to make that recovery felt in every corner of the economy.

 

Study: EB-5 Challenges, Successes

Since 1990, the EB-5 visa program has been a tool for converting international capital flows into local economic development and employment, creating jobs in targeted areas and offering foreign investors visas for doing so. Funds from foreign investors are often channeled into capital for commercial development projects and a cottage industry around the process has arisen in the years since it first came online.  Commercial brokers and developers across the country have participated in projects funded in part by EB-5 investors, and the interest level is on a steady rise.

Since the time when I published a large list of EB-5 Regional Centers, we’ve seen the program in the news, backing interesting and sometimes even exciting projects all over the U.S.

With Finance Sometimes Comes Allegations Of Fraud

Along with this spike in interest and EB-5 participation has come charges of fraud and abuse from the SEC, such as the recent case of two commercial property developments that allegedly weren’t, both in Seattle. Using private placement memos and subscriptions that, according to prosecutors, did not accurately reflect the project to investors,  has landed one developer in hot water.  While non-EB-5 proposals are just as susceptible to fraud as those under the program, other cases abound, and concerns about lack of transparency as to the program’s effectiveness have been raised.

Report Cites Successes, Challenges, Provides Perspective

A recent Report by the Brookings Institution cites EB-5’s increased utilization despite a “dearth of reliable and publicly available data [on] the economic impacts of regional center investments.

An hour spent with the Brookings report will very well serve the reader interested in understanding the broad shape of the EB-5 program.  It’s invaluable for parsing out the network of intermediaries in the program, understanding compliance requirements and learning the history of successful partnerships between regional centers, investors and the communities they serve.