By Steve Pumper, Executive Managing Partner, Capital Markets, Transwestern
Investor confidence in U.S. real estate continues to accelerate, demonstrating a belief that values will increase on core assets in prime locations as the economy recovers. Investment volume reached $255.1 billion in the first half of 2015, up 36 percent from the first half of 2014, according to Real Capital Analytics Inc. Portfolio and entity-level deals were particularly strong early in the year, accounting for 38 percent of all deal volume in the first quarter alone. In this changing environment, U.S. lenders are finding that issuing debt has become as competitive as placing equity in the most attractive deals.
The markets drawing the strongest capital flow continue to be the New York City boroughs of Manhattan and Brooklyn, Boston and Washington, D.C.’s central business district. Miami has taken off, and deal flow tied to a recovering economy in Atlanta has piqued lender interest. Downtown Chicago, Austin, Dallas and Denver continue to perform well, as do Seattle, the San Francisco Bay Area and Los Angeles. A certain segment of investors is also interested in buying assets in Phoenix, which has turned a corner and is rapidly improving.
Industrial properties are currently the preferred asset class of the industry, experiencing the greatest amount of deal flow. During third-quarter 2015, the industrial sector experienced a 69 percent increase in deal flow year-over-year for Certified Commercial Investment Members (CCIMs) who participated in the CCIM Institute’s Quarterly Market Trends survey. Given the average deal size for industrial assets, lenders are more apt to pursue debt origination for larger projects or portfolios.
As debt markets become increasingly competitive, borrowers are enjoying interest-only terms, which a few years ago were available for up to two years but now can stretch to 10 years, even when the loan carries a low interest rate. Also boosting liquidity are higher loan-to-value ratios, which are trending to 65 percent, up from 60 percent. Conversely, interest rates increased in the third quarter for seven- and 10-year loans by 30 and 40 basis points, respectively, following concerns about whether the Federal Reserve would raise rates. The reaction from borrowers created a shift to shorter-term loans, which, in effect, will result in buyers taking on more refinance risk in the current cycle.
Meanwhile, investor interest has advanced CMBS volume by double digits year-over-year in the U.S., representing 21 percent of all debt origination through the end of third-quarter 2015. A total of $77.6 billion in CMBS debt was issued on 113 deals during the first three quarters — a 12.7 percent increase in volume from the first three quarters of 2014, when $68.9 billion was issued on 95 deals. Despite the increases, the CMBS market does not appear to be overheated at this time.
Investors may see additional competition for their transactions as more national and international players expand into the space. Debt will continue to be very attractive, keeping rates low for the foreseeable future. This positive outlook is echoed by many economists, who don’t expect another recession until 2018 or 2019.