Q&A: Health of CRE Sectors Affecting Lending Activities

By Keat Foong, Finance Editor

Certainly, not all commercial property sectors have recovered. In the view of Warren Higgins, head of mortgage banking at Berkadia,  multifamily, industrial and hotel properties are performing very well. The industrial sector is driven by online shopping, and hotels are replicating the strength of the economy. On the other hand, the retail sector, except for high-end and shopping centers, and the office sector, are still generally weak. These conditions are affecting how lenders are treating loans for the different property sectors. Indeed, there is still “significant difficulty in refinancing” some office and retail property types.

CPE: Have all commercial property sectors recovered in your view?

Warren Higgins: Certainly not. It’s a mixed bag. Multifamily is obviously doing very well and in full recovery and growth mode. As you move through the different sectors, I am personally a fan of industrial and hotel. They tend to mirror the economy very carefully and they have some tail winds behind them as well, particularly industrial properties. You have a shift to online retailing that’s driving a lot of growth in these bigger, massive, distribution facilities. The upcoming Panama Canal expansion is going to increase the ability for some of our ports to service imports and create the need for larger industrial buildings. Hotels tend to mirror the economy. Since the economy is doing well, we are seeing a lot of activity there.

As you move to some of the other property sectors, retail is still struggling, as it reinvents itself and as online becomes a bigger component of consumer shopping. There is certainly winners and losers in there. High-end shopping malls and neighborhood service centers are doing well, and the stuff in between not so well.

Bringing up in the rear is office which is still definitely in the recovery phase. Even though the economy is recovering, most major employers are getting by with either fewer people or going to office hotels and collaborative workspaces which require less office usage for their corporate needs. So, even as the economy recovers, the need for office space is not recovering at the same level. We are seeing hotels sector as definitely a laggard.

CPE: How will your perception of the strengths of the various commercial real estate sectors affect how you treat loans for these types of properties?

Higgins: Certainly, our view of those sectors affects our willingness to finance those sectors. And the availability of capital going into those sectors mirrors that as well. Multifamily is awash with capital. There is a fair amount of capital for hotel and industrial. For retail, most lenders are trying to stick to the winners, and office is generally treated very cautiously and very conservatively. It is tough to make a case that if your building is 80 percent leased that you are going to go much more than that. So, you have to have a powerful set of circumstances to execute office deals anywhere close to the higher end of the leverage end that most borrowers like to be at, such as 75 percent.

Q: What financing volume does your company expect to execute in 2015?

Higgins: We’re projecting growth of about 20 percent as a company year over year. That is based on velocity of business we saw from 2013 to 2014 as well as projected CMBS growth of 20 percent which we think is a good proxy for general marketshare.

CPE: How are general expectations for the interest rate direction this year affecting the market in terms of borrower activity?

Higgins: I think the fact the interest rates are extremely low now, but the fact that they may rise slightly, is helping to generate loan activity. At low interest rates with an expectation that rates may rise–that is generally a formula for borrowers to move sooner rather than later.

CPE: How would you describe the ability of loans to refinance—how much of them are still underwater and/or troubled in the commercial real estate space?

Higgins: I think the general recovery of the economy and the extremely low interest rates we are experiencing now are helping to deal with the fact that many of those loans financed in ‘05, ‘06 and ‘07 were completed at extremely aggressive underwriting terms. Having said that, when you look at properties such as retail and office where the properties have not recovered in parallel with the general economic recovery, those are still experiencing significant difficulty in refinancing. Those will be the “problem childs” as these waves of maturities come through.

CPE: What is your outlook on CMBS. Will there be any changes in terms of investor demand for CMBS in 2015?

Higgins: No. I think there is still strong demand for CMBS bonds. We don’t see that changing in 2015 absent the deterioration of underwriting standards which is a potential possibility but seems to be in check for now.