2020 MBA Conference - Market Update
Greetings from Charlotte!
The Medalist Team recently returned from San Diego having attended the annual CREF Conference where we met with over 50 lenders including most of our correspondent life insurance lenders. It was a busy three days and the best conference I’ve attended since joining the company.
Based on feedback gathered from the lending community, 2019 was an exceptional year with the majority of lenders reaching or exceeding their mortgage investment allocations. Commercial and multifamily originations backed by income-producing assets rose by an estimated 14% year over year which correlates with the record-setting year of production Medalist had internally securing $1.71 billion in debt financing!
Fueled by steadily declining interest rates and favorable market conditions, demand for commercial and multifamily properties remained strong throughout the year. I remember reading articles a year ago describing the likelihood of a 3% 10-Year treasury yield that would continue to rise and potentially put pressure on property values and decrease the demand for debt. Instead, given the coronavirus concern this week the 10-Year fell to 1.38%. It is a great time to be a borrower!
The current rate environment seems to be signaling uncertainty about the direction of the economy. That, coupled with the impending presidential election and other factors, has caused some concern for lenders about where quality mortgage investment opportunities will come from this year because of a perceived slowdown in the acquisition market. We learned at the conference that some of our life insurance lenders remain aggressive for core product but will also consider opportunities beyond leverage thresholds they’ve historically underwritten to chase yield. Additionally, more of those lenders are exploring floating rate, bridge products as another avenue to chase yield, but also to position themselves to execute the permanent loans upon stabilization. These programs will selectively look at deals $1mm and up. We also heard more aggressive construction to perm strategies with lenders entertaining partially leased and speculative deals.
Agency lending markets experienced a slight pause last summer as they hit their annual allocation heading into the third quarter after a big Q1-Q2. Fannie Mae and Freddie Mac originations slowed over those months as they effectively priced themselves out of the market while revisions to the caps were being drafted. The FHFA subsequently announced a new cap structure of $100 billion for each enterprise for the five-quarter period between Q4 2019 – Q4 2020. Going forward, the FHFA has indicated that 37.5% of all business must be mission-driven affordable housing. It’s important to note that this is not necessarily rent-restricted product, but properties with rent levels that meet affordability tests. We continue to hear from our agency originators that significant pricing waivers are available for multifamily product that meets these standards. Please reach out to your Medalist producer for more information.
Multifamily and industrial properties remain lenders’ preferred asset classes. Given where we are in the cycle, lenders are underwriting Class-A mid/high rise multifamily more conservatively as we begin to see signs of softness in various markets for that product. Instead, they are more aggressive for garden-style deals delivering at lower costs per unit comparatively.
Lenders can’t seem to get enough industrial product as fundamentals remain healthy. Strong consumer spending in 2019 translated into robust retail sales, which filtered to industrial supply chains and subsequently leasing demand. National vacancies for industrial product are at historical low of 5% due to e-commerce and 3PL growth. Construction activity still measures at a cyclical high with southeastern markets leading new development activity nationally as a percentage share of inventory. Look for continued flow of institutional capital to these southeastern markets.
Office and retail round out the core asset classes and appetite for those deals has not diminished although the ‘Amazon effect’ and e-commerce are constantly being analyzed for their impact on retail. Service-oriented retail is preferred and lenders are paying close attention to market share and store sales for grocery anchors. Similarly, lenders are favoring granular and diversified rent rolls for office. Both asset classes appear to be underwritten more conservatively by lenders.
Looking ahead to 2020, commercial real estate fundamentals remain strong in our markets stemming from an economy that continues to grow. In-migration to towns in the southeast continues with an average of 50 people moving each day to cities where Medalist has an office. Our lenders have been given their allocations for the year with most receiving goals exceeding the previous year’s production. They remain aggressive for quality product and multifamily and multi-tenant industrial remain at the top of lenders’ lists, but quality deals will not be overlooked due to asset class. We heard 2% handle rates are currently being quoted and locked for core deals at the conference.
Now is a great time to contact your Medalist producer about potential financing options and take advantage of these attractive rates. Please feel free to call us as you’re analyzing deals in the market. We’re always happy to be a sounding board and provide current terms. 2020 is off to a great start and we look forward to assisting you with any of your financing needs!
Tom McHugh, Producer