Nine Takeaways from Day One of the MBA CREF Conference
The mood on the show floor at the annual MBA Commercial Real Estate Finance/Multifamily Housing Convention & Expo,, which is taking place in San Diego this week, is an odd mixture of optimism and uncertainty. With ealthy property fundamentals and few concerns about overbuilding in the commercial real estate space, mortgage bankers and financial intermediaries feel a certain level of confidence in the market. But worries about the potential implications of proposed tax reform, the strength of the dollar, the possibility of trade wars and other unforeseen geopolitical events are making the near-term future harder to predict than it was in years past. Here are the takeaways from Monday’s panels and discussions:
Lenders are concerned about what kind of impact the proposed tax reform might have on the commercial real estate industry. While it’s uncertain at the moment what the new tax legislation may look like in its final form, details like the proposal to do away with depreciation on real estate expenses are giving MBA leadership pause, and causing it to ramp up its lobbying activity in Washington. “If you thought 86 was a big deal, I really encourage you to buckle up,” said David H. Stevens, president and CEO of MBA, referring to the 1986 Tax Reform Act, which led to a real estate downturn. “It’s the law of unintended consequences,” noted Gregg Gerken, executive vice president and head of U.S. commercial real estate lending with TD Bank. “What will happen? Who knows?”
Given the current economic and geopolitical climate, lenders should make sure they are prepared for any and all possible scenarios, according to Mohamed A. El-Erian, chief economic advisor at life insurance firm Allianz and former chair of President Obama’s Global Development Council. El-Erian noted that according to market consensus, 2017 should be a similar year in terms of economic and commercial real estate activity to 2016—with projected 2.0 percent to 2.5 percent growth in U.S. GDP and continued caution on the part of Central Banks throughout the world when it comes to fiscal policy. He cautioned, however, that “after you run sophisticated market economies at low growth for a long time, you start getting wreckage: economic, political, financial.” The stress on the system has been evidenced by unexpected events such as Brexit and the election of Donald Trump. As a result of the current geopolitical uncertainty, in 2017, industry insiders should give more weight to the likelihood of outlying events occurring, El-Erian said. “You’ve got to ask yourself ‘What could go badly?’ and what mistake you can afford to make, and what mistake you cannot afford to make.’”
MBA economists suspect that encouraged by strong job growth and a stable economy, the Federal Reserve may raise benchmark interest rates four times this year, instead of the more widely expected two times. The 10-year Treasury will likely reach 2.8 percent by the end of 2017, according to Michael Fratantoni, chief economist with the MBA.
In a positive development, the volume of loan maturities expected in 2017 has gone down from the year-ago projections due to early refinancing and defeasance activity. Currently, $176 billion in commercial real estate loans are expected to come due in 2017, noted Jamie Woodwell, vice president of research and economics with the MBA. Last year, the figure was at $208 billion.
Unlike during the previous cycle, borrowers have not been pushing the envelope on trying to finance new construction projects with looser loan terms. In fact, “They are being very disciplined,” according to Gregg Gerken. “They don’t want to give projects back.”
The overbuilding in the multifamily sector has been exaggerated, Gerken said. Demographic studies have shown that the rate of household formation among Millennials is far exceeding supply, he noted. So while some markets have seen high levels of construction, “absorption has been surprisingly strong nationwide.”
The retail sector, on the other hand, is continuing to undergo a metamorphosis, and no one knows exactly what the result will look like, according to Daniel J. Mullinger, executive vice president for the Western region with PNC Real Estate, a commercial real estate lender and servicer. “The U.S. is still over-retailed and we are seeing the signs of that stress in the market,” he said. But, “the quality retail locations will survive and we’re really trying to focus on the quality.”
One challenge office building owners are encountering with their projects is that many tenants no longer feel comfortable signing 10-year leases, noted Paul LeBeau, principal and CFO with Bollert LeBeau Commercial Real Estate, a San Diego-based investment and development firm. The preference today is for three- to five-year leases. The lack of long-term tenant commitment makes it more challenging to secure financing, LeBeau noted.
It’s also tougher to secure financing for loans under $20 million because many banks and insurance companies have cut overhead, resulting in fewer mortgage bankers available to work on those transactions, according to LeBeau. “There is a lot of capital out there, but it is tougher to find it and find the fit for your deal,” he said.
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