Commercial real estate credit crunch coming?

Lenders turn cautious as six-year recovery in commercial real estate matures

Mar.March 20, 2016 10:30 AM

Lenders may fund fewer risky real estate projects this year than in 2015 as a six-year recovery in commercial property values shows signs of aging.

Mark Myers, head of the commercial real estate business at Wells Fargo, told Bloomberg the lending industry will show more caution as 2016 progresses.

“We’re getting late in the cycle,” Myers told Bloomberg in a telephone interview. “If the economy continues to grow ever so slowly, demand for commercial real estate will continue to grow ever so slowly. To the extent that the economic climate goes in the wrong direction, it’s going to have an impact on demand for commercial real estate.”

The Federal Reserve in January released a survey of senior loan officers showing that tighter bank underwriting criteria already had reduced the availability of credit for commercial property owners at the end of last year.

A surplus of pricey condos and hotels has emerged in the wake of a construction boom in Manhattan, Miami and other metropolitan markets.

Real estate developments in those high-end segments of the market are the developments most vulnerable to credit complications, Peter Sotoloff, chief investment officer of Mack Real Estate Credit Strategies, told Bloomberg.

Sotoloff’s invesment firm in recent months has provided $275 million to affiliates of Related Companies for Miami condominium projects. He told Bloomberg his firm has become more selective in choosing projects to fund: “The antennas are up. The bar is much higher.”

Dysfunction in the commercial mortgage bond market is hurting credit availabilility. The issuance of commercial mortgage backed securities, or CMBS, has decelerated.

The slowdown led analysts at Bank of America reduce their forecast for CMBS issuance in 2016 by 30 percent to $55 billion. Wall Street firms discouraged by new regulations have backed away from CMBS issuance.

Leveraged commercial property owners are seeking alternative refinancing options due to the CMBS market breakdown. Sotoloff told Bloomberg, for example,  that Mack Real Estate Credit is working on a $125 million mortgage loan to a property owner that initially sought financing in the CMBS market.

“We’re going to see more private lenders taking up the vacuum left by regulated lenders leaving the sector,” said Richard Mack, chief executive officer of Mack Real Estate Credit, told Bloomberg. “The process by which this occurs is going to be volatile and that’s part of what we’re living through now.” [Bloomberg] — Mike Seemuth

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