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Nine Takeaways from the MBA’s CREF/Multifamily Convention and Expo 2018

February 19, 2017



Nine Takeaways from the MBA’s CREF/Multifamily Convention and Expo 2018

As the annual MBA’s CREF/Multifamily convention got underway this week in San Diego, attendees expressed a healthy level of appetite for originating new loans and a desire to lend the same amount or more this year than they did in 2017. Last year, commercial and multifamily mortgage originations increased by 15 percent compared to 2016, according to preliminary estimates from the MBA’s quarterly survey of commercial/multifamily bankers. With a growing number of players in the debt space, that growth rate is likely to be matched in 2018. But greater competition might also come with some downsides. Here are the takeaways from day one of the show:

1.The increasing number of debt funds in the marketplace is putting pressure on banks to offer higher leverage, lower pricing and no recourse to attract borrowers, according to Kathleen Farrell, head of commercial real estate for SunTrust Bank. “There’s a new fund every couple of weeks,” noted Chris Niederpruem, managing director of CIT Real Estate Finance. “Their prices in the past couple of weeks have really dropped.”

2.However, most banks remain reluctant to offer terms matching those of alternative lenders. “A lot of us have long memories about difficult work-out situations,” Farrell said. Doug Faithfull, executive vice president and chief lending officer with Cambridge Savings Bank, echoed that sentiment. “In 2018, I’d like to lend more, but I actually expect to lend less because of the competition. We want to maintain our credit standards.”

3.At the same time, debt funds are beginning to feel the heat from foreign players wanting to invest in U.S. real estate debt. “Foreign capital is a positive—they are investors in all of our funds,” said Jimmy Yung, managing director of Blackstone Real Estate Debt Strategies. “But it’s also challenging because they are starting to lend to our borrowers at lower yields compared to [our investors].”

4.Bankers currently feel an “insatiable appetite” for loans underwriting industrial projects, according to Farrell. She noted that it took some time for SunTrust to get comfortable with speculative construction deals in the industrial space, but this is a sector where “it’s really a case where ‘if you build it, they will come.’” Luxury multifamily projects, on the other hand, are gradually falling out of favor with lenders because of potential over-supply issues in that space. In 2018, upscale multifamily “is a piece of the business we are not looking to grow necessarily. We tend to be cautious on multifamily,” noted Niederpruem.

5.When it comes to the office sector, banks may not be as enamored of co-working concepts as other players in the marketplace. While the office sector may be evolving overall, there is concern companies like WeWork may or may not be around in the long term, said Farrell. “The future is still a little bit uncertain around the impact they are going to have in the office space.”

6.Meanwhile, banks continue to have to guess which loans fall under the HVCRE regulations, as “there’s no consistency whatsoever how you define [it],” said Farrell. So if SunTrust executives feel the construction loan pencils out and the borrower is a someone they like to work with, they will go ahead with the deal. Cambridge Savings Bank, meanwhile, has stepped away from some attractive deals that may have had an “HVCRE component,” according to Faithfull.

7.Most panelists at the show expect interest rates to rise this year, and some believe this will have a negative effect on the commercial real estate market. “We will see a negative effect on asset values,” as a result of rising rates, said Greta Guggenheim, CEO and president of TPG Finance Real Estate Trust. “We really stress the exit of the stabilized cash flow with higher interest rates.”

8.Likewise, most speakers seemed to agree that the current real estate cycle is in its later stages, but no one expressed the belief that a downturn was imminent. “There’s no indicator right now that says a recession is coming right away,” according to Farrell.

9.In a guess as to what is going to cause the next recession, Victor Calanog, chief economist and senior vice president with research firm Reis and Ryan McCullough, real estate economist with CoStar Portfolio Strategy, both pointed to the Fed potentially missing the mark on monetary policy. “The scary thing is that no one has a good idea of where the natural rate of interest is in the United States,” said Calanog. According to McCullough, historically, the two most common causes of recessions have been “the Fed over-tightening and energy crises.” (National Real Estate Investor/Elaine Misonzhnik)



Tech Firms Continue to Seek Out New Markets for Expansion

As the U.S. economy continues to evolve, the high-tech sector is growing at four times the rate of the national economy and is expected to generate 9 million new jobs between 2012 and 2022, according to the U.S Bureau of Labor Statistics (BLS). And with stiff competition for talent in major existing tech hubs, including San Francisco and Seattle, tech companies are opening offices in new markets, according to Colin Yasukochi, director of research and analysis for Northern California with real estate services firm CBRE. They are looking at cities that have a critical mass of STEM (science, technology, engineering and mathematics) talent and/or universities graduating significant numbers of STEM professionals. Currently one of the fastest-growing tech markets in the country, Phoenix is an example of an emerging tech hub, as the number of people employed in tech occupations over the last five years has grown by 48 percent, according to real estate services firm JLL. The region has a relatively low cost of doing business, an affordable cost of living and several universities, including Arizona State University. JLL reports that nearly 40 percent of the population in the Phoenix region over age 25 has an associate degree or higher, about 31 percent holds a bachelor’s degree or higher, of which about 24 percent are STEM degrees. Consequently, Phoenix experienced nearly 8 percent net absorption in office space, and Tempe, where Arizona State is located, saw office rents climb about 28 percent over the two-year period in 2015 and 2016, according a the CBRE report. Julia Georgules, JLL senior vice president, director of technology research and co-author of JLL’s Tech Office Trends 2017 report, notes that while there’s still lots of growth in top tier tech markets—San Francisco, Seattle, the Silicon Valley, Boston—these markets also have the most expensive cost of living. Educated millennials want a work/life balance, she says, and are migrating to cities like Nashville, Tenn. because they offer a relatively low cost of living and an attractive lifestyle. “Well-educated new graduates are going to places like Denver and Salt Lake City—the Silicon Slope—because they offer an active, outdoor lifestyle, and tech companies are chasing them,” adds Steppen Kammerer, JLL senior vice president and technology group lead. As a result, he notes, “New tech hubs are popping up in markets across the country.” Over the last five years, for instance, the number of people employed in tech occupations in Denver grew by 19 percent. Foremost among the considerations for a tech company considering entering a new market is the talent pool, says Georgules. Secondly, the company will look at how attractive is the specific location or district within that market is to millennial employees and what it amenities it offers. The availability of attractive housing and entertainment options nearby, a pedestrian-friendly setting and adequate parking all make a difference. Lastly, what is the cost and condition of real estate; if it’s a second-generation asset, can it be modified to attract talent and what would that cost? Over the last few years, 25 cities have achieved double-digit job growth in the tech sector, according to CBRE’s 2017 Tech-20 report. These include Austin, Texas, Denver, Charlotte, N.C., Nashville, Portland, Ore. and Atlanta, among others. Thirteen cities also achieved double-digit rent growth, CBRE reports. However, the influx of tech companies tends to drive a market’s vacancy rate down and rents up, Yasukochi says. And while this is good for landlords, continued rent growth in urban centers is causing an exodus of non-tech office users to lower-cost space in suburban markets. Expansion in the tech industry is expected to continue in 2018, albeit at a slower pace, due mostly to insufficient talent to fill a growing number of jobs, according the CBRE report. “The tech sector has been growing so fast since 2011, its bound to slow down,” Yasukochi says. “The lack of talent is putting constraints on growth. Companies can’t fill jobs.” CBRE predicts that the tech industry’s positive impact on the office market will last through 2019. (National Real Estate Investor/Patricia Kirk)