The (Real Estate Finance) Year in Review and Forecast for 2012

A Perspective from Mike Cantwell, a Principal of Johnson Capital
(re-printed with permission from Mr. Cantwell)

Banks continued their lethargic return to the market with more loans moving off the balance sheets than being added. The Mortgage Bankers Association estimates that there is $2.4 trillion of commercial debt outstanding as of Q3 in the United States. Banks hold 33% of that total, so they are by far the most significant source of capital for commercial real estate. Banks will have lost over $100 billion in their commercial loan portfolios through this year.

CMBS lenders started the year with great optimism and retooling for a return to higher volumes. After a slowdown in the spring and early summer due to legacy loans, this sector was brought to its knees in July. S & P literally stopped CMBS lending in its tracks by the untimely and questionable withdrawal of its rating on the day before a securitization was to settle. CMBS spreads ballooned out to levels that were 100 to 150 basis points wide of Life Company and bank lending. As of December, we are finally seeing spreads come in and some meager volume reemerge. CMBS looks like it will finish with approximately $32 billion of closed transactions, which is up from 2010, but well below the pace that was anticipated at the beginning of 2011.
Life Insurance lenders enjoyed a record year in terms of production. With a total volume for 2011 approaching $75 billion, they were the mainstay of our business. This record level of production was achieved while maintaining low LTV levels and cherry picking only the most stable of assets used for collateral. Part of this record volume can be traced to the lack of competition from banks and CMBS as well as borrower willingness to de-lever.

Agencies: Freddie Mac and Fannie Mae remain solid and are producing loans at near record volume levels. Their multifamily delinquency rates remain at less than .5% and this sector of their business is solid and profitable.

New Construction:Multifamily continues as a good news story with demand projected to continue increasing for years to come and supply lagging behind demand. Rents and values are up and we expect to see a large increase in the number of multifamily permits as well as investment sales activity. Lenders consider apartments to be the preferred asset class. With new starts projected at 188,000 units across the country, opportunity exists for construction lending with our FHA, 221 d4 program as well as the life companies who are now providing low leverage, construction/permanent financing. Other than build-to-suit projects, expect to see little or no new construction of office buildings, warehouses or retail facilities.

Refinancing:Interest rates remain at all-time low levels and we can expect to see relatively flat interest rates for 2012. Only $101 billion of commercial loans mature in 2012, so the real onslaught of refinancing is projected to occur in 2015-2017. Look for banks to continue to move loans off of their books which should be another good source of refinancing opportunities. Also, we expect CMBS to re-emerge as a factor. Freddie Mac, FHA and Fannie Mae continue to offer very attractive rates and terms that most life companies and banks cannot match.

Investment Sales:Commercial investment property sales are surprisingly slow and have not reacted as expected to the low interest rate/cap rate environment. CRE sales are up over 2010 but the total is something close to 30% of the peak years’ activity (’05-’07). However, the trend is up and we expect 2012 to produce a continued increase in sales volume. A great deal of this activity will be a function of the political environment toward the end of the year and the health of the European Union economies.

2012 promises to be just as volatile and unpredictable. However there is good news on the horizon. Interest rates will remain near record low levels. And the top 30 life insurance companies report a collective increase of 20% in their 2012 lending programs. Founded in 1987,

Johnson Capital is one of the country’s top real estate capital advisory firms with eighteen locations nationwide. Mike Cantwell, who has built his 29-year career in mortgage banking and commercial real estate in Denver, is in charge of new business production in Johnson Capital’s Denver office. He is also responsible for the mortgage loan servicing department. To learn more, email:


Costa Rica Real Estate said...

I think its good sign that lenders started the year with great optimism and retooling for a return to higher volumes after spring and early summer.As a Costa Rica Real Estate Expert in my point of view its good sign to start on..

Park City Real Estate said...

It's good to know the forecast of real estate financing this 2012. And with all these positive views towards the progress of economy,it is indeed a great way to face the new year. Thanks!

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real estate finance said...

"Interest rates remain at all-time low levels and we can expect to see relatively flat interest rates for 2012", sounds good for home buyers! There are no better days to own a house than today!