The debate about how 2016 is going to fare for the economy and commercial real estate is ongoing. Despite initial market volatility, some believe it will be a strong year. Others aren’t quite as optimistic. Here are the top 5 things you need to know about debt and loans this year.
1. Longer Loans
The potential Fed rate hikes will be one of the biggest market influences. While the rates may not be raised four to six times, expectations of a hike can raise the short end of the yield curve, flattening or even inverting it. Both cases can cause borrowers to migrate to longer-term loans including 10-year CMBS loans. Another major factor will be refinance opportunities. The 10-year loans that were produced in 2006 are now coming due, and these borrowers can refinance with CMBS lenders. While the market size of CMBS deals in 2006 was around $230B, the amount due for refinancing is about $90B due to loan prepayment, defaults, and differing term lengths.
2. The Strength of Fannie Mae and Freddie Mac
Last year both agencies gave out more than their quotas, and Freddie Mac reported its first loss in four years. There is optimism that both will grow in 2016 and increase their market share. In comparison to other financing sources, they offer cheaper debt. The spreads on Fannie Mae and Freddie Mac’s multifamily bonds have tightened.
3. Influx of CMBS Lenders
The CMBS market has seen a major influx of lenders. There were 47 lenders at the end of 2015, up from only a handful 5 years ago. New lenders have to offer lower interest rates or more proceeds to be competitive. This results in more levered deals, and investors have begun to refuse deals without greater spread or yield. Lower-rated and AAA bonds have been affected by wider spreads and underperformance. As people see the relative value of highly credit enhanced CMBS, some believe the spreads will shrink. This makes CMBS loans a pocket of opportunity.
4. Investment from China
If the dollar stays strong, there is a potential for increased foreign investment including CMBS purchases from China. Investors may be drawn to the safety of US dollar-denominated CMBS bonds as a result of monetary policy that devalues the yuan as an economic stimulus. Some recommend buying into real estate deals that are appealing to investors from China such as easily underwritable fixed-rate single asset deals on trophy properties.
5. Strength of the Multifamily Asset Class
Even in the event of a total recession, the asset class that remains strong is multifamily. A decrease in consumer confidence and retail spending would affect office properties. If we head into a recession, reductions in company staff would lead to less required office space. The loss of tenants would prevent borrowers from being able to make their mortgage payments. However, multifamily would still remain strong as people cut customer spending more readily than their monthly rent. With consumers having less money for a down payment on a home, multifamily would get a boost.