Commercial Loan Originations on the Rise

According to Jamie Woodwell, VP of Commercial Real Estate Research at the Mortgage Bankers Association, “Rising property values, improving property fundamentals, lower interest rates and higher loan maturity volumes should all help boost mortgage borrowing and lending in the coming year.”
The Mortgage Bankers Association (MBA) predicts that originations of commercial and multi-family mortgages will grow to $414 billion in 2015. This is an increase of 7% over last year.

In fact, according to the MBA’s quarterly survey of the top commercial and multi-family mortgage originations firms, there was an 11 % increase in loan originations during the fourth quarter of 2014. Multi-family and industrial properties had the most loan originations during that time period.
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Defease With Ease® Doubles Defeasances

In 2014, Commercial Defeasance, LLC defeased over 500 commercial real estate loans – double the number of transactions it closed in 2012. The company’s smallest transaction of the year was a $330,000 defeasance for a New York co-operative, while the largest was the defeasance of a $755,000,000 loan secured by the biggest shopping mall in America.
Cincinnati Ohio Skyline
According to a review of the “Top Defeased Loans of 2014,” Commercial Defeasance advised on nine of the largest, including the Mall of America in Minnesota, the Loews Miami Beach Hotel in Florida, and Herald Center in New York.
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How Does an Increase in Interest Rates Affect CRE?

Lately, there has been a lot of chatter about rising interest rates and their potential impact on the commercial real estate market.
Respondents of the CNBC Fed Survey forecasted that the Federal Reserve could raise rates during the summer of 2015. This will be the first time interest rates have increased in eight years.

Will an interest rate hike come down to a simple policy change?

On December 17, the Federal Reserve met to determine whether or not they would make changes to a policy statement about keeping short term borrowing rates low for a “considerable time.” However, even a minor change to a Fed policy statement had the potential to stifle the economy’s positive momentum. Ultimately, the Federal Reserve chose its words very carefully and only replaced a reference to borrowing costs remaining low for a “considerable time” with a pledge to be “patient” on the timing of a rate increase. Federal Reserve Chairman Janet Yellen also said that policy makers are likely to hold key rates near zero for at least the first quarter of 2015.
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CRE Prospects Bright for 2015

According to a recent article in the Wall Street Journal, “prospects for commercial real estate appear promising for next year, with broad rent increases as well as tighter vacancy rates in most major sectors.” These insights are based on the Q3 forecast from the National Association of Realtors.


The report identified the positive trajectory of the U.S. Gross Domestic Product as a contributor to the forward momentum of the commercial real estate markets. According to the report, “with commercial real estate fundamentals and investment prices on a solid upward trend, lending conditions eased as financing sources broadened in 2014.”

The National Association of Realtors evaluated all commercial real estate categories and found the apartment-rental market to be the only segment where vacancies are expected to increase to 4.3% in the fourth quarter of next year. They also said that vacancy rates below 5% are considered a “landlord’s market,” which means owners can charge a higher rent due to demand.

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Refinancing – Will it be possible in 2015?

Pull up a few recent headlines and you’ll notice that a number of commercial real estate owners are refinancing their properties.

Cincinnati Ohio Skyline

  • $500 million refinancing of International Place in Boston
  • – $30 million refinancing of an apartment building in Newark
  • – $7.7 million refinancing of Tuscaloosa student housing

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Risk Retention Rules Raise Rates!

Many CMBS borrowers with loans maturing from 2016 to 2018 are waiting to refinance until they have some indication that market interest rates are about to rise. Such a strategy is challenging enough to execute without the introduction of new variables that impact interest rates on new loans. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act does just that.

Last week, U.S. regulators approved final rules regarding the retention of risk in asset-backed securitizations, including CMBS. Initially, the rules required loan originators to retain 5% of the market value of the loans they securitize. However, the rule was revised to allow B-piece bond buyers to satisfy the 5% risk retention requirement on a lender’s behalf, provided the B-piece buyer holds those bonds for a minimum of five years. Moreover, to get to 5% of the market value of the bonds in a CMBS securitization, experts are projecting that B-piece buyers will be asked to buy lower yielding bonds higher up in the capital stack.

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Loan Maturing in the Next 4-years? Be Prepared!

Ten years ago, it was very easy to get a loan. Property values combined with low interest rates and loose underwriting standards created an unsustainable “golden age of CMBS originations.” Now, all of those loans originated before the Great Recession are approaching maturity but in a very different refinancing landscape.

Almost 35,000 fixed rate conduit loans will be maturing through 2017. That equates to over $400 billion of outstanding debt. While many borrowers have been focused on whether interest rates will remain low long enough for them to refinance at maturity without incurring the cost of defeasance or prepayment fees, they may not have considered whether the lending community will have the capacity for the looming wave of maturities, especially in a rising interest rate environment with more conservative underwriting.
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Office Market Strengthens in Q3

According to an article in World Property Journal, office vacancy rates declined in most major U.S. markets during the third quarter of 2014.
Economists attribute the decline to a stronger U.S. labor market.

“The single most important factor for the office sector is employment,” stated economist Kevin Thorpe. “Businesses have been creating well over 200,000 net new jobs per month for several months now, the highest stretch of job creation in almost 15 years. About 30% of those new jobs require office space, so this clearly creates a stronger economic backdrop for the office sector.”
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Low Rates Boost REITs

According to a report by CNBC’s Diana Olick, “the one sector that is outperforming the market this year is real estate investment trusts.”
As interest rates hover near recent lows, and investors search for anything with yield, commercial real estate is finding its footing yet again, outperforming the broader U.S. stock market.

Stock exchange-listed U.S. equity real estate investment trusts were up 16.25 percent, with a dividend yield of 3.52 percent, in the first half of 2014, according to the National Association of Real Estate Investment Trusts (NAREIT). These results compare to the S&P 500 index first-half 2014 total return of 7.14 percent and a dividend yield of 2 percent.
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Tips for Negotiating Defeasance in Conduit Loans – Part 2

The “Payment Date” Definition:

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While it may seem like a minor detail, the wording of the “Payment Date” definition in a lender’s CMBS loan documents can have a big impact on the price a Borrower pays for the Defeasance Collateral when the Borrower sells or refinances. Ideally (from a defeasance standpoint), the Payment Date definition should state that a payment due on a Payment Date that is not a Business Day will be made on the immediately succeeding Business Day (not the immediately preceding Business Day).
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