Where is the Multifamily Industry Headed?

During the Fall Meeting of the Urban Land Institute (ULI), panelists evaluated the future of investing in multifamily properties, factors driving the industry, and overall industry health.
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Panelists were generally positive about investing in apartments but did identify two areas of concern. Overall, the group was encouraged about the continued demand for apartments. However, the group expressed concern that excessive demand could further inflate prices and lead to overbuilding in certain markets.

Demographics Push Demand for Apartments
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Top 10 CRE Trends for 2015

The 36th annual “Emerging Trends in Real Estate,” co-published by PwC U.S. and the Urban Land Institute provided some insights on trends that are expected to impact commercial real estate investing in 2015.


“Unlike previous reports and previous cycles, we are seeing sustained growth,” said Mitch Roschelle, PwC U.S. real estate advisory practice leader. “In the past several years, we reported that real estate market participants’ main fears revolved around uncertainty with the economy. Now, the trepidation in their eyes has more to do with the ability of the growing real estate markets to adapt to a series of megatrends impacting society and the global economy.”

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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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Commercial Defeasance Facilitates $150M Defeasance for Loews Hotels

Commercial Defeasance, LLC (Defease with Ease®) just announced the simultaneous defeasance of $150 million of CMBS loans for a luxury resort in Miami, Florida owned by Loews Hotels. The defeasance, a substitution of government securities for the real estate collateral securing the loan, was structured as a New York-style defeasance and combined loans in three different securitizations into one transaction.

Commercial Defeasance managed the entire defeasance process, including structuring the $150 million securities portfolio and coordinating approvals with two major statistical rating agencies: Moody’s and Fitch Ratings. Throughout this process, the Defease with Ease® team guaranteed full transparency and a timely closing. Deutsche Bank refinanced the loans through their CMBS program.

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NYC Commercial Real Estate Values Continue to Rise

According to Moody’s Investors Service, “U.S. commercial-property prices have surpassed the peak reached seven years ago, before the financial crisis sent real estate values plunging.”


While a number of recent industry reports confirmed that the commercial real estate market strengthened across all property types in the third quarter of 2014, apartment complexes in large cities and office buildings in central business districts delivered the best results.

In particular, dramatic increases in New York commercial real estate property values have inspired many investors to expand their portfolios or cash in their equity.

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Sentiment Surveys Reveal Recovery of CRE Markets

The results of two major Investment Sentiment Surveys are out and both indicate that the commercial real estate markets are improving. However, they both say the future is unclear.commercial2
According to The Real Estate Roundtable’s fourth quarter Sentiment Survey, senior commercial real estate executives continue to see recovery in commercial real estate markets. However, they also indicated a feeling of uncertainty over legislative and monetary policies, which they believe may temper future growth.

“On the eve of the congressional mid-term elections, our Sentiment Index shows favorable views about current market conditions yet also reflects concerns about the lack of clear direction in many federal policies, primarily terrorism risk insurance. Without a long-term reauthorization of the Terrorism Risk Insurance Act when policymakers return in November, financing for CRE projects will be directly threatened, job creation will suffer as it did after 9-11, and businesses can expect a general slowdown as many financing contracts will be found to be in technical default without terrorism insurance,” said The Real Estate Roundtable President and CEO, Jeffrey DeBoer.

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Retail Years Away from Recovery

Several recent industry articles indicated that the demand for retail space remains weak. Many experts believe that this is due to a slow recovery in retail sales and competition from e-commerce. Even the improving labor market has yet to translate into any meaningful increase in retail sales growth.

According to recent data, for the second consecutive quarter, the national vacancy rate for neighborhood and community shopping centers registered at 10.3%. This represents a decline of just 20 bps over the past 12 months.

In an article in nreionline.com, experts reported that regional mall vacancy remained at 7.9% for the fourth consecutive quarter with growth in the 0.4 -0.5% range. Malls began their recovery sooner than neighborhood and community centers but have stalled faster. Much of the vacancy compression has come from low-hanging fruit, as the best spaces in the best malls have already been leased. The malls that have vacant space tend to be inferior and in locations where the population is also struggling. The challenge this poses for the overall mall sub-sector is that any further meaningful vacancy reductions will need to be attributable to new tenants in these inferior malls.

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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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