The commercial lending market exceeded all expectations in 2003 with significant increases in loan volume and originations.
The Mortgage Bankers Association monitors commercial lending activity and the numbers for 2003 have been tabulated. Loan originations exceeded $116 billion, which is an increase of 33 percent over 2002. The total number of loans was 14,500, a 40 percent increase over the 9,870 loan in 2002.
These increases reflect the availability of capital, historical low interest rates, a strengthening economy and strong real estate values. Those trends continue to be in place for 2004.
Lenders in the New England market have a strong appetite for all types of business. The first few months of 2004 have seen activity reflect the plentiful supply of mortgage money. Even though underwriting criteria tightens for most product types, the lenders continue to find quality financing opportunities for construction and fixed-rate loans.
While the statistics are not yet confirmed, there seems to be an increase in construction lending throughout the area on a variety of product types.
Apartments have always been successful in New England. Currently the focus is on the other form of residential: condominiums. The market is seeing small and large condominium developments from Boston to Cape Cod. Single-family home interest rates have been so low that owning a unit is more viable for the long term than paying rent. Residential areas in Boston have seen strong condominium sales for years in the Back Bay, Beacon Hill and South End.
New markets in Boston include South Boston, East Boston and Brighton. These have historically been rental markets. In addition, developers are tapping into the suburban markets with major development in Danvers, Malden, Framingham and many other markets.
The apartment, retail and industrial section continue to attract most lenders for long-term fixed-rate financings. While vacancy rates are a little higher than a few years ago, these sectors have historically resisted the large swings in economic value like office and R&D properties.
The Boston suburban market is a stronghold of owner-occupied and single-tenant leased properties. The Route 128 submarkets are filled with these single-user properties, many of which are not covered by market vacancy reports because the buildings never hit the market. There is great interest in financing the single-tenant product, assuming a company has a history of strong performance in its industry. This is defined by operating profits, solid balance sheets and a positive business plan. Even strong credit is subject to a real estate underwriting, including rents and market vacancy rates. Only the rated credit companies can expect some softening of underwriting guidelines for credit tenant financing.
We are currently working with many developers/owners who are refinancing existing loans at low loan-to-values. These 40 to 60 percent loan-to-value financings have low spreads and more flexible loan application negotiation. Lenders need low loan-to-value financings to improve the credit quality of their portfolios. These loans see significant spread reduction by both life companies and the commercial mortgage-backed security lends.
The long-term treasury continues to trade at historically low yields. Yields for the 10-year bench mark treasury started 2003 at 5.02 percent. The same treasury moved to 4.38 percent to start 2004. This downward trend was tied to low business confidence and little competition from the equity markets. This year has seen some strong consumer confidence with more competition from the stock markets for the investment dollar.
The 10-year treasury started the month of May at a yield of 4.50 percent. While up 62 basis points since April 1, it still represents a historically low yield based upon the past 20 years. While lenders cannot control the treasury yield, they can and do control the interest rate spread that they charge. Spreads have crept down over the past 12 months almost 50 basis points. A typical 75 percent loan-to-value retail or industrial loan had seen spreads in the treasury plus 165 basis points range. Currently those loans are seeing treasury plus 115 to 120 basis points spreads for well-located product. Apartment loans are seeing thinner spreads from both Fannie Mae, Freddie Mac, the life companies and the CMBS lenders. Low loan-to-value financing are seeing spreads at 80-90 basis points over the treasury. The thinnest spreads are for very low loan-to-value financings with rapid amortization. These opportunities will grab a treasury plus 60 basis points spread from a few of the life companies.
The Boston market continues to be very attractive to all long-term lenders including life companies, CMBS lenders, banks and private lenders. The banks are more aggressive in pursuing fixed-rate product. The life companies are very focused in this market with increase flexibility to attract deals through quicker underwriting, better spreads and easier document negotiation.
The commercial mortgage market will continue to be strong for 2004 as markets strengthen, occupancy improves and rental rates turn the corner.
