According to the Mortgage Bankers Association, commercial and multifamily lending set a new record in the third quarter of 2003. Members reported originating a total of $29.7 billion, an increase from the previous record of $29.5 billion during the second quarter of 2003. The $29.7 billion is a 45 percent increase from the $20.5 billion originated in the third quarter of 2002. The increase in originations does not stop there.
Year-to-date, commercial and multifamily originations are up 40 percent from this time last year. The fourth quarter is normally the strongest for commercial and multifamily originations, and if fourth-quarter production equals last year’s level of production, loan production for 2003 will surpass $100 billion without difficulty.
For the most part, lending on all property types showed increases in 2003. Industrial lending increased by 64 percent, retail by 60 percent, office by 58 percent and multifamily by 29 percent. The major sources of funding were commercial mortgage-backed securities (conduit) lenders and life insurance companies.
Long-term treasuries, the primary benchmark for commercial mortgage loans, had a volatile year. Dropping rapidly over the first six months of 2003, the yields on 10-year treasuries reached a historic low of 3.35 percent during the second quarter.
This free fall also kept spreads at record lows, allowing some fortunate borrowers to lock up loans at the lowest long-term interest rates in over 50 years. Although yields on long-term treasuries have crept up slowly since then, they are still remarkably low and have kept interest rates very attractive.
LIBOR also remains at its lowest level in decades, keeping demand for floating rate loans very much alive. However, with treasuries continuing to hover at or near record lows, a recent trend that has emerged is the float to fixed rate loan. In an effort to win business, many lenders started aggressively marketing this product line in 2003 allowing borrowers to take advantage of the low LIBOR rate during the first few years of the loan term. This product line forced some lenders who did not have the ability to provide it to stretch out amortization schedules and even offer interest only product.
Locally, lenders across the board are still active. The supply of mortgage capital continues to be very strong from all lending sources, even as underwriting continues to tighten. That, however, has not stopped loans from closing. All lender types – CMBS (conduits), life insurance companies, pension funds and banks – had a very strong year in 2003 with most surpassing their annual lending goals and announcing significant increases to their mortgage loan allocations for 2004.
Multifamily, food-anchored retail centers, power centers and industrial properties continue to be favored property types among lenders. Multifamily housing continues its long run as the most desired product type for most lenders, even with the recent increase in vacancy rates caused by another successful year in the single-family and condominium sales market.
The condominium – ground-up construction or conversion – market continues to be a successful emerging trend in many local markets, and banks and other lending institutions continue to be very aggressive in structuring construction and mezzanine loans. Demand remains high and spreads remain very tight for quality, well-anchored and well-occupied retail centers. Industrial properties with strong tenant rosters, i.e., good credit, are in high demand; while single-tenant properties remain a less desired product unless there is a rated credit on the lease.
Mortgage financing for the office sector is available, however, loans are subject to more restrictive underwriting standards directly related to the state of the market. Underwriting for this product type includes marking to market the rents in the particular building, and lenders are using actual vacancy rates, which has a direct impact, in some cases major, on loan proceeds. As such, loans are getting done; however, they have more structure than in years past and include funded reserves for tenant improvements and leasing commissions.
Staying Afloat
This underwriting and structure will stay in place until this sector rebounds. To avoid this structure, many office loans in 2003 were underwritten on a lower leverage basis – 50 to 60 percent in loan-to-value – allowing borrowers to get spreads in the low 100s.
Mortgage capital in the hotel sector continues to be weak; however, some lenders are beginning to allocate funds for this product in 2004 in an effort to obtain wider spreads.
Money will be available in 2004 for quality product with a strong operating history in this sector. There will be ample mortgage capital in the market in 2004. A strengthening economy will cause interest rates to rise minimally; however, rates will remain in a range that will be very attractive for investors.
