New England commercial banks continue to dominate the commercial real estate lending market
Contrary to most predictions, 2021 has been a good year for commercial real estate across all asset classes. As expected, some property types have lagged others, with multi-family, industrial and labs being the big winners, but even retail, office and hospitality have seen growth. solid investments and renewed interest. Multi-family, industrial, and labs were the big winners, but even those lagging behind these leaders, like retail, office, and hospitality, saw strong investment and renewed interest. . Continued investment growth is expected for 2022. Many investors are cash-rich and commercial real estate has become a preferred asset class. Combined with a growing economy, this will fuel demand for more space, which will put further pressure on cap rates.
The Federal Reserve has made its stance on rates clear, and the impending interest rate hikes over the next six to eight quarters will certainly affect the underlying indices that lenders use to price debt. However, spreads will likely tighten and the overall coupon will not move basis point by basis point.
New England commercial banks continue to dominate the commercial real estate lending market. Backed by greater liquidity than ever before, banks are well positioned to continue making new loans and become an even bigger part of the New England financial scene. Banks are currently grappling with pricing long-term funding as they move away from LIBOR, but have yet to gain traction with SOFR. As a result, lenders are quoting more and more coupons. Although this normally pushes lenders towards more 5- and 7-year deals, such a change has yet to happen.
The agencies – Fannie Mae, Freddie Mac and FHA – had a very good year in 2021 and were even overworked at times, resulting in slow processing times, resulting in a large backlog. This blockage has started to dissipate and processing times have normalized. COVID-specific underwriting, i.e. reserve and stress underwriting, is gone. 2022 should be a very good year for agencies.
Life insurance companies are a little more cautious in underwriting offices and retail than they were before the pandemic, but are really looking to grow their business volume in the North East. Labs, industrials, and multi-family homes in solid locations will benefit from very attractive long-term rates from life insurance companies. Traditionally smaller leveraged lenders, life insurance companies are now willing to leverage products to win bargains.
Among Wall Street lenders, CMBS continue to become more aggressive in trying to generate more loans, going so far as to now routinely offer term interest-only notes. Rates continue to be a bit higher than other sources, however, CMBS will likely be the lenders that narrow their spreads as indices rise, making them a more viable option in 2022.
Alternative lenders continue to appear to fill the funding gap, whether due to the lack of debt service coverage on these ultra-low-cap transactions or transition assets that are being repositioned by investors to free up the trapped value. These bridge/mezzanine lenders have reduced their coupons and are becoming a more attractive option for many investors who may have a short investment horizon and are worth considering.
Derek Coulombe is senior managing director at Fantini & Gorga, Boston, Mass.