As we come to the end of the second quarter, many are wondering if the tremendous volume of loans maturing in 2015 will have an impact on financing for commercial owners and investors. Loan maturities are expected to increase to more than $340 billion dollars per year for the next two years.
This substantial increase (a hike of 72 percent from 2014 to 2015) is the direct result of loans that originated at the height of the market, in 2005 to 2007, just prior to the economic downturn. During this time, loan originations were at an all-time high based on rising property values coupled with low interest rates and tremendous sales activity.
Today, approximately ten years later, owners and investors are asking: will this significant increase impact financing for commercial properties today?
While predicting how the loan maturities boom will affect financing is not an easy or foolproof task, there are three trends in the current market that indicate that the financing is not likely to be negatively affected. These trends include:
Positive market fundamentals continue
Key market fundamentals play a major role in predicting what the next financing cycle will entail. Current fundamentals indicate continued growth for 2015—a fact that is evident from ongoing increases in employment rates, decreases in vacancy, and rising lease rates.
At the close of the fourth quarter of 2014, strong employment rates were posted throughout the U.S. The national employment rate demonstrated an increase of 1.7 percent that quarter, and overall personal income increased by 3.9 percent.
Concurrently, vacancy rates are steadily decreasing and are expected to continue to shrink throughout the next three quarters. Lease rates are also expected to continue to rise throughout 2015.
The culmination of all of these positive factors indicates that the market should continue to improve throughout the year, regardless of the inevitable loan maturity boom.
Capital supply remains strong
As the market fundamentals continue to improve, so does the amount of capital available. Today’s market is no exception. At the 2015 Mortgage Bankers Commercial Real Estate Finance Conference held in February agencies, portfolio and CMBS lenders all are prepared for the increased demand. The agencies are adding to staff and the portfolio lenders are increasing allocation. There are currently thirty one CMBS lenders in the market up from seven in 2010.
These positive indicators create less uncertainty within the market, which makes lenders more comfortable funding commercial real estate investments.
In the current financial cycle, portfolio lenders such as large national and international banks, as well as life insurance companies will continue to be a reliable source of capital in the market. In addition, the revived CMBS market is proving to be both stable and attractive - a fact that will also contribute to meeting the increased demand for loans set to mature in the next two years.
Record low rates endure
Interest rates have remained relatively steady through the first quarter of 2015. These historically low rates are expected to continue to remain low throughout most of 2015. Although many in the industry anticipate a slight increase in rates, it will not likely be significant enough to impact the loans expected to mature in the next two years.
The loans set to mature in the next two years were written at a time when the ten-year treasury was in the mid-4 percent range, and rates ranged from low 5 percent to high 5 percent.
Fast forward ten years, and today’s treasury is in the low 2 percent range. This indicates that, even if rates were to slightly increase, borrowers would achieve a lower interest rate now than when their initial loan was originated. The fact is, while the volume of loans maturing over the next two years presents some uncertainty in the commercial real estate market, all market fundamentals indicate a strengthening financial landscape for commercial property owners and investors. As we continue through the loan maturities boom of 2015, owners and investors can brace themselves for a healthy and growing commercial finance market.
Patrick Ward is the founder of MetroGroup Realty Finance, a private, Newport Beach-based mortgage banking company that specializes in providing capital advisory and mortgage banking services for properties throughout Southern California. Contact him at [email protected].