Real Estate Leadership Guides 8 DEBT & EQUITY CAPITAL EDITION 2018
high as $5 million. In other words, we’re not talking about
the $100-million CMBS bracket. We’re talking about the
$15-million to $25-million loan that may be a couple of
million dollars short” of being fully refinanced.
The company is seeing strong demand in particular
from retail and hotels, in large part due to the way the
market is undervaluing those asset classes right now.
“We also see it in multifamily where Fannie and Freddie
are not active for a particular reason on some transactions,” he says.
UNDERWRITING REMAINS CONSERVATIVE
In prior times, liquid markets have led to looser under-
writing standards, but that’s not the case in this cycle.
Lenders remain disciplined, which in Campanella’s
opinion will be the reason the current cycle will likely
end gently. “When you have a lot of liquidity in the mar-
ket, it is easy for underwriting to loosen as lenders try
to win deals,” he says. “But that’s not happening.”
LTVs for CMBS are around 75%, according to
Campanella. This compares favorably to 60% for banks
and 65% for life insurance companies, and is only
topped by the agencies, which offer 80%.
Bank lending has remained disciplined as well,
though it’s being constrained not just by regulatory factors but also by the growing cost to fix banks’ rates in
order to satisfy the demands of borrowers looking for
The cost to hedge their loans has become very
expensive, Campanella says. “The banks are going to
have a very difficult time competing with the life companies for stabilized fixed-rate transactions. Ultimately
this will put pressure on the banks to lower their
spreads even further in 2018.
“At this part of the cycle, the pen-
dulum is swinging back toward the
life companies and pension funds
for the low priced fixed-rate money
with more term,” he adds. That said,
“there is no shortage of capital out
there. There are a lot of options for
borrowers on both fixed and floating
Other lenders and investors, for
their part, are also keeping a close
eye on interest rates.
“The global economy is doing
better, and that tends to push interest rates higher,” AGNC’s Kain says.
However, the forces that have kept inflation low glob-
ally—among them, technology and globalization—are
still in place, he adds. “While interest rates are likely
to inch up over the near term, it’s going to be very
gradual. The increases are likely to be contained.”
What Kain and others do not want to see is a huge
move in either direction. “A sudden 100-basis-point
increase or even decrease in rates would force us to
rebalance the portfolio more actively,” he says.
THE INTERSECTION OF REGULATION & CAPITAL
The new Fed chair, from all accounts, is unlikely to jack
up the benchmark rate in such a manner. Powell’s
expected continuity from his predecessor Janet
Yellen’s regime is the reason why he was the market
favorite for the position.
As it happens, other regulatory events are also cautiously aligning for commercial real estate. The initial
pass at tax reform that the House of Representatives
made at the end of October generally favored commercial real estate’s interests, barring a few notable exceptions. These include new rules around pass-through
entities, the cap on the mortgage interest deduction
and a proposed increase in the carried interest hold
period. The Senate’s tax-reform package maintains the
carried-interest hold period as-is, caps mortgage interest deductions at $1 million rather than the $500,000
cap in the House version and applies a different formula to the treatment of pass-through entities. It will
be a waiting game to see what will make it into the final
legislation that’s signed by the president—if any legislation is able to pass at all.
Another example of a favorable regulatory development is the proposed rule that the finance regulatory
It’s difficult to identify double-digit returns. Instead, we are
finding ways to play in the
different parts of the capital
stack to achieve the returns our
investors are seeking.