44 REAL ESTATE FORUM MAY 2017
As Jamie Woodwell, the Mortgage
Bankers Association’s VP for commercial
real estate research, said recently when
releasing 2016’s originations data, it
remains to be seen the degree to which bor-
rowing and lending are affected by rate
increases and other potential market
changes, including tax reform proposals,
general economic growth, foreign invest-
ment and consumer confidence.
He is correct. He is also correct in pointing out that the post-election rise in interest
rates took a bit of wind out of the sails of the
transactions market in Q1.
But such discussions always seem to gloss
over a fundamental fact: we have started the
year following one of the industry’s high-water marks. Even if sales and originations
are moderating this year—and they are—
they’re still above average.
One has only to refer back to the MBA to
realize that. Woodwell also highlighted how
well the markets performed last year. “For
originations, 2016 was the third highest
year on record,” after 2015 and 2007, when
volume reached $508 billion.
The Urban Land Institute Center for
Capital Markets and Real Estate made a
similar point with the recent release of its
new semi-annual three-year economic forecast. For instance, it reported that sales volume is expected to continue declining
from $489 billion in 2016 to $450 billion in
2017 and 2018, and slip to $430 billion in
2019. However, this three-year forecast
period is surpassed only by 2007, 2015 and
“Growth is positive—it’s not declining,”
says Anita Kramer, vice president of the
ULI Center for Capital Markets. “It’s just
that the rate of growth in several catego-
ries is more subdued.”
For example, CMBS issuance grew con-
sistently from 2009 to $101 billion in 2015,
then declined in 2016 to $76 billion. It’s
expected to maintain this level in 2017.
Then moderate increases, to $80 billion
and $85 billion, are forecast for 2018 and
CRE prices as well are projected to grow
at relatively subdued and slowing rates in
the next three years, at 5% in 2017, 3.5% in
2018 and 3% in 2019. This is below the
long-term average growth rate of 5.7%.
It is important to remember that during
the recovery there were huge leaps of
growth, Kramer says, and that many of the
forecasts are better than the long-term aver-
ages. Some categories—including job
growth; transaction volumes; CMBS issu-
ance; occupancy rates for certain asset
classes such as industrial, office and hotel;
and the rental rate growth for retail and
industrial—are still expected to exceed
their long-term averages, according to ULI.
This touchstone—the long-term performance of say, sales or CMBS issuance—
could well prove to be a useful prism as the
industry confronts changes expected to be
introduced by the Trump Administration.
For starters, President Trump has promised to push for comprehensive tax reform
in both the corporate and individual sectors. The final details of his plans are not
expected until June—and of course,
Congress has its own thoughts on the matter. But some of the ideas floated on both
ends of Pennsylvania Avenue promise to
have a significant impact on CRE finance.
For example, President Trump has proposed eliminating the tax deduction for
interest payments by business—something
that House Republicans also want. Their
argument is that this deduction distorts the
capital markets as dividend payments are
not deductible and thus debt becomes
favored by developers over stock. There is
also the question of whether depreciation
will be eliminated in favor of immediate
deductibility, or expensing, of capital
expenditures. The latter, however, is not
tenable if the former remains in place.
Companies may be allowed to pick one
or the other, but that in turn would increase
rather than decrease the tax code’s com-
plexity—to say nothing of the uncertainty it
would introduce into expected tax reve-
nues by the US Treasury.
Another measure on the table includes
the elimination of like-kind exchanges. At
the end of April the Trump Administration
released guidelines about what it will be
proposing later this year for tax reform.
The CRE community was pleased to see a
proposed 15% tax rate for pass-through
entities and policies that could skew preferences for rental living instead of homeown-ership (obviously not all CRE players were
pleased with the latter). Unfortunately the
proposal said nothing about depreciation
or like-kind exchanges.
However, what Congress takes away with
one hand, it gives with another. The House
of Representatives is proposing a measure
that would clarify the High Volatility
Commercial banks were the leading capital source last year, originating $157.4 billion
in commercial/multifamily mortgages, up
from $138.6 billion in 2015. Fannie Mae and
Freddie Mac also increased their share, with
$105.8 billion in loans, compared to $99.4
billion in 2015.
CMBS also delivered a respectable $76
billion in 2016—but came out of the gate in
2017 with quite the woeful performance.
Depending on who is counting, CMBS
originations for the first quarter of this year
were down anywhere from 18% to 34%
compared to the same period in 2016.
It would easy to attribute the drop to
Dodd Frank’s Risk Retention rule that went
into effect at the start of the year, but the
story is more complicated than that.
In fact, the CMBS market is doing better
We will have a better
gauge about where
CMBS is going this year
in the months to come.”
LISA PENDERGAST, CREFC