The Urban Land Institute’s Real Estate Economic Forecast, which
includes predictions for the economy and industry through 2020,
does not pull punches in its latest report. The news is hardly bad,
but the consensus is plain: growth in the US economy and the CRE
markets will start to moderate after 2019. GDP growth is projected
to stay strong in 2019 at 2.5%, while moderating to 1.7% in 2020.
Meanwhile, expectations for the real estate market are more
tempered than the overall economy, with rent growth and return
forecasts below trend and surprisingly moderate for late in the
cycle, wrote William Maher, director, Americas Strategy & Research
at LaSalle Investment Management on behalf of ULI.
This is not to say growth will retract in two years: it is forecast to
continue. And if it does, Maher pointed out, “the 11-year real estate
expansion that started in 2010 will be one of the longest on record.”
All in all, it is not a bad forecast for a cycle so long in the tooth.
Transaction volume should continue to decline this year, following
the dips in 2016 and 2017 from a post-recession peak of $569 bil-
lion. This year, volumes are expected to clock in at $475 billion.
Next year, they are predicted to be $450 billion and $415 billion
in 2020. Still, these levels are substantially above the 17-year
annual average of $313 billion.
Meanwhile, CMBS issuance has rebounded since a low in 2009
but at a much lower level than pre-recession levels. CMBS issuance
is expected to be $90 billion in 2018, $88 billion in 2019 and $80
billion in 2020. Compared to the forecasts of just six months ago,
the current forecast for transaction volume is expected to be
higher in all three forecast years, while the forecast for CMBS issuance remains essentially the same.
The RCA Commercial Property Price Index has had some recent
high growth years. Price growth is expected to continue, although
the pace will likely taper off over the next three years, at 6% in 2018,
5% in 2019 and 4% in 2020.
What CRE Will Look Like in 2020
UP Front A comprehensive look at what’s trending in the world of commercial real estate
Marking its first transaction since opening its doors for business in
June, MidHudson LLC last month successfully introduced a fresh
way to assist borrowers in obtaining HUD financing. The
Washington, DC-based company’s HUD Reserve Funding Program
involves a new financial structure that addresses the expenses associated with raising equity for 221(d)( 4) loans, typically used for
The company was acting on behalf of its client, Graham
Development, an Austin, TX-based developer that was seeking
financing for The Venue at Werner Park. The 544-unit project is
part of a master-planned community in Papillion, NE that will
and a 60-acre
didn’t use some
reduce its client’s cost of debt. Rather, it simply made a preferred
equity investment to help Graham Development meet HUD’s
required working capital and initial operating deficit reserves for
the loan. According to Graham Development partner Corbin
Graham, the MidHudson investment is more cost effective than
raising more equity.
This transaction also marked the first transaction for MidHudson,
which has additional deals in the works, according to president Joe
Carroll. There is a demand for this kind of structure, he says, since
it not only helps the borrower close the loan faster, but it also
improves returns to the borrower’s equity investors. Carroll is no
stranger to the capital markets; he joined MidHudson from
Barclays Capital and, prior to that, played a significant role in the
development of the structured credit business at Deutsche Bank
and Brightwater Capital Management.
He explains how MidHudson’s process works: HUD typically
provides 80% to 85% of the financing, and beneath that is the
hard equity that the project developer must provide. Part of that
is a reserve component that would sit in the mezz position if
there were that type of traunching in a HUD transaction, but
there is not. There are also reserves for working capital and initial operating deficits. Those reserves, which sit in an account
controlled by HUD and are meant to make up for cost overruns,
come to 8% to 10% of the size of the HUD loan, or a total of
30% of equity to develop the project. “It can be a significant
amount of money,” Carroll says.
To hit the reserve requirements, the developer typically turns to
equity investors that are looking for returns in the 20% range,
which is fairly expensive capital. Under MidHudson’s program,
though, borrowers are able to bypass equity providers, Carroll
explains, since the firm provides the reserves through its own preferred equity investment into the entity that provides the capital
needed to cover these reserves.
That convoluted sentence is a nod to the varying structures
developers use for these projects. Put another way, Carroll says
MidHudson “invests in whatever entity that other investors are par-
ticipating in. Sometimes, it’s the borrower from HUD, but usually
it’s more senior than that in the corporate structure.”
The firm looks for a preferred return of 12% on its equity invest-
ment, which Carroll points out is significantly less than what the
developer would have to pay with true equity. HUD releases the
reserves once the property starts generating cash, which is when
MidHudson’s involvement ends.—Erika Morphy
Lowering the Cost of HUD’s Equity Requirement
BEHIND THE DEAL
The Venue at Werner Park