Commercial and Multi-Family Market - Growing Weary

By rchrisman@robchrisman.com

I received this email from a golfing friend recently.

"I have two tickets to the US Open final round in Oakmont, but just realized I'm getting married that day and can't go."

"If you're interested in going in my place, it's at St. Paul 's church and her name is Emily."

 

We're now past the Summer Solstice, and the sun will start rising later and setting sooner - most noticeable in places like Anchorage where the sun now goes down around 11:42PM. Turning to more "man-made" changes, any time you combine computers, copying machines, and currency, strange things happen. Ever tried to copy money? Most of the time it doesn't work on a modern copy machine; here's a video why not.

I've mentioned the upcoming changes to the 1003 form, the Uniform Residential Loan Application, and mentioned that the "target implementation date is 1/1/17 (think HMDA)." Several astute readers pointed out that the date for implementation is actually 1/1/18 - not 1/1/17. I apologize for any confusion, hand-wringing, frustration, or the like.

 The changes, scheduled for 1/1/18, prompted one veteran broker to write saying, "Why change the 1003? It is a tried and true form: simply fill in the boxes. Leave it alone. The last thing we need is to redo all the operating systems again due to bureaucrats trying to justify their jobs with more unnecessary form changes. That is the problem with government.  All those bureaucrats must have something to do, so they create needless/useless paper so they have paper to push around."

 The reason, suggested another originator, is that the current form "Is not intrusive enough. I'm guessing it's to back up the FHFA /CFPB national data base. What concerns me is the lack of security on that data base. I get they are seeking to charge lenders with discrimination...but at the risk of national security? By the time the data base is breached, and it will be, it will be too late..."

 For events that might be of interest to lenders, depending on the area of nation you're in...

 The Community Bankers Association of Georgia kicks off its 38^th Annual Leadership Convention and Mini-Trade Show today in Orlando. The mission of the CBA is to promote the preservation and continued development of locally, independently-owned community banks in Georgia and the philosophy of hometown banking through unified efforts of its membership and staff. Skip Willcox with Triumph Mortgage says, "As a sponsor, I am very excited to be involved in this event. As part of a community bank, Triumph Mortgage is proud to help other community banks with their mortgage needs. The meeting at Disney will be a great opportunity for bankers from around the state to share ideas, network and learn."

 In Northern California, the CAMP Silicon Valley Chapter Officers Installation event is this Friday, June 24^th in San Jose and will feature California Real Estate Commissioner Wayne Bell officiating the installation of Richard Wang as president and the incoming board members. For more information, contact TJ Roberts at 408-802-8522 or register on-line.

 American Banker is offering a free webinar tomorrow on e-signature authentication techniques.

 Moving to September, the TMBA has its 16th Annual Reverse Mortgage Day on September 6th & 7th at the downtown Omni Hotel in Dallas, Texas.

 Event information and registration is already underway for Zelman & Associates 2016 Housing Summit September 22^nd & 23^rd in Boston. This conference offers a unique combination of very topical, interactive panel discussions moderated by Ivy Zelman and Dennis McGill.  In addition to scheduled 1x1s, there will also be opportunities throughout the day for investors and senior executives from over 100 public and private companies to meet and network.

 On person who won't be enjoying any of this is the former Connecticut State Representative who pled guilty to mortgage fraud. Just what the public continues to see in terms of headlines...not the fact that tens of thousands of LOs are doing exactly the right thing, legally, every day.

 I can't pick up a newspaper these days without some dire prediction about something happening. Someone is always yapping about stocks going down, or up, rates going up, or down, housing going up, or down. I remember when Meredith Whitney predicted the freefall in muni bonds, and when Bill Gross opined that Treasuries were a lousy investment and that rates were going to shoot up. How's that trade working out?

 Lately the clamor has reached a higher-than-normal pitch about the dreadful future of commercial real estate, and therefore lending. For example, PIMCO is in the mix saying the prices buyers pay for commercial real estate in the US could fall as much as 5% over the next 12 months. Pacific Investment Management said the value of commercial properties will be under pressure from asset sales by publicly traded owners, tightening regulations and approaching maturing debt.

 And the Federal Reserve warned that prices in the commercial real-estate market may have run up too far too fast. Valuations in commercial real estate "appear increasingly vulnerable to negative shocks, as CRE prices have continued to outpace rental income," the Fed said in its semi-annual Monetary Policy Report to Congress. The Fed noted that prices exceed their pre-crisis peaks by some measures.

 The Fed included a special section on financial stability risks in the report, which accompanies Chair Janet Yellen's testimony. The report said that even given "moderate'' financial vulnerabilities, risks of external shocks, such as the U.K.'s possible exit from the European Union, pose stability risks.

 Someone should tell Cushman & Wakefield since management announced that it has acquired Atlanta-based Multi Housing Advisors (MHA) in a transaction that creates the leading multifamily brokerage platform in the Southeast U.S. With the addition of MHA, Cushman & Wakefield now commands 23.8 percent of multifamily investment sales in the Southeast, year-to-date. The combined firms, with nearly $3 billion in transactions, captured 20 percent of 2015 Southeast multifamily sales, compared with CBRE's 15.7 percent market share.

 According to the MBA, Commercial and multifamily mortgage originations closed $503.8 billion of loans last year, which was 26 percent higher than the volume in 2014. This is close to the record high that was reached in 2007. The large volume was due to the low interest rate environment, rise in property value and stronger demand. Commercial bank portfolios were responsible for $138.6 billion of the total, followed by commercial mortgage-backed securities at $99.4 billion and life insurance companies and pension funds. Multifamily properties experienced the greatest origination volume at $201.7 billion, office buildings saw the second highest volume, followed by retail properties, hotel/motel, industrial and health care. First liens accounted for 97 percent of the total dollar volume closed.

 The MBA recently released its Fourth Quarter 2015 Commercial/Multifamily DataBook, suggesting that the final quarter of 2015 experienced continued growth. Property sales volume was 25 percent higher in 2015 than in 2014, just slightly below the record levels seen in 2007. The fourth quarter of 2015 was also the highest quarter for borrowing and lending on record, with only the commercial mortgage-backed security sector not breaking a record for originations like banks, life insurance companies and the GSEs. Total commercial and multifamily debt outstanding reached $2.83 trillion at the end of last year, rising 2.2 percent from the third quarter. Multifamily mortgage debt outstanding grew 3.4 percent reaching $1.06 trillion.

 So with all this growth is coming warnings. As another example, Felice Maranz with Bloomberg writes that Morgan Stanley has become more cautious on commercial real estate (CRE) as it sees the multiple expansion that's helped drive REIT price appreciation subsiding. The article notes that the focus is shifting to earnings growth; at the same time, it's likely too early to call cycle's end. Apparently analysts are seeing signs of "peaking fundamentals," including tightening lending conditions, active selling by REITs (pre-crisis turning point for property prices), and recent stalls in CRE prices for 1st time since 2010. There may not be enough NOI growth to offset risk of tighter lending conditions, leading to declining valuations.

 Yet the American Bankers Association writes that demand for CRE loans may be strengthening, or at least relatively speaking. As most are aware, commercial loans, and the securitization markets which provide liquidity to them, was probably hit the hardest during the recession. From a peak in 2006 and 2007 (CMBS of $198.4B and $228.6B, respectively) to current levels of $100B last year, with forecasters estimating $115 billion-ish for 2016 (currently not on pace; YTD of $19B), the market in this space is choppy at-best. However not is all lost according to the ABA who writes that banks are currently seeing an increase in demand for commercial real estate loans. It writes, "Eighty-two percent of banks plan to increase capital concentration in commercial real estate, according to its first annual Commercial Real Estate Lending Survey. The banks cited strategic planning and demand as the biggest driver in growth."

 According to the survey, most banks identified regulatory burden as their primary concern for the CRE industry looking forward into 2016 and beyond. About 65 percent indicated that recent regulatory guidance on CRE risk management will cause a measureable reduction in credit availability.

 Turning to the bond markets, today the European Central Bank will begin an experiment that could test how lenders respond when actually paid to extend loans. They will be offered four-year loans with zero interest that could end up in negative territory in the ECB's latest bid to encourage credit, even as liquidity remains abundant and global demand sputters.

 But are we already in the summer doldrums? Using the yield on the 10-year T-note as a proxy for interest rates, it shot down into the 1.60% range a while back, and seems content there until a) Janet Yellen says something new, or b) the United Kingdom determines if it is staying in the European Union. Neither happened yesterday, and so the 10-year sat between 1.67%-1.70% Tuesday. And regarding the Brexit/Bremain question, well, the bookies currently expecting that Britain will remain a part of the EU.

 Today, as much of the nation roasts, we have Fed Chair Yellen back in front of Congress when she delivers round two of her semi-annual Monetary Policy Report and testimony (this time in front of the House Financial Services Committee beginning at 10AM EDT). But we've already had the MBA release its survey of 75% of retail originations for last week: +2.9%, +35% from a year ago, and refis at nearly 58% of the total. Later we have the April FHFA Home Price Index at 9AM EDT, and May Existing Home Sales 10AM EDT. Oh, and if you have some spare doubloons, pony up for the Treasury's $13 billion 2-year, $5 billion 30-year TIPS, and $28 billion 7-year note auction. In the early going the proxy 10-year yield is at 1.69% and agency MBS prices are pretty much unchanged from Tuesday's close.