State of The Market November 2018

The general feeling in the market is that borrowers have accepted that slightly higher rates are here to stay. This supports continued high sales volume for commercial property through 2019. The commercial real estate lending environment has many new lenders. Loans on commercial property are less likely to see rates jump up as they have in the past. In general, the US commercial real estate market is very stable and values are very stable.

The US Economy

• 2019 growth projected at 2.5%
• Wage growth projected at 3.1%
• USA has had stronger growth in 2018 than European countries

Interest Rates and Property Values

• 10 year treasury (Current 3.1%) may go up 3.5% by end of 2019
• I see cap rates stable in 2019.

• What Drives CRE Cap Rates: Inflation. Treasury Rates. The Feds Balance Sheet. Unemployment. Loan Volume. Value of the US Dollar. Keep an eye on these factors.
• Retail, office, and multifamily assets are selling at slightly higher cap rates and values are flattening.
• Industrial property values are very strong.

The Midterm Election

• The house and the senate are split. Gridlock in government is the preferred outcome for “smart money”.
• Regulatory changes are held within the executive branch, so regulations will stay low.
• All politics is local. The propositions and amendments in your state will have the most effect on your local commercial real estate market.

Government and Trade

• Infrastructure is the one area Republicans and Democrats can agree to spend money.
• Trade: China and the USA want to cut a trade deal before G20 meeting.
• Construction Industry: Trade war has increased material costs, and labor costs have increased.

Capital Market

• CRE funding is up 6 to 10% in deal volume.
• Institutional lenders/investors are looking at smaller and smaller markets.

Rate and Spreads

• LIBOR and Treasury Rate are both up in 2018.
• Spreads tend to contract during a raising rate environment, but we don’t see that.

Lending Regulations

• HVCRE* regulations have been relaxed.
• Banks are reentering the construction loan and bridge loan market.

*The HVCRE regulation within the Basel III capital requirements, effective as of January 1, 2015, has been clarified with S.2155 signed by the President on May 24, 2019. In order to be exempt from an HVCRE designation, borrowers who originate commercial acquisition, development and construction (ADC) loans must meet a 15% borrowers equity requirement, value or appraisal is based on the as “complete value” of the development. HVCRE loans are subject to a 150% risk weight requirement – higher than the 100% requirement. (from https://www.aba.com/Advocacy/Issues/Pages/HVCRE.aspx)