Pessimism looms at CREFC event as US real estate prices fall

CREFC’s High Yield & Distressed Realty Assets Summit in Manhattan was marred by an air of pessimism as signs of a market peak begin to weigh on the minds of the country’s top lenders.

CREFC’s High Yield & Distressed Realty Assets Summit in Manhattan this week was marred by an air of pessimism as signs of a market peak begin to weigh on the minds of the country’s top lenders.

New York Athletic Club
New York Athletic Club

On top of the shaky CMBS market, commercial real estate prices ticked down for the first time in six years in January, declining by 0.3 percent, according to Moody’s/RCA index.

“We probably have seen the peak from an asset price perspective,” said one panelist, the head of capital markets with a private equity firm, to a packed hall at the New York Athletic Club.

Other panelists sparred on whether or not the price drop was a sign that more significant declines lie ahead in 2016.

“The market obviously is peaking,” one panelist said, but another argued that the “fundamentals are still improving,” albeit at a slower pace.

The rise in prices since the financial crisis is largely due to increased domestic and foreign demand for US real estate. Foreigners pumped more than $91 billion worth of cross-border deals into the US in 2015, up from less than $5 billion in deals completed in 2009, according to data from Real Capital Analytics.

But that demand could stall with declining oil prices, delegates heard at the conference. Foreign wealth has flooded the global real estate markets largely through sovereign wealth funds, but two-thirds of all sovereign wealth money comes from oil or energy commodities, which has declined about 17 percent in the last two years, one panelist said.

Meanwhile, CMBS, a main focus of the conference, has had a rough start to the year. CMBS lenders and issuers are much more careful in today’s market and trying to focus on lower leverage and better credit, and panelists noted that that their CMBS businesses have declined markedly. While CMBS made up about 30 percent of one lender’s business in 2014, that has dropped to effectively zero, he said.

“I would say issuance over the next few months is going to be very slow,” added an executive with a major bank lender. “It’s hard to originate the lower leverage and better quality products, and our origination bases are going to be a quarter or a third of what we were doing last year.”

But lenders still said that financing outside of CMBS will carry the commercial real estate market through the next year. There has been less dislocation in the bank markets and non-bank lenders continue to lend aggressively.

“I think we’ll look back on 2016 as the year of haves and have-nots when it came to the capital markets,” said one panelist.

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