The US commercial real estate debt markets are gearing up for a 2022 that will look a lot like the past couple of years, but with new twists on old trends and adapting old ways of looking at new niches.
Here are three things that were at the top of affiliate title Real Estate Capital USA‘s conversations going into 2022.
Real-time analysis will replace rear-view analysis
Historically, commercial real estate lenders and investors have primarily used backward-looking analysis when underwriting loans and acquisitions. But this is changing as more market participants embrace tech-powered deal and portfolio management and leasing platforms.
A case in point is the monthly VTS Office Demand Index, launched in December 2020 to track tenant tours of office properties across the US and provides market participants with an early indicator of tenant demand.
“The folks who have accepted this analytical perspective on the markets want to use this information to get ahead of the trend,” said Eli Gilbert, head of market research at VTS.
The bottom line is that real-time, weekly, or even monthly data provides more accurate insight into what is going on at properties and in markets – and allows lenders and borrowers to underwrite loans from a more robust place.
Liquidity premiums will rise for niche sectors
Movie studios, life sciences properties, single-family residential properties and data centres are a handful of the niche sectors inching toward the mainstream, with commercial real estate lenders working to get hold of asset classes that might resemble more established sectors at first glance but are actually very different.
There are relatively few lenders active in these sectors. These players are working to evaluate and underwrite challenges that include the delayed draws on single-family residential development loans that are a sharp contrast to loans in the multifamily sector that are nearly fully funded on day one, noted Daniel Jacobs, a partner and head of originations at New York-based debt fund manager Asia Capital Real Estate.
However, a takeaway for lenders is that these niche sectors often only have a handful of lenders, which translates into a liquidity premium for those active in parts of the market that are set to see significant growth.
Racing to lock rates
There has been much talk about the Federal Reserve’s plans to raise interest rates over the next two years as the US emerges from the pandemic. But there’s been less discussion of how this will affect borrower behaviour this calendar year.
The Mortgage Bankers Association is expecting the 10-year Treasury bill to average just less than 2 percent in 2022, up from the roughly 1.75 percent level where it started the year.
Ivan Kustic, a vice-president at Los Angeles-based mortgage banker MetroGroup Realty Finance, told REC USA borrowers looking to lock in low rates is likely to be a major theme of 2022.
“Almost without exception, the mortgages that we have provided in the last couple of years have been at rates lower than what has been paid off in that time. And while interest rates remain at record lows, they are increasing,” Kustic said. “We’ve been encouraging our clients to review their current interest rates, and if applicable, estimate the cost of their prepayment premiums and compare that to what is available today.”
Borrowers should take note: banks and insurance companies can commit to terms going as far out as 18 months. This could give these lenders an edge over debt funds and other alternative lenders.