C — January 11 - 24, 2013 — 2013 Forecast — Mid Atlantic Real Estate Journal
www.marejournal.com
2013 F orecast By David Cohen, Meridian Capital Group, LLC Year end summary of trends in commercial real estate
I n today’s commercial real estate finance environ- ment one cannot under-
confluence of events driving the current level of market activity, especially in the multifamily segment. Given the favorable risk pro- file of multifamily properties, there are new entrants daily to the multifamily debt capi- tal markets including banks, conduit lenders, life insurance companies and other specialized lenders. Not surprisingly, many of them want the same thing; high-quality loans secured by stabilized multifamily proper- ties in the Northeast and Mid- Atlantic regions of the U.S. The relative safety of multifamily as a property type in combina-
tion with a post-crisis attitude shift on the part of lenders to focus on new loan origination, rather than defense of balance sheet, has driven spreads lower and decreased overall interest rates for commercial real estate loans. In addition to increased lender activity, every property owner is reexamining his or her existing financing situation and looking for opportunities to reduce interest expense and potentially take out addi- tional proceeds. We have seen numerous examples of loans that closed less than two years ago where refinancing makes
economic sense given the cur- rent interest rate climate and helps to achieve the investors’ overall strategy and business plan more quickly. In the past few weeks alone, I have fielded calls from three borrowers who closed balance sheet loans in 2011. With rates dropping dras- tically, the analysis we provided showed that it made financial sense to pay the penalties in favor of lower rate loans with extended terms to solidify fu- ture cash flows. With both lenders and own- ers aggressively back in the market it comes as no surprise to see property sales volume
numbers as well as property values on the rise. Given the price appreciation momentum for multifamily properties in the Northeast and Mid-Atlan- tic, many longer term owners are marketing or considering marketing their properties for sale to capture the trapped equity. Sitting across from these sell- ers are buyers who have been actively picking over the lim- ited list of available properties. Favorable market conditions are encouraging investment as investors who remained on the sidelines during the economic downturn believe that the market has stabilized and have renewed interest in deploying equity in established markets. Meridian’s New Jersey office re- cently closed on several sizable loans on properties that were previously marketed unsuc- cessfully and are now attract- ing offers acceptable to sellers, due to increasing rent trends and lower interest rates avail- able for longer terms. Further short-term fuel for the property sales market has come from the looming fiscal cliff and the tax implications if an agreement is not reached by January 1, 2013. Many long- term holders of real estate have quietly gone into contract to sell assets with closings slated before year end to avoid the potentially onerous tax impli- cations. Investors are also diversify- ing into multifamily for its stability and to capture the ben- efit of several short-term eco- nomic factors, including high unemployment and the weak single-family housing market, which are contributing to rent growth, low vacancy levels and price appreciation. Despite the weak employment situation in the U.S., the slow recovery in combination with increased single-family mortgage un- derwriting requirements have prevented families from pur- chasing homes leaving them as renters in a fairly tight rental housing market. This dynamic will not change quickly giving investors a sizable window of opportunity. As rents have grown and va- cancy has declined, developers have regained confidence and are now building new multi- family properties. This new development activity is further supported by banks and equity investors who are also making continued on page 16C
s t a t e t h e significance of low inter- est rates and their impact on both re- f i n a n c i n g volume and p r o p e r t y sales. What is
David Cohen
important to note are the driv- ers behind these trends and the further knock-on effect that is spurring development. Low interest rates alone are not enough to create the unique
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