14C — June 24 - July 14, 2016 — Mid-Year Review — M id A tlantic

Real Estate Journal

D ebt

By Jon Mikula, HFF Mid-year debt markets recap


here is currently no lack of liquidity in the commercial real estate

$88 billion, representing 16% of all acquisitions, compared to $42B and less than 10% in 2014. Over the last 12-18 months, foreign capital has ventured outside the major CBD markets and in many cases into secondary markets to chase yield. All of this liquidity bodes well for our industry. At the start of 2016, many lenders were faced with the implications of additional fed- eral oversight. As a result of the Dodd Frank Act of 2010, numerous regulatory reform measures are finally taking effect in the commercial mort-

gage market. These measures require heightened standards for lending practices in an effort to help avoid another meltdown. One challenge for the re- mainder of the year is the upcoming wave of CMBS ma- turities from loans originated 10 years ago. There is an an- ticipated $50 billion of CMBS maturities still to come in 2016, with an additional $95 billion to follow in 2017. An estimated 60% of these ma- turities are office and retail loans, while an estimated 35% have a debt yield less than 8%. Givenmost of these loans were

originated in 2006 and 2007, these are generally aggres- sively underwritten (full term I/O, etc.). Including maturities for other lenders (life insur- ance companies, banks, etc.), the totals for 2016 and 2017 amount to $752 billion. Below is a summary of the major debt market players: Banks Banks, especially those with assets in excess of $500 mil- lion, are dealing with Basel III, which requires them to hold increased capital against commercial mortgages as a buffer based on risk. Throw in HVCRE (High Volatility

Commercial Real Estate) clas- sifications, which effectively impacts all development/con- struction loans, and you have a lot to get your hands around. The bottom line is the banks are being inundated with fed- eral oversight, thus creating an overwhelming need for in- ternal compliance personnel. While many of the banks are gun shy of construction, higher leverage, and risk, as a result of the above, most are looking to aggressively add term loans to their books and are as com- petitive as ever in that arena. CMBS CMBS, which was respon- sible for 54% of all transac- tions that closed in 2007, with $230 billion in originations, produced ~$100 billion in 2015, representing about 20% of the market. The first half of 2016 was difficult for CMBS as the secondary market needed to absorb the glut of product that was originated in late 2015, in the midst of volatile pricing, as all-in coupons went from 4% to 5% overnight. Dodd Frank legislation finally made its way to this segment of the market with Risk Retention rules, which come into play in December of 2016. The big- gest impact of this is the new requirement for issuers or B-Piece holders to hold 5% of the securitization. In the past, this was hedged or sold. The layers of compliance that come with this have added costs that ultimately get passed on to the consumer. Given the new regulations, B-Piece buyers are now involved very early in the loan structuring process since they will be living with the first loss piece of the loan. In the past, lenders would close about 60% of their loans before identifying the B-Piece buyer. Today they close only about 10% before showing the B-Piece buyer the tape, to get their feedback on structure and pricing. As we approach the summer months, the CMBS market has improved dramatically since the begin- ning of the year, with pricing that is much more attractive, having come in about 100bps since the fall. The industry needs CMBS to be healthy, specifically for assets in sec- ondary and tertiary markets (CMBS represented a third of all loans in tertiary markets in 2015) and to deal with the wave of maturities coming over the next 18 months. continued on page 16C

market. $138 billion of dry powder has been raised by closed and open ended funds to be deployed in the spac e , representing

Jon Mikula

a 60% increase from the peak in the last cycle. Additionally, foreign capital has made a significant shift as an active investor in the U.S. In 2015, foreign investment totaled


HFF New Jersey was involved in $1.5 BILLION in Multi-housing Sale & Financing Transactions During the last 12 Months

The Crest at Princeton Meadows Property Sale 704 Units Multi-housing - Garden-style Plainsboro, NJ


The Brownstones at Englewood South Financing 350 Units - Class A Multi-housing - Mid-rise Englewood, NJ

Tower Portfolio Financing

Mid-Atlantic Apartment Portfolio Property Sale 4,035 Units (13 Properties) Multi-housing - Garden-style NJ, DE, PA

1,300 Units (11 Properties) Multi-housing - Garden-style NJ and NY

HFF New Jersey | 200 Campus Drive, Suite 410, Florham Park, NJ 07932 | (973) 549-2000 | hfflp.com

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