Money Talks: Gantry Assesses the Lending Market

Mark Ritchie

This year’s annual Mortgage Bankers Association Commercial Real Estate Finance conference offered optimistic views on the year ahead for commercial real estate finance. Those sentiments were punctuated by massive 2021 commercial mortgage production totals. For borrowers, it should be noted that even with some mild upward fluctuations, rates remain at what are historic lows.

For most lenders in the commercial space, the refrain was they would have done more business if they could have last year, and that expectation is defining their 2022 allocation targets as the year begins. That bodes well for an active year in commercial real estate finance, which is really what the conference is about—the year ahead. In that spirit, here are a few of the key takeaways from the conference to focus on as we chart a course in commercial real estate finance for 2022.

Variety of debt capital solutions

In a career that spans decades, I have never seen such a wide spectrum of commercial mortgage options available to sponsors and investors. Today’s market is a veritable supermarket of choice. Beyond the traditional banks, credit unions, CMBS and life company sources, new capital chasing yield and the inflation hedges of real estate investments has emerged as specialized debt funds competing with traditional capital providers for commercial real estate loans. This bodes well for tailoring debt to targeted investment outcomes, both short-term and legacy hold strategies alike. Options create competition, which will benefit borrowers in 2022.

Tsunami of variable-rate capital

A healthy appetite from the institutional world for commercial mortgage debt reflects the discipline and health of today’s asset class. These institutions see inflation and an opportunity for near-term returns in adjustable short-term debt. With rates remaining at historic lows, these variable-rate loans will serve an appetite from sponsors seeking debt at higher leverage or for value-add investments. Lenders remain confident that commercial real estate performance and revenue growth from operations will continue to meet loan performance as underwritten and are offering compelling adjustable-rate products for confidant sponsors in a variety of structures.

SOFR replaces LIBOR

At least for commercial real estate, the Secured Overnight Financing Rate has become the new benchmark for calculating variable-rate loans in the U.S. LIBOR is destined to be phased out completely, a process expected to finish by Q2 2023. While several new, different benchmarks came out from Europe, Japan and other mature markets, U.S. markets see SOFR as the de facto standard, compelling the shift to its widespread use. Most lenders in commercial real estate today now quote from SOFR, with a dwindling few institutions still quoting LIBOR.

Alternatives to conduit CMBS emerge

Banks, debt funds, credit unions and life companies have introduced products for sources of long-term debt capital to deploy at historically CMBS leverage points and spreads. This reflects my earlier point, with competition amongst lending sources creating viable options to legacy financing products

Fixed-Rate Debt Capital

Stability and performance across the spectrum of assets preferred by fixed-rate lenders, even in the face of post COVID disruptions, performed and continues to perform very well. Most lending program needs are greater in 2022, and their overall asset base is holding strong, though running hard to stay in place let alone grow. Mortgage run-off from these loans via amortization and property sales continue to motivate fixed rate lenders to identify and fund quality loans, meaning with qualified sponsorship and the right leverage, expect competition.

Not All Assets are Equal

Expect the trend of lenders aggressively competing for loans tied to multifamily and industrial properties to continue unabated in 2022. Subsequent tight spreads and debt yield in these asset classes have generated a re-emerging interest in retail, and we are seeing more and more debt sources funding well located properties for renovations and repositioning. Office product has also returned to the table for most of our lenders when there is a story to tell and a sponsor with an articulated business plan to write the next chapter. Of note, self storage as an asset class is maturing and turning into a “basic food group” for most lenders who now see this property class as an attractive target due to historic performance and continued demand.

Mark Ritchie is a principal with Gantry‘s Los Angeles Office.