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U.S. capital markets had a banner year in 2016, even accounting for volatility. The investment environment for commercial markets remained well-diversified, totaling $6.6 trillion in 2016. Debt investments accounted for 57 percent of total, with equity comprising the rest.
On the equity side of commercial real estate financing, where equity investors held $2.9 trillion in assets, private equity accounted for 55 percent of capital, followed by listed and non-listed REITs, which made up 31 percent of financing in 2016, according to Situs RERC. Pension funds, both domestic and cross-border were the third largest capital provider group, representing 5 percent of the equity market. The remainder was distributed between groups comprised of life insurance companies, commercial banks, corporations, foreign investors and others.
On the debt side, chartered depository institutions (banks) accounted for the bulk of capital providers, with a little over half of total market holdings, based on data from the Federal Reserve. The second largest share of debt holders was comprised of government sponsored enterprises (Fannie, Freddie), which accounted for 18 percent of debt investments, dominating the multifamily investment sector. Life insurance companies held 11 percent of commercial real estate debt, followed by securitized debt holders—commercial mortgage backed securities (CMBS), collateralized debt obligations (CDOs), and other asset backed securities (ABS)—making up 10 percent of total. U.S. offices of foreign banks accounted for two percent of total debt holders.
Looking at the distribution of capital by source, the most striking change over the past several years has been the diminishing profile of the CMBS market. U.S. CMBS issuance rose dramatically from $37 billion in 1997 to a peak of $229 billion in 2007. Originations dropped dramatically during the 2008-10 period, due to the Great Financial Crisis. They have rebounded somewhat, but nowhere near the prior levels, especially in light of the markets’ investment volume. In 2015, CMBS issuers offered $101 billion in commercial bonds. However, 2016 issuance was a more modest $76 billion, as bond issuers felt the impact of financial markets’ volatility. As of the first quarter of 2017, U.S. CMBS issuance was down 21.1 percent, with a total of $15 billion.
For the past seven years, investors have been concerned about the “wall of maturing debt”—many of the loans issued during the 2005-07 period, which were 10-year loans, and were scheduled for refinancing in 2015 – 2018. The majority of the loans were for office and retail assets, which have recorded slower comparative recoveries in fundamentals post-recession. Consequently, concerns abounded about the likelihood of these loans to turn delinquent in large numbers.
Due to a confluence of factors, including continuing low interest rates, improving fundamentals, as well as rising cash flows and property values, refinancing has not proven a major issue. According to Trepp, there is close to $109 billion worth of CMBS loans maturing in 2017.
For perspective, 2016 recorded $111.4 billion in resolved CRE mortgage debt. Of that total, 8.1 percent were a total loss. During the first six months of 2017, there is $65.6 billion worth of CMBS debt due for refinancing, of which only 6.4 percent is delinquent. Most of the maturing debt is linked to office and retail properties, which account for 31.9 percent and 24.8 percent of volume, respectively.
Impact on REALTORS® Commercial Markets
Based on the Commercial Real Estate Lending Trends 2017 report, CMBS loans made up only one percent of capital in REALTORS® markets, a consistent share over the past few years. In turn, as market conditions have improved over the past few years, asset valuations have risen in tandem with net operating income (NOI). The report data indicated that 67 percent REALTORS® active in commercial markets reported rising NOIs for properties they sold or leased over the prior 12 months.
As lending conditions eased, the share of transactions failing due to refinancing has been on a downward trend. Refinancing difficulties caused deal failures in 50 percent of transactions during 2012. The share dropped to 42 percent in 2013 and 21 percent in 2014. Based on REALTORS® latest data, refinancing failures dropped to below 14 percent, the lowest level since the report’s inception.
For more information and the full report, access NAR’s Commercial Real Estate Lending Trends 2017.