Texas Real Estate Business

FEB 2018

Texas Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in Texas.

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26 • February 2018 • Texas Real Estate Business www.REBusinessOnline.com THREE CAUSES FOR MORTGAGE BANKERS' OPTIMISM MORTGAGE from page 1 Tax Cuts and Jobs Act include a corpo- rate tax rate cut of 14 percentage points to 21 percent, reductions in individual tax rates, and favorable treatment of business income earned through a pass-through entity, a structure used extensively by real estate investors. Such optimism was somewhat un- expected. Many commercial real es- tate professionals figured the growth cycle would have ended months ago. Indeed, the economic expansion is a few months away from matching the second-longest expansion since World War II — 106 months in the 1960s. Having perceived this expansion to be on its way out, lenders last year re- duced leverage ratios by a few percent- age points for acquisition and refinance loans, among other tightening actions. Combined with regulatory changes that had already slowed bank lending, the move by lenders fueled deals with a growing number of private debt funds, especially for construction financing. (See sidebar.) But signs of accelerating growth sug- gest that the expansion isn't near an end, mortgage bankers contend, point- ing out that Australia's current growth stretch is nearing 27 years. "I don't know what the new norm is, but as far as hit- ting the end of the cycle, maybe it gets pushed out. Maybe it gets pushed out two or three years," says Bruce Francis, vice chairman of CBRE Capital Mar- kets, which reported mortgage origina- tion and servicing fees of $412 million through three quarters last year, a year- over-year increase of $19 million. Balanced Markets Robust CMBS activity is fostering the bright outlook, especially after a wave of CMBS maturities that were sup- posed to overwhelm the system never materialized. According to Trepp, pri- vate-label CMBS issuance in 2017 to- taled nearly $90.5 billion, a year-over- year increase of 28.1 percent, while the delinquency rate fell to a 15-month low of about 4.9 percent. In October, the Mortgage Bank- ers Association (MBA) estimated that commercial and multifamily mortgage originations for all of 2017, including private label CMBS issuances, would reach $515 billion, up 5 percent over 2016. (The final totals for the year hadn't been released as of press time.) At the end of the third quarter of 2017, life insurance companies and gov- ernment-sponsored enterprises Fannie Mae and Freddie Mac reported 60-day delinquency rates of 0.03 percent or less, according to the MBA. Banks re- ported 90-day delinquency rates of 0.52 percent, the lowest level in 24 years of observation, reports the MBA. "Mortgage bank- ers, lenders and bor- rowers really learned from the last down- turn that prudent underwriting makes all the difference in the world," says Sue Blumberg, a manag- ing director at North- Marq Capital's Chi- cago office. "Nobody I talk to is having issues with their loan portfolios." Aside from e-commerce-fueled jit- ters in the retail property sector, funda- mentals are generally healthy across all commercial real estate segments, inter- mediaries say. "It feels to us like things are in equi- librium at both the property level and at the capital level," adds M. Lance Patterson, principal of Atlanta-based Patterson Real Estate Advisory Group, which in 2018 looks to best last year's record origination volume. "We see no stupid money." Bumps in the Road Of course, the rosy view extends only so far. Intermediaries point to a handful of potential market disruptors, includ- ing a stubborn bid-ask spread that has slowed commercial property sales. Buyers and sellers completed $405.2 billion in commercial real estate trans- actions during the period January through November 2017, according to Real Capital Analytics. The firm tracks apartment, hotel, industrial, office, re- tail and development land deals of $2.5 million and up. The latest available figures indicate a year-over-year decline of 7.4 percent. Real Capital attributed some of the falloff to a decrease in portfolio sales, which peaked at $118 billion in 2015 before sliding to $85 billion in 2016. Through the first 11 months of 2017, portfolio sales totaled $77.1 billion. Wally Reid, a senior managing direc- tor with HFF in Houston, notes that big portfolio deals or bulk buys could bal- loon in 2018 as real estate investment trusts (REITs) go private or pursue large transactions, just as Hilton Hotels, Eq- uity Office Properties, Archstone-Smith Trust and others did in 2007 when property values were at a peak. Reid's office last year advised Hous- ton area office landlord Parkway Inc. in the $1.2 billion sale of its entire 19-building portfolio to the Canada Pension Plan Investment Board (CP- PIB). The sales price represented a 14.3 percent premium to Parkway's share price when the deal was announced in June. The transaction materialized a few months after CPPIB and two institu- tional investors agreed to acquire a 49 percent interest in two Parkway assets. "The equity got under the hood after the first deal and said, 'Oh let's just buy the whole com- pany,'" says Reid. HFF placed $35 bil- lion in debt through three quarters in 2017, a year-over- year increase of near- ly 27 percent, accord- ing to HFF financial reports. While the bid-ask gulf also has con- tributed to a slowdown in deal mak- ing, buyers on deadline to fulfill 1031 exchange transactions have typically been meeting the seller's price, mort- gage bankers say. Bruce Francis CBRE Sue Blumberg NorthMarq Capital Wally Reid HFF

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