Q&A: How Low Interest Rates Are Bolstering CRE Loans
Jonathan Roth, Justin Kennedy and Toby Cobb of 3650 REIT discuss the industry’s current direction and what to expect going forward.
Low interest rates and a slow-growing economy are two of the factors shaping the commercial real estate debt landscape. And while the industry is bracing for an eventual decline, fundamentals are stable in the near term.
So, what does this mean for commercial real estate lending? Co-founders & managing partners Jonathan Roth, Justin Kennedy and Toby Cobb of 3650 REIT shared insights on what to expect going forward. The balance sheet lender recently originated a $76 million bridge loan for the construction of Gateway at Wynwood, a speculative office project in Miami’s hot Wynwood submarket.
How optimistic are you about the performance of the CRE industry going into 2020?
Roth: We are optimistic about the continued health and steady performance of broad U.S. commercial real estate markets. Barring unforeseen events, the U.S. will continue to lead the global economy. From this strength, along with high construction costs and continued low rates, U.S. commercial real estate is well-positioned to maintain stable fundamentals and valuations in the intermediate-term. Unlike past expansions, the pace of construction and broad commercial real estate debt markets have maintained a relatively conservative posture and overbuilding has been limited to certain asset classes in distinct markets.
With mortgage delinquencies at record low levels, how do you expect this to shape CRE lending?
Roth: Strong fundamentals and low delinquencies are the result of the strong U.S. economy, along with largely disciplined construction, investment and lending since the financial crisis. Historically high construction costs are likely to keep supply muted and, along with a continued outlook for low rates, will bolster values. Yet global competition and margin pressures—along with industry-wide secular shifts, particularly in office and retail—will continue to constrain rent growth in “commodity” type properties.
Do you think the current low-interest rate and slow-growth environment will continue? What will this mean for capital markets?
Roth: The low global rate environment is driven by global central bank actions to combat significant off-shore deflationary pressures that seem likely to continue in the intermediate future. With continued low global rates, capital markets will continue to exhibit strong demand for safe investments offering healthy cash yields.
Which property sector do you expect to be top-performing in 2020 and why?
Kennedy: We expect walkable mixed-used developments in high-demand urban neighborhoods to perform especially well in the coming years. Several recent studies predict significantly higher rent growth in walkable urban districts relative to more conventional, “car-focused” properties. Not surprisingly, we also expect rents for warehouse and industrial real estate in strong job-growth regions to perform well, as powerful secular changes continue to change consumer preferences and retail sales patterns.
How do you think the financial community will handle LIBOR-related shifts?
Kennedy: We are optimistic that the Federal Reserve and the banking community will usher in the SOFR transition with minimal volatility. The past several months since early fall suggest that they are focused on the task and have been increasingly effective at dampening volatility in short-term capital markets.
Name three things that will impact CRE lending this year.
Cobb: Firstly, the strongest borrowers will increasingly demand better communication and effective asset management from their lenders. Next, capital markets lenders able to deliver on these communication and asset management demands will gain market share.
Furthermore, the GSEs—Fannie Mae and Freddie Mac—will focus on the “mission.” As such, they will continue to shy away from Class A multifamily, providing lending opportunities for capital markets and life companies to make attractive, long-dated loans in the space traditionally dominated by the GSEs.
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