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The world of CRE Finance
- 1. 1 COMMERCIAL REAL ESTATE FINANCE – TRENDS AND POLITICS
- 2. 2 • MODERATOR DAN GOTTLIEB • Chief Operating Officer, EDR PANELISTS: • LISA A. PENDERGAST • Executive Director • Commercial Real Estate Finance Council (CREFC) • MICHAEL P. FLOOD • Deputy Executive Director • Commercial Real Estate Finance Council OUR SPEAKERS
- 3. 3 MARKET TRENDS • Macroeconomic Trends • Regulatory Trends • Lending and Investment Trends CREFC MARKET OUTLOOK 2017 • Survey of CREFC Membership, Market Sentiment REGULATORY AND LEGISLATIVE DEVELOPMENTS • Infrastructure Spending • Dodd-Frank Reform • GSE Lending • Tax Reform OVERVIEW
- 4. 4 MEGA TRENDS • Sharing economy, collaborative economy – Air B&B, WeWork – multi-configurable spaces and flexible leases • E-commerce -Telecommuting, Driverless Cars • Demographic Shifts -- Millennials and Baby Boomer REGULATORY DEVELOPMENTS • Capital developments, alternative lenders, taxes, infrastructure PROTRACTED ECONOMIC RECOVERY GIVES LEGS TO CYCLE • Prolonged period of low rates informed by weaker/volatile global markets • Cautiously optimistic that industry can continue to grow • Fundraising declines as focus turns to allocation – niche markets for returns • Non-residential construction spending to grow at a slower pace amidst caution KEY CRE FINANCE MARKET TRENDS
- 5. 5 FOREIGN INVESTMENT IN U.S. CRE/MULTIFAMILY • Chinese (Life Cos) largest group of foreign investors in 2016 at $19.2b, up 10% • Safety (15% outside investment limit), diversify away from slowing economy, depreciating yuan, $1b+ buys • 2nd largest was Canada at $13.1b (Forbes) • FIRPTA and EB5 developments FEDERAL RESERVE / REGULATORS CITE CAUTION • Loosening credit risk underwriting practices • CRE growth and concentration risk on bank portfolios EXPANSION OF LENDER TYPES REDUCED CRE TRANSACTION VOLUMES KEY CRE FINANCE MARKET TRENDS
- 6. 6 OVERALL CRE PICTURE FOR 2017 • 55% believe CRE property markets have peaked (Especially in multifamily and hotel assets) • 67% expect economy to perform at least somewhat better than in ‘16 CRE CAPITAL AVAILABILITY AT LEAST SOMEWHAT FAVORABLE ATTRACTIVENESS OF CRE DEBT • Majority expect domestic investment in debt & equity to be about the same this year vs. 2016 (66%; 67%) • Expectations for foreign investment in debt and equity are higher • 72% believe 50-75% of 2017 CMBS maturing loans will pay off GAUGING SENTIMENT: CREFC MARKET OUTLOOK
- 7. 7 GAUGING SENTIMENT: CREFC MARKET OUTLOOK LOAN ORIGINATION VOLUMES • Expected to be healthy, even outpacing 2016 • Exceptions: banks, multifamily, hotel and construction lending. • 84% anticipate CMBS issuance of $50b-$100b in 2017, • Plurality predict $75b-$100b INTEREST RATES • ~80% of respondents expect interest rates to rise 25-100 bps • Majority anticipate some impact on business performance. EXTERNAL FACTORS OF MOST CONCERN • Contagion • Geopolitical trends
- 8. 8 LOAN ORIGINATIONS ENDED 2016 HEALTHY • Lower in 2016 by just 1% compared to full-year 2015 • Down 7% in 4Q16 REFLECTS DECLINE IN CRE/MULTIFAMILY TRANSACTION VOLUME • Lower YOY of 8% to $434.96 billion LOAN ORIGINATION VOLUME DIPS MODESTLY Q1 Q2 Q3 Q4 YOY Q4 Q3 to Q4 YTD-YTD 2013 123 167 166 223 16% 34% 15% 2014 122 164 193 246 11% 27% 7% 2015 182 210 217 293 19% 35% 24% 2016 182 212 227 272 -7% 20% -1% Commercial/Multifamily Mortgage Bankers Originations Index Percentage ChangeOrigination Volume Index (2001 Avg. Qtr * 100)
- 9. 9 1. CMBS MORTGAGE ORIGINATIONS FELL IN 2016 2. PORTFOLIO LENDERS & GSE LENDERS THRIVE 3. NEW ALTERNATIVE LENDERS RISE SHIFTS IN LENDING SOURCES YOY Q4 Q3 to Q4 YTD-YTD CMBS 2013 15 35 33 2014 6 -3 20 2015 -2 3 6 2016 -2 5 -15 Commercial Banks 2013 54 44 32 2014 -7 59 6 2015 82 50 59 2016 -17 37 6 Life Insurance Companies 2013 40 8 25 2014 8 16 2 2015 19 17 23 2016 -6 13 0 Fannie Mae/Freddie Mac 2013 -43 48 -18 2014 119 49 33 2015 24 90 59 2016 4 8 10 Source. Real Capital Analytics. Commercial/Multifamily Mortgage Bankers Originations Index by Lender Type Percentage Change
- 10. 10 U.S. RANKS 11TH GLOBALLY IN INFRASTRUCTURE WORLD ECONOMIC FORUM INFRASTRUCTURE SPENDING 88% 83% 77% 74% 63% 60% 58% 54% Quality of Infrastructure Consumer Demand Availability of Skilled Workforce Regulations That Encourage or Discourage Development Tax Structure (Development Incentives, Ongoing Tax Burden) Quality of Government (Transparency, Accountability, Service) Quality of Schools Availability of Recreation and Cultural Activities Quality of Infrastructure Is a Significant Driver of Real Estate Investment Source. Urban Land Institute and EY, 2014.
- 11. 11 INFRASTRUCTURE & REAL ESTATE POSITIVE TWO-WAY RELATIONSHIP • Power • Transportation • Telecommunications • Water Supply Networks FUELS JOB CREATION AND STIMULATES ECONOMY BI-PARTISAN SUPPORT BY HOW FUNDED? • Public-Private Partnerships • Public Financing - Direct Federal Spending • Tax incentives INFRASTRUCTURE SPENDING
- 12. 12 EXIT DODD-FRANK, ENTER CHOICE ACT 2.0? 96 169 203 230 12 4 12 33 44 86 94 101 76 15 CMBS Annual Issuance ($MM)
- 13. 13 EXIT DODD-FRANK, ENTER CHOICE ACT 2.0? FINANCIAL CHOICE ACT OF 2017 • Repeals and replaces (or reforms) Dodd-Frank • Sponsored by House Financial Services Chair Jeb Hensarling (R-TX) • 2nd version of a proposal first introduced in 2016 Then focus mainly relief for well-capitalized institutions MAIN FOCUS OF V2 STILL CAPITAL RULES / SIFI DESIGNATION ALSO ADDRESSES: • Repeal of risk-retention requirements (except for RMBS) • Volcker rule • Options for ending conservatorship of Fannie Mae and Freddie Mac CMBS REFINEMENTS TO RISK RETENTION LIKELY COURSE • RMBS risk retention not addressed by CHOICE ACT 2.0
- 14. 14 GSE REFORM A ‘PRIORITY’ FOR SENATE BANKING COMMITTEE CHAIR • April 27, “Housing finance is one of those areas that has greater potential than many of the others.” Senator Crapo (R-ID), Banking Committee Chair BOTH PARTIES AGREE GSE MULTIFAMILY PERFORMANCE EXCEPTIONAL • Business model works Fully privatize or keep the Agency’s “government sponsored” COMPETING ISSUES: • ACA, Tax Reform, CHOICE Act 2.0, Flood Insurance, Government Funding, Debt Ceiling ~$113B 2016 FREDDIE MAC K AND FANNIE MAE GEMS ISSUANCE • Outpaces private-label CMBS issuance of $76b GSE REFORM TARGET: LATE FALL OR 2018 FUTURE OF MULTIFAMILY GSE LENDING
- 15. 15 CREFC SURVEY ON GSE REFORM If Congress put forward a GSE Reform bill, which of the following would you support for multifamily real estate products? Partial explicit guarantee / partial private guarantee Partial implicit guarantee /partial private guarantee Full government guarantee / no private business No government guarantee / full private guarantee Standardized single platform Separate treatment of residential and commercial real estate
- 16. 16 TAX REFORM IN ALL ITS ITERATIONS TAX REFORM FOR ECONOMIC GROWTH & AMERICAN JOBS (TRUMP) • Corporations • Reduction of the corporate tax rate to 15% • Reduction of pass-through entities tax rates to 15% • Repatriation of corporate earnings • Conversion to a territorial tax system • Individual tax code • Individual income tax rates of 10, 25 and 35% • Greater childcare tax credits • Repeal of the Alternative Minimum Tax (AMT) • Repeal of estate taxes • No change to interest deduction and savings plan treatment. HOUSE HAS ITS OWN PLAN, SENATE STILL PULLING ONE TOGETHER
- 17. 17 Q&A?