Texas Realty Capital Market Update

The TRC team recently returned from the Mortgage Bankers national conference. We thought we should pass along to our clients some feedback on the market outlook for 2017. The main themes we noted after visiting with 20+ different lenders at the conference are: Invest More Money & Take Less Risk.

1. More Money – There is no question that there is money available for the mortgage market in commercial real estate. Most Life Company lenders are coming off of two years of record origination volume in 2015 and 2016. They are indicating that they still have a strong appetite with increased allocations in 2017 – several indicating that they have +20% more money to invest in 2017. All remain interested in the four main property types: office, retail, multi-family and industrial. And also have interest in: Medical Office, Mixed Use, Self-Storage and certain types of Hospitality. Property types that have a harder time attracting capital are: Single Tenant with short leases, Special Purpose Buildings, Power Centers and Enclosed Malls.

2. Less Risk – A consistent theme that we heard at the conference was an increasing focus on decreasing risk. Or said simply, limiting the LTV to lower levels than in years past. Lenders are seeing many markets where values have increased rapidly in the past few years as investors look to more aggressively deploy capital in this asset class. The 1.00% increase in Treasury Rates since the November election is also putting pressure on the Debt Coverage Ratio. When loan constants and cap rates approach similar levels, lenders must reduce LTV’s to maintain the same Debt Coverage Ratio. New risk based capital requirements and lenders’ prior experiences from the last down cycle have resulted in many making adjustments in their underwriting approach to reduce risk at the start of 2017.

So for 2017, we expect lenders to start the year trying to win deals with pricing not proceeds. While we recently closed a 10 year fixed-rate deal at 3.21%, that rate was locked in before the November election. Currently, the best pricing we are seeing on 10 year fixed rate deals is just under 4.00%. It is no surprise that deals with lower Loan-to-Values and higher Debt Service Coverage Ratios will likely have the luxury of lenders competing to win the business. But it may be harder than usual for the higher leverage deals to find a home in the early months of 2017. If we get further into the year and there just are not enough lower leverage deals available to fill the lender allocations then the competition for deals will probably prompt lenders to relax their underwriting and find a way to push harder to find more proceeds.