Commercial banks and other lenders may be competing for fewer transactions
In the Greater New York City commercial real estate (CRE) market, we expect to see a lower volume of financing transactions completed during 2017. Our forecast is that commercial banks and other lenders are going to compete for fewer transactions.
The decrease in loan volume will mean that, overall, commercial banks will be competing for fewer transactions. With respect to multifamily lending, the number of bank lenders may have decreased since two years ago due to consolidation or regulatory pressures, but the projected number of loans is also significantly less than in 2015. We expect that the New York City, New Jersey and the greater Philadelphia region will continue to be a borrower’s market for most loan types.
This year, banks may continue to step back from certain types of real estate products as well as development and construction loans. This will be especially apparent in the luxury multifamily housing sector. Aside from these areas, where consolidation in the market is expected, property owners are likely to be able to secure attractive and relatively low cost financing.
Available financing for CRE and multi-family housing properties will be priced higher than in the past few years, but from an historical perspective is still very low. In the near term, we expect that the interest rates for most permanent financing transactions will likely be increasing in coming months as banks migrate their balance sheets to accommodate future expected yields. Banks continue to be well capitalized with strongly performing loan portfolios. We believe that lenders will continue to offer financing to maintain and grow their balance sheets and will continue to provide more loans to a broad range of mixed-use buildings and CRE properties.
Interestingly, the banking sector did experience a surge in loan applications for commercial real estate and multi-family properties immediately after Election Day. The uptick in loan demand continued through December as property owners moved to lock in mortgage rates quickly. Towards the end of January, however, the volume of new loan applications leveled off and continues to move ahead at a reduced pace.
For the balance of the year, we are forecasting lower demand for CRE and multifamily housing loans. We expect the transaction volume to fall about 20 percent to 25 percent overall for the year.
At the same time, commercial banks in the New York and New Jersey market are healthy and have significant capital reserves. Therefore, we expect that developers, real estate investors and building owners that seek financing are likely to secure the bank loans they need to acquire or refinance existing properties and even – in selective circumstances – banks will structure financing for new construction.
In terms of macroeconomic trends, there has been an economic recovery since 2009/2010, employment is back to strong levels, but these headlines haven’t necessarily painted an accurate picture of economic health. While there have been certain areas, such as multi-family, that have benefited during the past seven years with historically low interest rates, others have not.
The unemployment rate is reportedly under five percent, and down from the 2009 peak of around 10 percent. However, this doesn’t consider participation rates, which are hovering below 65 percent or that many of the ‘employed’ are under employed earning less in actual or real terms.
We believe that the combination of positive changes to the economy including lowering of corporate taxes, a reduction in overreaching regulation as well as relief from health care costs, could have significant positive effects on the business climate. We have heard from many small and midsize companies in our region and they are optimistic that the economy will expand at a rapid pace this year and beyond. Looking ahead, companies are increasing their workforce and making capital expenditures to expand their operations.
That optimism is a potential positive for the commercial real estate sector as well. As the economy grows at a faster pace, we foresee increasing demand in our market for commercial office space, warehouses, advanced distribution facilities, and light industrial properties. E-commerce and logistics companies have already invested in large-scale distribution facilities located across New Jersey. This trend fits nicely with commercial banks eager to diversify their CRE loan portfolios. While banks will continue to provide financing to the multifamily housing sector, they are increasing their loans to office buildings and warehouse space and industrial facilities.
In addition, many banks have greatly expanded their business lending which allows for commercial banking relationships and business loans. Through a combination of owner-occupied real estate financing together with other business lending needs, such as lines of credit, payroll processing, many banks are able to offer comprehensive loan products to extend beyond only mortgage financing.
In conclusion, despite a likely decrease in the total volume of loans that are originated in our region this year, commercial bankers remain bullish about the overall growth of the commercial real estate sector.
Joseph Orefice
Investors Bank, New York City Office
646-358-8381
JOrefice@myinvestorsbank.com
www.myinvestorsbank.com
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