EAGLES WIN SUPERBOWL!!! and CRE Lending is on FIRE!

Just how big is this thing going to get? CRE Market Analysis Summary

Market Size

There are two factors that drive lending volume, refinancing of existing loans and property sales. Total outstanding CRE debt at the end of 2015 stood at $2.72 trillion and is projected to reach $2.8 trillion by the end of 2016 according to the Mortgage Bankers Association ("MBA"). Loan volume peaked in 2007 at approximately $510 billion just before the global financial crisis, but has steadily recovered since that time. The MBA indicates that the 2015 volume was approximately $457 billion and projects the 2016 volume at $485 billion. This volume was driven by approximately $350 billion of refinancing (per MBA) and $511 billion of property transactions according to data from Real Capital Analytics (“RCA”). 

It is projected that more than $300 billion of CMBS loans will come due by 2018. Historically CMBS lending has accounted for between 30% and 40% of CRE lending activity. Therefore, total refinancing activity over the next two years could be $750 billion or more.  

A recent report by Morgan Stanley indicated that the average size of a conduit loan since 2012 has been approximately $17 million, while small balance loans in government backed programs have averaged approximately $2 million. New CMBS activity is estimated to be between $75 billion and $100 billion.

In terms of property transactions, data from Costar indicates the average transaction value over the past five years was approximately $5.8 million. In 2015 the average was just under $6.9 million. Costar also splits the results between investment grade and non-investment grade. Investment grade sales averaged approximately $24.5 million since 2012 and $26.5 million in 2015. Non-investment grade averaged approximately $2.1 million from 2012 and just under $3 million in 2015.  

Investment grade would closely mirror the sales RCA tracks (sales greater than $2.5 million). Extrapolating the Costar data to the RCA total transaction number indicates there were just over 71,000 property transactions last year, of which approximately 54,000 were non-investment grade. Each of those transactions represents a lending opportunity and assuming a conservative loan-to-value ratio (“LTV”) of 65% would result in a loan amount of approximately $2 million. 

Market Composition

While the market has materially recovered, a May 2015 survey on the CRE lending market by the National Association of Realtors (“NAR”) shows that challenges persist. The following graph shows that over the past three year commercial brokers have had transactions fail 45% of the time, on average, over the last three years.

The survey results indicate that 62% of the failures resulted from loan underwriting standards. Another 19% failed due to “financing ability”. Together this represents 81% of the responses. One general interpretation of this is that borrowers could not find the right lender or loan programs. It is these types of issues that Lendersbridge will be able to help overcome.

Mortgage Banker Association (“MBA”) data and compiled by Mesa West (a private lender) shows, the lending market has rebounded since the financial crisis. However, it has also gotten more fractured as more private lenders have entered the market.

This trend began with the shutdown of the CMBS market that occurred during the financial crisis where private lenders saw the opportunity for attractive returns by filling the void in the market. The regulatory environment expansion resulting from the financial crises appears to be sustaining this trend. CMBS lenders will have to retain a portion of the risk on each of their deals starting at the end of 2016. In addition, banks in general have a growing concern about the impact of the risk treatment of real estate loans proposed in Basel III. This is further supported by the NAR lending survey where 58% of the respondents indicated that bank capital remains an obstacle to getting a deal done and 53% of the causes were attributed to regulatory impact and/or bank capital requirements.  

As further proof that this trend of private lenders coming into the market will continue, Private Equity Real Estate data shows that there are over 50 funds in the market seeking to raise almost $19 billion for CRE lending. Various professional organizations estimate there are over 15,000 CRE lending companies such as banks, credit unions and insurance companies. However this does not include private equity funds established to make CRE loans, hedge funds (4,500+ in the U.S.), high net worth investors (defined as having $1 million of assets or more; over 4 million in the U.S.), private equity real estate debt funds (several hundred) or family offices (over 3,000 in the U.S.).

Based on the data above, it is estimated that there are potentially 18,000 to 25,000 lenders that LendersBridge will onboard.

Another important facet of the market besides lenders and borrowers is intermediaries, of which there are two types; real estate brokers and mortgage brokers. There are approximately 300,000 CRE brokers in the U.S. Many of them will often refer clients to lenders in order to help facilitate completing a sale.  

A recent article by PEI Media indicated an estimated 70% of all CRE loans are now placed using the services of a mortgage broker. Most of the respondents, which included lenders as well as mortgage brokers, expect that number to continue increasing as a result of the continually changing marketplace. The expanding regulator environment and changing composition of lenders has made finding a loan more difficult, so borrowers have become more willing to pay someone to help them navigate the process and hopefully increase the certainty of securing financing.

IBISWorld indicates that there are approximately 13,000 mortgage broker firms employing over 48,000 people as of December 2015. It is estimated approximately 5,000 of those firms are involved with CRE lending. Proportionally that would mean there are approximately 18,500 people involved in CRE mortgage brokerage. 

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