December 15, 2016
By Dennis Kaiser
George Smith Partners’ Gary Tenzer, who spoke at Connect Westside LA, shared his insights about the performance of the finance market in 2016. We asked him what trends he sees ahead in 2017, as well as what key factors will play a role in shaping the market. Here is his overview of the year, as well as predictions for the road ahead.
Q: How was the overall performance of the financing market in 2016?
A: 2016 was a strong year for financing. While it began at a slower pace after a substantial dip at the end of 2015, the market started to recover in Q2 and was going strong by Q3. That momentum has continued, and we expect lending volume to remain strong throughout the coming year.
Other major trends this year include:
- Fluctuation in the CMBS market: CMBS projections were at $125 billion for 2016, based on a total volume of $105 billion last year. Instead, the CMBS market will likely complete $60 billion by the end of the year, indicating continued fluctuation.
- Increased Lender Caution: During 2016, we’ve seen banks become much more conservative, especially on construction loans. Many lenders believe that certain markets are reaching peak values. We will continue to face these challenges in the year to come, making it even more important for borrowers to seek out specialists who can demonstrate the value in their deals. That said, many life insurance companies have had a good year and plan to increase allocations in 2017, which is positive news for the financing market. The CMBS market is still strong.
- The Election: There is no doubt that this historic election affected (and will continue to affect) the financing market. After the election, interest rates rose 50 to 80 basis points, and spreads have widened. As a result, the cost of borrowing is higher, and will continue to be higher for long-term debt. Short-term debt has yet to be affected, based on its tie to LIBOR and Fed Funds, which haven’t moved as of yet, but we will be watching the actions of the Fed and short term rates closely in the year to come.
Q: What trends do you see emerging in 2017?
A: Transaction volume will continue to rise in 2017, but cap rates will need to adjust higher to make deals work.
Further, the high valuations that we’ve seen over the past two to three years will likely come back down to earth. This correction doesn’t indicate a slowdown – lenders are well-capitalized, they are just being more conservative, and it will be more expensive to borrow.
That said, from a historical perspective, money is still extremely cheap. In the 80’s, industry professionals said rates would never go below 10% again. The year I got into the business, prime went to 21. As a comparison, today’s rates are extremely low. Even if rates rise another 50 to 60 basis points, the fact remains that it’s inexpensive to borrow in the current market climate.
Q: What outside factors will impact the financing market in 2017?
A: The general economy has the greatest impact on the financing market. Current stock market activity indicates that the economy is entering a boom based on fiscal spending and tax cuts proposed by the Trump administration. Business growth across the board is good for rents and occupancies, all of which is good for borrowers and lenders. All of this activity will have a positive impact on financing in the coming year. However, looming deficits due to Trump’s proposed tax cuts, combined with infrastructure and military spending, will likely be inflationary and push rates higher. Bank regulations under Basil III and CMBS risk retention under Dodd-Frank will likely be relaxed under the new administration.
For comments, questions or concerns, please contact Dennis Kaiser