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‘Uncertainty’ Creeps into lenders’ outlook: Borrower demand remains strong, but some wonder if the market has reached an inflection point.
We’re happy to have been featured alongside other leading lenders across the Midwest to offer our perspective on the state of the debt financing market.
The following questions were asked by Heartland Real Estate Business and answered by Jeffrey Morris, President and CEO.
Heartland Real Estate Business (HREB): What is your firm’s specialty in the commercial real estate space as a provider or arranger of capital?
Jeffrey Morris (Morris): As an intermediary, MSF Real Estate Capital is a total capital provider. We have an active roster of permanent lenders, which include insurance companies, CMBS origination firms, credit unions and agencies such as Fannie Mae and Freddie Mac. Construction lenders include banks and all of the forms of gap capital that would include joint venture equity, preferred equity, mezzanine debt and bridge debt.
HREB: As you reflect on deal volume and trends in the debt financing market for commercial real estate across the Midwest and beyond during the first half of 2017, what stands out? Any surprises?
Morris: MSF has a reputation for its expertise in midsize to larger deals that are complicated. That includes development projects and permanent loans that have unique features. As 2017 has evolved, we are engaged to manage more placements of construction loans together with equity and preferred equity transactions than at any previous time. We have a large pipeline of permanent financing assignments as well. We typically are asked to source out a lot of multifamily financings and create a marketplace for our borrowers that shows them all options. Columbus, Ohio is a high-growth market, and we have been routinely engaged from the ground floor on mixed-use and larger transactions this past year.
HREB: Has the total dollar amount of commercial and multifamily loans closed so far by your firm in 2017 increased, decreased or remained the same across the Midwest compared with the same period a year ago? What have been the driving factors?
Morris: For 2014 we arranged 47 transactions for $650 million in capital. In 2015, we arranged 53 transactions for $700 million in capital and in 2016 we arranged 53 transactions for $715 million in capital. Those were three straight record years that followed three prior record years.
We are on the same pace as 2016 and feel confident we will approach or exceed 2016 numbers. Our key factors are that we have a mature, market-dominant firm that works for a large number of very active developers and that generates our core volume. Columbus is on most investors’ radar screen.
HREB: What has accounted for the lion’s share of your business during the first half of 2017? Has it been refinancing, acquisition financing, construction financing, bridge lending, etc.?
Morris: Refinancing has made up 54 percent of our production, acquisition financing has made up 24 percent, construction financing has made up 14 percent and business in the equity and quasi-equity space has made up 8 percent of our production.
HREB: What’s the outlook with regard to deal volume in your shop across the Midwest in the second half of 2017 compared with the second half of 2016. What variables are in play?
Morris: The second half of every year has proven to be our strongest six-month period, and 2017 will be no different. Interest rates will be stable and there are a lot of transactions in need of permanent debt the second half of 2017.
HREB: Which property types are you most bullish on as a lender or financial intermediary, and which are you most bearish on and why?
Morris: In reverse order, we are less bullish on retail as MSF hasn’t seen as much grocery-anchored retail recently and that’s what is in demand by most lenders. In our market, Kroger is the dominant grocery chain and the company owns most of its stores. We are bullish on multifamily as we are in a market with strong demand generators — a younger and more affluent population. Our multifamily markets will be strong over the next 12 months. Office in the core is strong and industrial is super strong, all due to central Ohio’s distribution position in the Midwest.
HREB: The 10-year Treasury yield, a benchmark for long-term, fixed-rate financing, closed at 1.64 percent on June 10, 2016. As of June 9, 2017, the 10-year yield stood at 2.20 percent. What impact has that increase had on deal volume and borrower strategies?
Morris: There has been no impact. In Ohio, we tend to see more permanent loans with full or near full leverage, and this had routinely kept transactions priced in a whole coupon bandwidth in the upper 3 percent for modest leverage to lower 4 percent range for full leverage loans above $10 million, which has been just at our average size. Naturally every loan has its own pricing story, but loans today that are fuller leverage are being done at 4 percent to 4.25 percent. In 2016, they felt like the same pricing level.
HREB: The current economic expansion is eight years and counting. Do you anticipate a slowdown in the near term, or continued economic growth for the foreseeable future?
Morris: Our market (the Columbus metro area) is still growing as we have such a strong confluence of education, government, healthcare, large corporate businesses, plus a newer industrial base. We are adding to our population compared with every other city in Ohio and we have expanding businesses that have a national reach. Having one of the two largest universities in the country provides for a younger, growing population.
HREB: Aside from Millennials, are there any other demographic groups lenders should monitor in order to maximize opportunities?
Morris: Attention should be given to the age group 55 and above. We see greater numbers of higher-end apartment communities being developed to accommodate this segment, and with those communities come nearby amenities that would include shopping for convenience as well as entertainment.