Dekel Capital Founder & Principal Shlomi Ronen contemplates the top trends that impacted the capital markets this year, and discusses how the major capital sources and real estate sectors performed.
2017 Capital Markets Year in Review
As the year comes to a close, we reflect on the major trends in the real estate capital markets and their impact on operating, investing and new development activity nationwide.
The capital markets continue to push forward with a full head of steam through year-end. Today there is ample liquidity and reliable competition among lenders at all levels of the capital stack. Geo-political concerns that dominated the first quarter of the year have abated, as the national economy continued to expand at a steady, manageable pace. As a result, this year we saw lenders enter new markets, expand their platforms to lend on niche product types, and take on more execution risk in order to maintain pricing and constrain LTV/LTC ratios.
On the institutional equity side, 2017 proved to be a challenging year to deploy capital, as liquidity compressed yields across the risk spectrum, new supply (especially in multifamily) tapered rent growth in most major markets, and concern over the longevity of the real estate cycle tapered equity investor appetite for investments that were exposed to significant market risks beyond two years from the initial investment date. On the international front, we saw the Chinese government curtail outflow of capital from China, which resulted in a palatable contraction of new Chinese equity capital in the market. On the other hand, we saw Japanese investors expanding their U.S. investment focus in a significant way.
Additionally, mobile home communities seem to be in favor with lenders nationally. The expectation is that the agencies will continue to provide strong tailwinds, with 2018 multifamily lending caps for Fannie Mae and Freddie Mac projected to be at $35 billion for each enterprise, just slightly down from $36.5 billion in 2017.
Agencies (and some banks offering fixed-rate programs) are proposing increasingly attractive terms, in contrast to conduit lenders (further discussed below) who are restrained due to risk retention and consistent discipline from the CMBS B-piece buyers.
Institutional equity funds continue to express a strong appetite for both value-add and ground-up development opportunities in the industrial sector. Generally, industrial is wholly accepted and recognized as a critical component of a commercial real estate portfolio allocation. Equity investors and lenders understand the need to be involved on speculative, ground-up industrial deals in order to win business, as demand drivers show the strength of the containerized supply chain going forward.
The appetite for creative office remains strong, although with time horizon constraints due to the expectation of economic slowdown at some point in the next two to three years, investors in value-add projects are leaning heavily toward business plans that can be executed within 24 months. Longer business plans are being hyper-analyzed due to the expectation of a general slowdown in the economy thereafter.
Meanwhile, the commoditized grocery or big-box, anchored business plans based on population density and demographics are considered non-starters for most equity investors unless there is a compelling story (or basis).
A few new, non-securitized lenders have entered the fixed-rate space, looking to pick off the small dollar loan requests by offering fixed transaction costs and in-house servicing.
Overall, our recent conversations with players in the equity, debt and brokerage space have a familiar theme: everyone seems to have had a busy and productive year and is looking to take a few weeks off at year end to recharge for a competitive year ahead in 2018.
This article was originally published on Commercial Property Executive.