The State of Debt Markets: Mid-Year 2016 Review

Thursday, June 30, 2016

Real Estate Indicators from Jon Mikula, Senior Managing Director and Co-Office Head for HFF New Jersey. 

There is currently no lack of liquidity in the commercial real estate market. One hundred and thirty-eight billion dollars of dry powder has been raised by closed and open ended funds to be deployed in the space, representing a 60 percent increase from the peak in the last cycle. Additionally, foreign capital has made a significant shift as an active investor in the U.S. In 2015, foreign investment totaled $88 billion, representing 16 percent of all acquisitions, compared to $42 billion and less than 10 percent in 2014. Over the last 12-18 months, foreign capital has ventured outside the major CBD markets and in many cases into secondary markets to chase yield. All of this liquidity bodes well for our industry.

At the start of 2016, many lenders were faced with the implications of additional federal oversight. As a result of the Dodd Frank Act of 2010, numerous regulatory reform measures are finally taking effect in the commercial mortgage market. These measures require heightened standards for lending practices in an effort to help avoid another meltdown.

One challenge for the remainder of the year is the upcoming wave of CMBS maturities from loans originated 10 years ago. There is an anticipated $50 billion of CMBS maturities still to come in 2016, with an additional $95 billion to follow in 2017. An estimated 60 percent of these maturities are office and retail loans, while an estimated 35 percent have a debt yield less than 8 percent. Given most of these loans were originated in 2006 and 2007, these are generally aggressively underwritten (full term I/O, etc.). Including maturities for other lenders (life insurance companies, banks, et cetera), the totals for 2016 and 2017 amount to $752 billion.

Below is a summary of the major debt market players:


Banks, especially those with assets in excess of $500 million, are dealing with Basel III, which requires them to hold increased capital against commercial mortgages as a buffer based on risk. Throw in HVCRE (High Volatility Commercial Real Estate) classifications, which effectively impacts all development/construction loans, and you have a lot to get your hands around. The bottom line is the banks are being inundated with federal oversight, thus creating an overwhelming need for internal compliance personnel. While many of the banks are gun shy of construction, higher leverage, and risk, as a result of the above, most are looking to aggressively add term loans to their books and are as competitive as ever in that arena.


CMBS, which was responsible for 54 percent of all transactions that closed in 2007, with $230 billion in originations, produced ~$100 billion in 2015, representing about 20 percent of the market. The first half of 2016 was difficult for CMBS as the secondary market needed to absorb the glut of product that was originated in late 2015, in the midst of volatile pricing, as all-in coupons went from four to five percent overnight. Dodd Frank legislation finally made its way to this segment of the market with Risk Retention rules, which come into play in December of 2016. The biggest impact of this is the new requirement for issuers or B-Piece holders to hold five percent of the securitization. In the past, this was hedged or sold. The layers of compliance that come with this have added costs that ultimately get passed on to the consumer. Given the new regulations, B-Piece buyers are now involved very early in the loan structuring process since they will be living with the first loss piece of the loan. In the past, lenders would close about 60 percent of their loans before identifying the B-Piece buyer. Today they close only about 10 percent before showing the B-Piece buyer the tape, to get their feedback on structure and pricing. As we approach the summer months, the CMBS market has improved dramatically since the beginning of the year, with pricing that is much more attractive, having come in about 100bps since the fall. The industry needs CMBS to be healthy, specifically for assets in secondary and tertiary markets (CMBS represented a third of all loans in tertiary markets in 2015) and to deal with the wave of maturities coming over the next 18 months.

Life Insurance Companies

Insurance companies did a record $65 billion in loan originations in 2015 and are looking to have another record year in 2016. In comparison, $44 billion was done in 2007. They have their own set of regulations but none as onerous as the banks and CMBS. They continue to chase opportunities up and down the risk spectrum – predominantly first mortgages but selectively construction, bridge, and mezzanine loans.

Bridge Lenders

Historically reserved for transactions in transition or with higher leverage, during the first half of 2016 these lenders filled a void for higher leverage and non-recourse construction opportunities as well as CMBS fall-out. Pricing for traditional bridge opportunities has increased by 50-100bps over the first half of the year.

With rates at all-time lows, it is often asked if rising rates will impact transaction volume. At the peak of the last cycle in 2007, the 10-year treasury averaged 4.6 percent and the industry enjoyed $510 billion in loan activity. This past year, the 10-year treasury averaged 2.14 percent and the industry produced $504 billion in loans. Theoretically, rates don’t necessarily correlate to volume - it’s all about liquidity and price discovery. While government oversight has impacted the lending environment, the capital markets are healthy and anxious to deploy. The equity market is poised to invest and the CMBS maturities over the next 18 months will give rise to refinance or sale opportunities.

About Jon Mikula

Jon Mikula is a Senior Managing Director and Co-Office Head in HFF’s New Jersey office and a member of the firm’s leadership committee. He has more than 20 years of experience in commercial real estate finance and is primarily responsible for arranging debt and equity placement transactions, as well as the day-to-day operations of the firm’s New Jersey office. During his tenure at HFF, Mr. Mikula has completed in excess of $7 billion in commercial real estate transactions.

Mr. Mikula joined the firm in May 2000. Prior to HFF, he spent six years with the David Cronheim Mortgage Corporation in Chatham, New Jersey, where he served as Managing Director. He also spent two years at James R. Poole & Company in Newark, New Jersey.

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