Real Estate Forecast for 2013- More Gold at the End of the Rainbow

A Viewpoint from Sean Barry, a Vice President of Johnson Capital
(re-printed with permission from Mr. Barry)

It is starting to feel like we are on the road to an economic recovery.

There is no denying that it has been a tough couple of years for the real estate industry. Yet, we are now finding our footing and moving forward.

If liquidity is the leading indicator of a market recovery then we are definitely headed in the right direction.

Last month Johnson Capital attended the Mortgage Bankers Association (MBA) Commercial Real Estate Finance Conference in San Diego. This event is held early in the year so it is always interesting to hear the goals and game plan of the real estate lending world. This year was unique because for the first time in several years the sentiment was overwhelmingly positive. Real estate veterans are back on the job and capital is flowing for new originations.

The real estate lending business has officially rebounded and many of the lenders who had downsized in 2008 and 2009 have shifted from an asset management mindset back to the origination of new transactions. Most displaced bankers have now found new positions and many new groups have formed that focus on bridge loans, note purchases and other structured finance transactions. It will be interesting to see how these groups adjust as the market becomes more efficient and less distressed. More importantly, most of these lending institutions had success in the early stages of the recovery in 2011 and through 2012, and have the support of their management to increase originations for 2013.

Multifamily continues to be the strongest sector. Agency lenders still finance the highest number of these transactions but banks are continually gaining market share especially in the major metropolitan markets. In these areas the banks have found many ways to compete and complement the agencies by providing competitively priced money with more flexibility in their underwriting and loan structures. The availability of low cost capital in this space has helped to keep asset values higher while allowing purchasers to still realize meaningful rent growth and value creation through asset repositioning.

Sean Barry, Vice President, in Johnson Capital’s Los Angeles office believes more markets will benefit from expansion of the capital base in 2013. “There will be an increase in non-recourse multifamily portfolio capital in secondary markets as the large banks continue to push the regional banks to make sensible loans in locations they may have avoided in the last few years,” Barry says.

Commercial assets are also showing the signs of improvement, albeit not at the same pace as multifamily. Positive leasing absorption and signs of recovery in the job market have enabled investors to once again achieve underwritten yields acceptable to pursue new acquisitions.

Life insurance companies have large allocations and are competitive with quality assets in the four major product types, and “CMBS originations will see significant growth this year as the market continues to improve. Conduit lenders are back in a meaningful way and had a very successful 2012,” says Barry. Having grown from essentially zero originations in 2009 and through most of 2010, the domestic CMBS market securitized more than $40 billion in 2012, and is already on pace in 2013 to securitize in excess of $60 billion.

Underwriting is still fairly tight for commercial properties, yet quality real estate is being financed at rates and terms that are as or, in some cases, more attractive than at the peak of the previous cycle. The most significant change is the amount of lender protections in deal structures and loan documents as a result of recent asset management experience with troubled assets at the forefront lenders memory. “As the market improves and, I would expect that competition will lower a few of these requirements,” comments Barry.

The Federal Reserve has committed to keeping interest rates low. Slow to moderate economic growth will keep the nation’s economic recovery on track. The amount of liquidity in the market, coupled with low rates and an improving economy, has created an optimistic environment for investors, developers, and capital providers alike, one that should continue for the foreseeable future.

Founded in 1987, Johnson Capital is one of the country’s top real estate capital advisory firms with eighteen U.S. locations. Sean Barry joined Johnson Capital in 2003 and is a Vice President with the firm. Based in their Los Angeles office, Barry originates and structures financing secured by income producing property nationwide. To learn more, email Mr. Barry at: seanbarry@johnsoncapital.com