Business & Investment

Today’s Commercial Real Estate Loan Opportunities, Risks

Image via pixabay by Gerd Altmann

Despite recent widespread economic challenges, MetroGroup Realty Finance maintains consistent loan production levels from 2020 to 2021. In fact, Vice President Ivan Kustic said Metro Group’s trading volume in the first half of 2021 was comparable to the last three to four years. ..

In conversation with Commercial real estate executive, Kustic explained why the current low interest rate environment is expected to continue into 2022, but also considered the factors driving single-tenant credit investment in triple net leasing.

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How was Metro Group in the first half of 2021? What kind of funding did you mainly work with?

Kustic: Metro Group loan production in the first half of 2021 is consistent with the last three to four years. We saw the same amount of sales activity as we needed to rebuild the maturity loan.

Ironically, the capital providers we raised the requirements on a percentage basis largely reflect that of the existing outstanding loan balances of various investor groups across the country. 22% agency GSE. 15% life insurance company. 14% CMBS. Others are 11%.

Fortunately, healthy regional banks working to lend to commercial real estate are thriving in Southern California. It also represents active, competitive regional and national credit unions that want to finance commercial real estate in Southern California. We work with one region and one national credit union that offers fixed-rate 10-year loans of up to $ 20 million at prices similar to medium to large life insurers.

What do you expect in the coming quarter? Do you think the low interest rate environment will continue?

Kustic: As in the last 3-4 years, we expect normal consistent quantities to continue from 2021 to 2022. Interest rates also remain relatively low as a result of the Federal Reserve’s commitment to keeping employment and the economy healthy.

The Mortgage Bankers Association predicts that the 10-year Treasury short-term securities will average around 1.5% in 2021 and slightly below the average of 2% in 2022. These 10-year T-bill rates range from low 3 seconds to low 4 percent, which is still a very competitive and attractive rate.

What do you think the origins of the various property types in 2021 will be?

Ivan Kustic, Vice President, MetroGroup Realty Finance. Image courtesy of MetroGroup Realty Finance

Kustic: Hospitality and retail are the most affected, and lenders are certainly more conservative when it comes to these asset classes. Some of the lenders we work with have stopped lending to these sectors. The other 75% of lenders look very carefully at retail, with a detailed analysis of rent rolls, business history, and performance of each tenant during a pandemic. The retail industry is funded, but we’re looking into it in more detail.

We have several individual investors and family offices that continue to invest in triple net lease single tenant credit investment real estate at the regional and national levels. Funded to facilitate the acquisition of DaVita Healthcare Centers in McAllen and Austin, Texas.Two TCF Bank branches in Chicago, Dollar General Store in Blackwood, NJ

It also provided competitive funding for distribution and logistics buildings in Inland Empire, Commerce, City of Industry, Vernon and California. In addition, we have completed several loans to an industrial building in Irvine, California.

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What do you think of the potential wave of bad assets on the market?

Kustic: There is little prospect of activity in the near future for bad assets sold by mortgage lenders. Financial institutions learned a lot from 1989 to 1992 when the Federal Deposit Insurance Corporation established the Resolution Trust Corporation to liquidate problematic assets created by the end of the savings and loan industry.

One-third of savings loans failed in seven years, with $ 394 billion in assets liquidated. Opportunistic buyers bought income-generating real estate at significantly discounted prices, and in most cases did little or nothing but wait for the economy to recover, creating real value. Much of this activity was not seen in the 2008 and 2009 environments. Creditors have become asset managers and have patiently waited for the economy to recover.

How have your priorities changed compared to before COVID-19?

Kustic: We have always felt that it is essential to have strong knowledge and experience in marketing to finance all asset classes including industry, retail, office, multi-family, hospitality and self-storage. rice field.

Our success over the years is due to our relationship with a diverse group of investors who understand and offer competitive financing options for all different asset classes and sizes. We will continue to focus on some of the marketing activities that have been successful in the past. Healthy industry Southern California Logistics Market and Triple Net Lease Single Tenant Credit Investment Property.

As a commercial mortgage lender, what are the biggest challenges you can expect in the future? And where do you think there is an opportunity in 2021?

Kustic: We expect the commercial mortgage industry to remain healthy for both lenders and borrowers over the next few years. Since our founding in 1983, we have experienced three major challenges for the industry and have successfully overcome them. It is now the 13th year of a healthy environment with active economic activity, and the composition of mortgages has set a new record year-on-year. These volumes are expected to increase by 10% each year over the next two years.

Looking at the composition of the 2011 and 2012 loans, the coupon rates ranged from 4% to 5%. Current and projected coupon rates for the next two years should be triple to mid-quadruple. Therefore, for the next few years, borrowers should be able to continue to borrow at a lower interest rate than they are currently paying.

As long as we can provide our clients with rates equal to or greater than the rates they have paid in the last decade, they are considered an opportunity to improve their cash flow or take advantage of their increased equity through refinancing their cash outs.

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In your opinion, what’s next in terms of borrower demand and available liquidity in the area of ​​capital markets?

Kustic: See the discussion Real estate tax treatment As an important issue related to real estate value, sales speed and demand. Discussions on the abolition or modification of the 1031 exchange process and the strengthened foundation of inherited real estate could change the speed of real estate investment and real estate planning in the coming years. We see this as a major threat to our clients and the industry.

Liquidity has not been an issue since the mid-1990s, with the creation of the CMBS market in the mid-90s and the addition of options for financing commercial real estate by local banks, savings and loan associations and credit unions. Currently, commercial real estate has $ 3.8 trillion in outstanding debt. As these loans mature, there is sufficient liquidity to restructure these loans.

All current sources of capital consider income real estate lending to be an attractive and high performance asset class. The institutions we represent continue to view commercial real estate mortgages as an attractive asset class that complements fixed income and equities as they complete their investment portfolio.

Today’s Commercial Real Estate Loan Opportunities, Risks Today’s Commercial Real Estate Loan Opportunities, Risks

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