October 6, 2016
NACLB Coverage — Conventional Commercial Real Estate Rates to Remain @ 5% in 2017
Exclusive from Las Vegas
By Bob Coleman
Editor, Coleman Report
The National Alliance of Commercial Loan Brokers second annual convention hosts almost 500 small business lenders and small business loan brokers this week.
Michael Sneden of ValueXpress presents an outstanding overview of the commercial mortgage-backed securities market. Savvy small business lenders should read up on this market to understand the scope of the market, and, importantly how secondary market investors impact interest rates.
Michael predicts interest rates will remain in the 4.5% to 5% range with volume of $75 billion in 2017.
Check out his comments here in this 5 minute video.
Here is a transcription of the video:
Mike Snenden: We’re going to go backwards in time just a little bit to give you folks some information about where we’ve gone and to understand where we’re going. What’s very, very important about our product is since the loans that keep originating are converted into securities we need functioning capital markets in order to sell securities to investors. If the capital markets are not functioning we are collectively out of business, so I’m going to rewind a little bit back to ’08 and ’09 where all of our products collapsed. We definitely collapsed because the capital markets seized and we had no ability to create more mortgages because there were no investors to buy them.
So we can thank J.P. Morgan in 2010, we managed to get the CMBS mortgages started with the first CMBS deal that was issued since the crash. It was very, very successful. Those bonds today created [unintelligible 00:00:56], so they got us out of the box and we were able to get back to business. So in 2010 the CMBS industry did $11 billion of business. What’s important to know is when I talk about numbers in CMBS securities there is an underlying mortgage that you guys originated dollar for dollar, so even though I talk about $11 billion in securities [unintelligible 00:01:21] $11 billion in loans. So in 2010 we did $11 billion, in 2011 we did $32 billion.
What’s interesting now when you reference the SBA [unintelligible 00:01:32] a $25 billion area, so now we can see that we’re talking about very large numbers. In 2012 we did $48 billion. In 2013 we did $86 billion, in 2014 we did $94 billion and in 2015 we went over $100 billion of commercially owned originations by you folks that were converted in securities through the CMBS program. So that’s the history and now we got to ’15 and we’re saying why are we going through this? Well, in 2016 was the first pickup in our industry since the restart in 2010.
Talking a little bit about supply and demand down there, what happened in 2016 is that the industry that buyers with the bonds cannot absorb $100 billion of securities a year, so in order to be able to sell securities the originators had to increase the interest rates that the securities paid to the investors. What that meant is that interest rates to the borrowers rose [unintelligible 00:02:50] product in the spring 2016 and borrowers began to back away, our volume fell in the industry 25 to 30 per cent. We have a psychological barrier in CMBS origination which is actually a pretty important takeaway for you folks. 5 percent seems to be a psychological barrier for borrowers whether they want the product or they don’t want the product.
Up until the beginning of 2016 pretty much all ten-year fixed rates and CMBS [unintelligible 00:03:23] loans were in the 4.5 to 5 percent area. So we were [unintelligible 00:03:28] to see what statistics. In the spring of 2016 rates slipped over 5 percent and it went as high as 5.5 percent. So what happened is the industry slowed down in the first quarter of ’16, but what’s interesting is that since the industry slowed down we reversed the situation. By the summer of 2016 there were not enough bonds for the investors because things had slowed down so much. So the market recovered, we are now in the 4.5 percent to 5 percent range.
I’m glad this convention got moved to the fall because I don’t think I would have been so happy to report this in the spring, but the bottom-line is now the market is corrected and we are in the 4.5 to 5 percent area. The market is vibrant. We will probably do about $65 billion this year, so even though we’re down from [unintelligible 00:04:22] $100 billion $65 billion is a lot. [Unintelligible 00:04:26] producing commercial mortgage loans. It’s nationwide, so you guys [unintelligible 00:04:30] marketplaces all day long. My prediction for 2017 is that I think we will manage to keep supply and demand stable. I think the industry was [unintelligible 00:04:42] $75 billion in business. I think we’ll remain in the 4.5 to 5 percent area.
Like Craig mentioned I also believe that [unintelligible 00:04:51] going to go to his question in a little while. The federal reserve has been incredibly slow in moving interest rates. The economy is not moving in the direction or a pace that warrants it. They’re moving very, very carefully, so I think 2017 is going to be another good year for us. I think we are a little bit on borrowed time, so we’ve got to make [unintelligible 00:05:13] when the sun shines [unintelligible 00:05:14] 2017 and at this time I think what we’ll do [unintelligible 00:05:19] CMBS has been and where it’s going. Thankfully [unintelligible 00:05:24] in spring. Everything is fine now, so let’s go out and do some new business.