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Jason Tuvia

How Baby Boomers, Retailers, Banks May Change Commercial Lending This Year



Some of the industry's top commercial real estate mortgage bankers expect business to stay just as strong in 2019 as the past two years even as the nation's almost record economic expansion shows signs of slowing.

The Mortgage Bankers Association predicts loan origination in the sector will reach $530 billion in 2019, essentially on par with 2017 and 2018, at its annual commercial real estate finance conference in San Diego this week.

The amount of financing in fourth quarter of 2018 beat the year-earlier period by 14 percent, the group said. It suggests that commercial and apartment lenders apparently have not been scared off by government shutdowns, stock market volatility, looming global trade wars and other headline events. And this follows almost a decade of recovery from one of the nation’s worst real estate collapses, as analysts and economists wonder how long this recuperation can last.

Indications for the immediate future are steady if not high-growth lending activity, bankers agree.

For 2018, "the market as a whole ended the year roughly flat compared to 2017, continuing a plateau we’ve seen in mortgage borrowing and lending since 2015," said Jamie Woodwell, vice president of commercial research for the mortgage bankers’ group.

These were among the key points of the gathering of the Washington, D.C.-based trade group, which represents lenders, investors, developers and others involved in commercial real estate financing.

1. Financiers avoid retail

Blame the rise of e-commerce and retail chain store closings, but MBA figures show commercial loans in the retail sector posting relatively anemic growth in the past year. They were up 1 percent in the fourth quarter from a year earlier in 2017, compared with 32 percent growth for apartment loans and 28 percent growth for industrial loans.

"We saw the cracks in the armor in retail many years ago, and really have not done a significant amount (of lending) in any of our retail funds in the last few years," said Justin Guichard, managing director with Oaktree Capital Management, during a panel session on debt funding. Similarly, Managing Partner Peter Sotoloff said his firm, Mack Real Estate Credit Strategies, has no retail exposure in in its debt portfolio.

2. Aging boomers haven't spurred healthcare lending boom – yet:

U.S. growth for healthcare and senior-housing-related lending was up 61 percent year-over-year for the fourth quarter, but analysts said the aging of baby boomers still is only a fraction of development and lending activity.

Care facilities especially face headwinds including the preference of seniors for staying at home as late in life as possible; private insurers’ claims scrutiny geared to minimizing stays in such facilities; staffing shortages; and the struggles of some providers to effectively scale their facilities on a nationwide basis.

"These are all trends and pressures that are facing the industry," said Steve Ervin, senior vice president at brokerage firm Berkadia.

3. As banks get queasy, others stand by

Even if banks are getting skittish about how long the good times can last, a multitude of other financiers stand ready to step in, and the fastest growing contingent includes debt funds. Numerous prominent firms in financial management and private equity have established funds geared primarily to lending to third-party commercial investors and developers, and they are finding rewards even in a tight interest rate environment.

Many traditional banks have yet to pull back on tight lending standards imposed in the wake of the Great Recession, and debt funds generally face less regulatory restrictions in how they lend and the risks they can take. Debt funds are poised to continue moving beyond the fringes of commercial lending if an economic downturn causes traditional lenders to pull back even more.

"Even though we’ve all only been around a handful of years, it wouldn’t surprise me 20 years from now, if you had non-regulated entities filling that space, primarily the bridge-lending space," said Jeff Friedman, co-founder of Mesa West Capital, which is now part of Morgan Stanley.

Debt fund managers said as of yet, there are no signs that regulators will seek to impose restrictions on those funds, giving them a competitive advantage and allowing them to participate more in commercial real estate, provided they can find the right opportunities.

"The regulatory environment has just been a huge tailwind for our business," said Oaktree’s Guichard. "As the industry matures, I think we’re being viewed as a more permanent part of the capital structure."

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