2015 Market Outlook Survey. FPL Associates L.P.

Transcription

1 CRE Finance Council 2015 Market Outlook Survey FPL Associates L.P.

2 Introduction The CRE Finance Council (CREFC) and FPL Associates L.P. are pleased to present the 2015 CRE Finance Council Market Outlook Survey. Sponsored by CREFC and conducted by FPL, this survey was designed to gauge the industry s outlook for 2015 across a range of topics (listed below). Seventy-seven (77) companies participated in this year s survey, which assesses the industry s 2015 outlook on: U.S. Economy Interest Rates Liquidity Property Fundamentals Capitalization Rates Valuation Leverage Credit Quality Risk Borrowing Sector Outlook CMBS Lending Balance Sheet Lending Private Capital Lending Government Sponsored Enterprise (GSE) Lending We extend our sincere appreciation to organizations that completed the survey. The level of participation has enabled us to provide meaningful information on projected trends within the commercial real estate finance industry. Stephen M. Renna President & CEO CRE Finance Council Josh Anbil Senior Managing Director FPL Associates L.P. Melissa Thelen Vice President FPL Associates L.P. Lindsay Pankratz Survey Director FPL Associates L.P. -1-

3 Introduction CREFC The CRE Finance Council is the collective voice of the more than $3.3 trillion commercial real estate finance market, and our members include all of the significant portfolio, multifamily, and Commercial Mortgage-Backed Securities ( CMBS ) lenders; issuers of CMBS; loan and bond investors such as insurance companies, pension funds and money managers; servicers; rating agencies; accounting firms; law firms; and other service providers. CREFC s membership consists of more than 280 companies and 7,000 individuals. Our industry plays a critical role in the financing of office buildings, industrial complexes, multifamily housing, retail facilities, hotels, and other types of commercial real estate that help form the backbone of the American economy. In addition to its member forums, committees and working groups, CREFC acts as a legislative and regulatory advocate for the industry, plays a vital role in setting market standards and provides education for market participants in this key sector of the global economy. For more information please visit FPL Associates L.P. FPL Associates, a member of the FPL Advisory Group family of companies, provides a range of specialized compensation and management consulting solutions to the real estate and related industries. FPL works closely with numerous public and private real estate and related firms to address a variety of compensation, organizational, and strategic questions that our clients are facing. As part of our compensation services, we assist clients in the assessment, design, and implementation of compensation plans, including annual and long-term incentive plans. We specialize in compensation benchmarking and plan design, including the development of performance management and reward systems that align management s interests with those of the company and its investors/shareholders. Additionally, we work with public real estate firms, as well as all types of privately-owned real estate organizations in terms of investment strategy and ownership structure. FPL Associates affiliate, Ferguson Partners, provides expert executive, director, and professional recruitment services to specialized industry sectors. For more information please visit FPL Associates L.P. and its affiliates (collectively, FPL ) are providing this report for informational purposes only, which does not constitute advice or recommendations. Accordingly, this report is provided exclusively with the understanding that FPL is not engaged in rendering professional advice or services to participants by virtue of providing this report. In particular, nothing in this report should be used in or construed as an offer to sell or solicitation of an offer to buy securities or other financial instruments or any advice or recommendation with respect to any securities or financial instruments. Because we rely on information provided by survey participants, FPL cannot provide representations or warranties, express or implied, with respect to the accuracy of the information aggregated in the survey results. FPL disclaims any liability for action taken as a result of this report and its findings. The information contained in this report is protected by United States and international copyright laws. Reproduction or use of the whole or any part of the contents of this report without the writtenpermission of the copyright holders is strictlyprohibited. 2014FPLAssociates L.P. -2-

4 Summary of Survey Results The results of the survey indicate that the outlook for 2015 is strong. Positive expectations include growth in the economy, stabilized cap rates, and increased leverage. Those positive expectations are challenged by anticipated issues with credit quality and possible oversupply in select sectors and major markets. We have highlighted below and on the following page key takeaways from the survey. Overall, most survey respondents (61%) are expecting the economy in 2015 to be somewhat better than 2014 Most organizations (69%) are expecting interest rates to increase (25 to 50 bps) and confidence in the Federal Reserve to manage rates is moderate (i.e., somewhat confident) In terms of availability of liquidity, expectations are split with 38% predicting similar availability from 2014 and 47% expecting liquidity to be somewhat more available More than half of respondents (59%) are expecting capitalization rates to remain the same (+/- 25 bps) in 2015 Sixty-five (65%) percent of firms expect underwriting in 2015 to use current cap rates and 76% expect underwriting and valuation to be more aggressive in the coming year Most firms (81%) expect leverage to be higher but anticipate credit quality to be somewhat lower than in 2014 Approximately half of respondents anticipate lending between 10% to 20% more CMBS in 2015 versus 2014 levels -3-

5 Summary of Survey Results Respondents expect CMBS issuance in the range of $100 - $125 billion in 2015 with the largest volume increase seen in CMBS Floaters and the majority of issuance concentrated in Fixed Rate Conduit Almost all respondents expect more origination volume in balance sheet lending (banks and life insurance companies), with loan terms the same for most organizations and the concentration of new loans in the multifamily and office sectors Private capital lending is expected to increase relative to 2014, with the largest percentage of the loan profile in first mortgages GSE loan origination volume is expected to remain about the same as 2014, however, there is concern in the credit quality of multifamily loans and the likelihood for oversupply in major markets In terms of which property sectors will be performing in 2015, participants expectations vary by sector and metric (summarized in table below) Metric Highest Lowest Returns Hotel and Self Storage Multifamily and Retail Expected Vacancy Retail and Hotel Multifamily Rental Growth Nationally Multifamily and Hotel Retail Construction Activity Nationally Multifamily Retail Areas for Construction Northeast, South, and Southwest Midwest -4-

6 Economic Outlook for 2015 Participant Demographics Type of Company Economic Outlook for 2015 CMBS Investor 35% CMBS Lender 30% Much Better 3% Third Party Service Provider 26% Private Capital Lender 23% Somewhat Better 61% Loan Servicer 19% Borrower 14% Same 35% Bank Balance Sheet Lender 13% Life Insurance Company Other 8% 10% Somewhat Worse 1% Rating Agency GSE 4% 3% Other includes: mortgage banker, attorney/law firm, and financial services software provider -5-

7 Interest Rates & Liquidity Where do you expect benchmark interest rates to be in 2015? How confident are you in the Federal Reserve's ability to manage benchmark interest rates? Much Higher (> 50 bps) 5% Very Confident 9% Somewhat Higher (25 to 50 bps) 69% Somewhat Confident 74% About the Same (-25 to 25 bps) 25% Not Confident 16% What do you expect the overall availability of liquidity to be in 2015 relative to 2014? 47% 38% 12% 3% Much More Available Somewhat More Available About the Same Level of Availability Somewhat Less Available -6-

8 Property Fundamentals Rank the following property sectors (5=highest, 1=lowest) for 2015 across the following categories: Property Sector 5 (Highest) Highest Returns (Lowest) Multifamily 14% 17% 14% 19% 36% Retail 11% 14% 18% 21% 35% Office 9% 31% 26% 28% 6% Industrial 13% 24% 29% 24% 10% Hotel 49% 18% 15% 11% 6% Other 40% 0% 0% 0% 60% Other: Self Storage Property Sector 5 (Highest) Expected Vacancy Nationally (Lowest) Multifamily 1% 3% 4% 7% 85% Retail 37% 32% 25% 5% 1% Office 19% 42% 27% 10% 1% Industrial 6% 7% 28% 56% 4% Hotel 36% 15% 17% 24% 8% 25% of Participants -7-

9 Property Fundamentals Rank the following property sectors (5=highest, 1=lowest) for 2015 across the following categories: Property Sector 5 (Highest) Rental Growth Nationally (Lowest) Multifamily 26% 15% 27% 14% 18% Retail 3% 11% 11% 27% 48% Office 15% 21% 24% 31% 10% Industrial 18% 27% 23% 19% 12% Hotel 36% 26% 15% 11% 11% Property Sector 5 (Highest) Construction Activity Nationally (Lowest) Multifamily 84% 11% 5% 0% 0% Retail 0% 4% 12% 30% 53% Office 3% 22% 27% 36% 12% Industrial 3% 26% 33% 23% 15% Hotel 11% 39% 22% 11% 17% 25% of Participants -8-

10 Property Fundamentals & Cap. Rates Rank the region (6=highest, 1=lowest) you expect to see the most construction activity overall. Region 6 (Highest) Construction Activity (Lowest) Northeast 26% 19% 9% 16% 13% 17% Mid-Atlantic 6% 9% 23% 22% 29% 12% South 29% 17% 14% 16% 14% 9% Midwest 3% 3% 6% 17% 25% 46% Northwest 9% 23% 29% 13% 17% 9% Southwest 28% 29% 19% 16% 1% 7% 25% of Participants Where do you expect capitalization rates to be in 2015? 59% 27% 15% 0% 0% Much Higher (> 50 bps) Somewhat Higher (25 to 50 bps) About the Same (-25 to 25 bps) Somewhat Lower (-25 to -50 bps) Much Lower (< -50 bps) -9-

11 Valuation What cap rates do you expect marketplace underwriting to use in 2015? What net operating income/cash flow do you expect the marketplace will use to underwrite value in 2015? Higher than Market Capitalization Rates 9% The Whole Building at Higher Pro Forma Rents 1% Current Market Capitalization Rates 65% Existing Rent Rolls plus Leases Rolling to Higher Market Rents 81% Lower than Market Capitalization Rates 25% Existing Rent Rolls 17% Based on underwriting expectations (above), how do you think the market will be in 2015? Based on expectations of underwriting values (above), how do you think the market will be in 2015? More Aggressive 72% More Aggressive 76% About the Same 24% About the Same 28% -10-

12 Leverage, Quality, Risk, & Borrowing Where do you expect leverage to be in 2015 relative to 2014? Where do you expect credit quality to be in 2015 relative to 2014? Much Higher 3% Somewhat Higher 3% Somewhat Higher 81% About the Same 15% Somewhat Lower 77% About the Same 16% Much Lower 5% Do you believe you are being adequately compensated for your risk? Not Sure Yet 30% Are your clients borrowing because of demand or the low cost of financing? Demand 4% No 42% Yes 27% Both 69% Low Cost of Financing 27% -11-

13 CMBS Lending How much total CMBS issuance do you expect in 2015? What deal type will see the largest volume increase in 2015? 70% CMBS Floaters 57% CRE CLOs 28% 12% 18% Small Balance Deals 14% $75 - $99 Billion $100 - $125 Billion More than $125 Billion Non-Performing Loan (NPL)/Liquidating Trust 1% Of the total CMBS issuance you expect in 2015, what percent will be across the 3 categories: Market Range * Average Fixed Rate Conduit 60% - 75% 67% Single Asset/Single Borrower (SASB) 15% - 25% 19% Floating Rates 10% - 20% 14% * Represents the range of 25 th to 75 th percentile -12-

14 CMBS Lending Of the more than $100 Billion of CMBS scheduled to mature in 2015, what percentage will pay-off or refinance on schedule? How much do you expect to lend for CMBS in 2015 relative to 2014? 42% 49% Significantly More (Over 20%) 22% Somewhat More (10-20%) 54% 8% Same 22% 25-49% 50-74% % Significantly Less 2% (Over 20%) What do you expect the underwriting standards will be in 2015 relative to 2014? Better 1% Same 11% Worse 88% -13-

15 CMBS Lending Rank the property sectors (5=highest, 1=lowest) in terms of new conduit loans for Property Sector 5 (Highest) New Conduit Loans (Lowest) Multifamily 16% 12% 22% 28% 22% Retail 31% 31% 18% 10% 10% Office 44% 37% 15% 4% 0% Industrial 0% 6% 15% 23% 55% Hotel 7% 13% 29% 35% 15% Indicate your level of concern (4=highest, 1=lowest) for the following trends in 2015: Trends 4 (Highest) Level of Concern (Lowest) Increasing LTVs 31% 24% 27% 18% Decreasing Debt-Service Coverage Ratios (DSCRs) 13% 32% 31% 24% Increase in Interest Only Loans 25% 14% 26% 35% Lower Debt Yields 29% 30% 17% 23% 25% of Participants -14-

16 Balance Sheet Lending (Bank/Life Co.) Please indicate your expectations for 2015 across the following categories: Origination Volume Non-Recourse Loans Same 11% Same 30% More 89% More 70% Construction Lending Syndicate Lending Same 30% Less 1% Same 31% Less 1% More 68% More 68% -15-

17 Please indicate your expectations for 2015 across the following categories (continued): Loan Terms Balance Sheet Lending (Bank/Life Co.) Same 88% Longer 10% Shorter 3% Rank the property sectors (5=highest, 1=lowest) in terms of percentage of new loans for Property Sector 5 (Highest) New Loans in (Lowest) Multifamily 38% 11% 34% 8% 8% Retail 10% 26% 31% 18% 16% Office 39% 36% 11% 10% 3% Industrial 6% 10% 13% 27% 44% Hotel 5% 18% 11% 38% 28% 25% of Participants -16-

18 Private Capital Lending How much do you expect to lend in 2015 relative to 2014? Where do you expect yields to be in 2015? More 69% Same 28% Same 52% Lower 21% Less 3% Higher 27% What do you expect the capital raising environment will be in 2015 relative to 2014? Somewhat Harder 18% Same 51% Somewhat Easier 29% Much Easier 1% -17-

19 Private Capital Lending What is your expected loan profile by percentage? Market Range * Average First Mortgage 60% - 90% 69% Bridge 10% - 25% 23% Mezzanine 10% - 25% 19% Preferred Equity 5% - 20% 15% Other 10% - 15% 13% * Represents the range of 25 th to 75 th percentile; zero values were removed from the analysis above, as such the average does not add up to 100% Average Loan Profile The graph below illustrates the average loan profile based on participant responses (the total profile adds up to 100%) 64% 15% 14% 6% 1% First Mortgage Bridge Mezzanine Preferred Equity Other -18-

20 GSE Lending Do you have credit quality concerns for multifamily loans expected in 2015? Do you expect multifamily oversupply to be a concern in many major markets? Yes 68% No 32% Maybe 51% No 15% Definitely 9% Likely 25% What do you expect your GSE loan originations to do in 2015? Increase 31% Stay about the Same 54% Decrease 15% -19-

21 Sector Outlook Multifamily 1. Demographics Most Attractive Features 2. Supply and demand 3. Availability of investor financing 4. Vacancy rates 5. Stability The top 5 responses (above) were indicated by 80% of survey respondents Demographics was the most attractive feature to most participants Shift to more transient housing due to generational preferences (renting vs. buying) and ability to obtain financing to buy homes Additionally, this sector continues to provide participants with stable returns and cash flows Greatest Concerns 1. Level of Construction/Overbuilding 2. Supply 3. Flat or lower rent growth 4. Cap rate compression 5. Government subsidies The largest concerns (above) were indicated by almost every survey respondent Overbuilding and the increased level of construction are the biggest area of concern, as indicated by 53% of respondents Additionally, there is concern that this growth is going to have an adverse effect on rents, cap rates, and lower returns Respondents also indicated that occupancy rates, returns, and investor financing terms make this an attractive sector -20-

22 Sector Outlook Retail Most Attractive Features 1. Limited construction/development 2. High end, luxury retail centers 3. Necessity retail centers (e.g., grocery) 4. Potential for growth 5. Returns There were fewer overarching trends in the retail responses Some respondents indicated that they don t see any attractive features of this sector Limited construction/development activity in this sector was the most attractive feature Certain types of retail appeal to respondents including high-end, luxury retail centers with well known tenants and grocery-anchored centers The degree of the impact of the recession on this sector leads participants to believe that there is potential for a profitable turnaround and growth Greatest Concerns 1. Internet shopping/e-commerce 2. Low sales 3. Consumer spending habits 4. Weak anchors 5. Retailers bankruptcies The impact of the internet on the sector was the largest concern by a large margin (40% of respondents) Low historical sales figures as well as uncertain and changing consumer spending habits are also a large concern for participants Actual and potential loss of anchors due to bankruptcy is also at the top of mind of respondents -21-

23 Sector Outlook Office Most Attractive Features 1. Supply and demand dynamics 2. Lack of new construction/development 3. Economic growth 4. Increased hiring 5. Central Business District (CBD) markets The top 2 responses (above) were indicated by approximately 50% of survey respondents Improving economic climate and increased hiring make this sector attractive Major cities (e.g., New York City, San Francisco, Boston, Washington DC) and assets in CBDs are attractive to participants Greatest Concerns 1. Downsizing (i.e. space per professional) 2. Suburban markets 3. Sensitivity to job growth 4. Older assets and repositioning costs 5. Telecommuting/Working remotely Companies downsizing and using less space per employee is the largest concern for this sector This is driven in part by the increased allowance for employees to telecommute or work remotely Continued poor performance of suburban markets is a close second, as indicated by a quarter of respondents The inventory of older assets and the cost to reposition these buildings is a growing concern -22-

24 Sector Outlook Industrial Most Attractive Features 1. Supply and demand balance 2. Impact of internet/e-commerce 3. Stability 4. Distribution/fulfillment centers 5. Growth aligned with economic recovery Participants view the increased demand for this type of asset and the current supply as the most attractive benefit of this sector Increased internet retail will drive up the need and demand for warehouses and distribution centers This sector has been consistently stable and participants expect that the sector's growth will increase as the economy continues to recover Greatest Concerns 1. Old, obsolete assets 2. Increasing supply 3. Low barrier to entry 4. Financing challenges 5. Construction Aging and obsolete assets is the most prevalent concern, as identified by 25% of respondents Additionally, there is concern that the growing supply of industrial assets will lead to over supply in the sector This is also driven by the low barrier to entry, which was identified as a major concern for participants -23-

25 Sector Outlook Hotel Most Attractive Features 1. Impact of economic growth on travel 2. Current strong performance 3. Limited supply 4. Daily rent structure Growth and stabilization of the economy has had a direct impact on the amount of travel conducted for business and leisure Growth is expected to continue The increase in the level of travel is expected to out pace economic indicators In many cities there is an under supply of assets which results in more competitive rates Daily rent structure is attractive due to the frequency in which rates can be reset 1. New construction Greatest Concerns 2. Potential oversupply 3. Volatility of the sector 4. Aggressive underwriting 5. Fear of and impact of disastrous event Limited supply could lead to new construction that will result in oversupply in certain markets Overall, respondents feel this sector is very volatile and thus risky Current underwriting is viewed as aggressive and at its peak This sector is very vulnerable to disasters and fear of catastrophic events (e.g., terrorist attacks, pandemic disease, natural disaster) -24-

26 FPL Associates L.P. 123 N. Wacker Drive Suite 1900 Chicago, IL Phone Fax 900 Seventh Street, N.W. Suite 501 Washington, DC Phone Fax