2016 commercial lending trends survey

8/18/2019 2016 Commercial Lending Trends Survey

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COMMERCIAL REAL ESTATE

LENDING TRENDS 2016

National Association of REALTORS®


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ATIONAL ASSOCIATION OF REALTORS ®

16 OFFICERS

resident

om Salomone

resident-Elect

l Brown

rst Vice President

zabeth Mendenhall, GRI, ABR, ABRM,

PS, CRB, PMN

easurer

chael McGrew, CRB, CRS

mmediate Past-President

hris Polychron, CIPS, CRS, GRI

ce President

chael Labout, GRI

ce President

herri Meadows, GRI, CIPS, CRB, PMN

hief Executive Officer

ale Stinton, CAE, CPA, CMA, RCE

COMMERCIAL REAL ESTATE LENDING TRENDS 2016

NATIONAL ASSOCIATION of REALTORS®


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INTRODUCTION1


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INTRODUCTION

Commercial real estate (CRE) notched another year of growth in 2015, favored by

continued macroeconomic growth and broadening capital markets, according to th

Expectations & Market Realities in Real Estate 2016: Navigating through the

Crosscurrents report, released by Deloitte, the National Association of REALTORS®,and Situs RERC. While global economies decelerated, leading to volatility in financi

indices, U.S. gross domestic product rose, employment growth accelerated toward

the tail end of the year, and housing prices reached new heights. In addition, the

Federal Reserve signaled a shift in its monetary policy by raising its target funds rat

as core inflation hovered around its target of 2.0 percent.

Commercial vacancy rates declined for the core property types. Availability is

expected to continue contracting for office, industrial and retail properties in 2016

Vacancies for apartments are estimated to rise, due to gains in supply. Commerciarents have risen across the board, and are projected to advance this year in the 2.5

percent to 4.0 percent range.

CRE sales volume continued its positive trend in 2015, with $534 billion in closed

transactions, compared with $432 billion in 2014, based on data from Real Capital

Analytics (RCA). Most of the transactions reported by RCA are based on data

aggregated at the top end of the market—above $2.5 million.

In contrast to the large commercial transactions reported by RCA, commercial

REALTORS® managed transactions averaging $1.8 million per deal, frequently

located in secondary and tertiary markets, and focused on small businesses and

entrepreneurs. The 2016 Commercial Real Estate Lending Trends shines the

spotlight on this significant segment of the economy—a segment which tends to b

somewhat obscured by reports on Class A trophy commercial properties.

Lending conditions in REALTOR® markets notched another year of sustainable

recovery. As CRE asset prices strengthened, financing and lending conditions

improved in 2015. The main sources of capital for commercial REALTORS®’ clients

remained local and regional banks, which made up 55.7 percent of funding in 2015

The incidence of failed transactions, due to lack of financing, reached a new low.

REALTORS® cite uncertainty from legislative and regulatory initiatives as the most

relevant cause of bank capital shortage for CRE.

6

EORGE RATIUector, Quantitative &

mmercial Research

[email protected]




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ECONOMIC OVERVIEW2


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ONOMIC OVERVIEW

oss Domestic Product

oking at macroeconomic performance through

e lens of the Gross Domestic Product (GDP), U.S.

onomic activity grew at a moderately positive 2.4

rcent in 2015, on par with the prior year. Thisarks the seventh year of post-recession economic

owth. However, with the fourth quarter’s growth

tching a mere 1.4 percent gain, it also marks

other year of subpar performance, considering

at long-term GDP growth has averaged 3.0

rcent. Nonetheless, in the context of the global

onomic landscape—especially as illustrated by

cent market gyrations—the U.S. economy

ntinued to be a comparatively bright spot.

oss domestic product had a slow start in the first

arter of 2015, with a slight 0.6 percent increase.

onomic activity picked up in the second quarter,

GDP rose at an annual rate of 3.9 percent.

wever, financial markets’ gyrations—predicated

the global slowdown—led to lost momentum

d the third quarter posted an increase of 2.0

rcent.

e changes in GDP through the year were mirrored

the pattern of business investments, which felt

e impact of volatility in financial markets. Business

investments typically make up 13 – 15 percent of

GDP. Spending by companies had a moderate start

in 2015, but was followed by a solid 4.1 percent

increase in the second quarter. The third quarter

recorded slower growth, while the final quarter of

2015 witnessed a 1.9 percent decline in

nonresidential fixed investments. Toward the tail-

end of the year companies cut back on commercia

construction and equipment spending. Double-dig

cuts in purchases of transportation and other

equipment led to declines in overall equipment

investment. Spending on industrial and informatio

processing equipment remained bright spots.

Companies also slowed their investments in

intellectual property products—software, R&D,along with entertainment, literary and artistic

works.

International trade continued to play an increasing

role in the U.S. economy. While the Great Recessio

clearly impacted the pace of trade, the subsequen

rebound had been positive, aided for a while by a

soft U.S. dollar, which drove marked growth in U.S.

exports and a contraction in the balance of trade.

However, in 2015, international trade felt the

impact of the stronger dollar, which reached its

highest point since 2004. U.S. exports rose at a

modest 1.1 percent in 2015, while imports

advanced 4.9 percent, keeping the balance of trad

2 0 0 1

2 0 0 2

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2 0 0 5

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2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

2 0 1 6

2 0 1 7

Exhibit 2.1: Real GDP (% Annual Chg.)

Source: NAR, BEA

-30

-20

-10

0

10

20

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

Exhibit 2.2: Real GDP Business Investments

(% Annual Chg.)

Structures Equipment Intellectual Property

Source:




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a negative $544 billion for the year. The

wdown in exports notwithstanding, international

de proved positive for the industrial real estate

ctor, driving demand for space and leading to

ong investor interest.

vernment spending, another major GDP

mponent, saw a modest 0.7 percent annual gain

ring 2015. Most of the gain came from higher

ending by state and local governments, which

ve enjoyed rising property tax revenues. The

deral government cut its spending by 0.3 percent

ring the year, as defense spending retrenched.

nsumers continued as the main engine of

onomic activity in 2015, with consumer spending

mprising 68.0 percent of total GDP. Consumer

penditures rose during each quarter of 2015,

ng from an annual rate of 1.8 percent in the first

arter to 3.6 percent and 3.0 percent in the second

d third quarters. However, the fourth quarter—hich includes the traditional holiday shopping

ason—recorded a slower 2.5 percent advance. On

ance, consumers spent more on a broader array

goods and services in 2015. Buoyed by declining

soline prices—which dipped to $53 per barrel by

cember—consumers purchased more cars. Auto

es reached an annual level of 17 million vehicles

the end of the year. In addition, rising

0

0

0

0

0

0

0

0

0

0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

Exhibit 2.3: Real Net Exports (Bil Chn2009$)

Source: BEA

0

5000

10000

15000

20000

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

Exhibit 2.4: Real Consumer Spending (BilChn 2009$)

GDP Consumer Spending

Source:

employment and higher household wealth

encouraged consumers to spend more on

household appliances, furnishings, clothing, but als

more discretionary items like recreation and

recreation vehicles.




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Over the same 2009-15 period, America’s

population rose by over 17 million. Even accountinfor an average of 2.5 persons living in one housing

unit, about 7 million new homes would have been

required to meet demand.

In addition, the historical household formation

numbers corroborate the gap in the market. Over

the long-term, the U.S. economy has recorded an

average of 1.5 million new households per year. Th

number dropped significantly during the Great

Recession, but it has been moving toward its long-

term trend.

In turn, home prices have been rising at a healthy

clip over the past few years. The price appreciation

has been a boon for homeowners, boosting their

wealth. In fact, household wealth tied to real estat

reached $22.0 trillion in the fourth quarter of 2015

with owners’ equity totaling $12.5 trillion, closing

on the prior peak achieved in the early 2006.

However, this has broadened the divide between

homeowners and renters. For consumers who

participate in real estate markets, the recovery has

been positive, leading to an improved outlook. For

consumers who are not participating in the market

income is the main measure of economic well-

being, and wages have been rising only about 2.0

percent on a yearly basis.

using

e housing recovery led the way during 2015. With

e annual pace of existing home sales above 5.0

llion, housing supply shrank and hovered below

long-term equilibrium of 6 – 7 months. At the

d of December 2015 there were 1.8 million

mes available for sale, down 5.4 percent fromeady low levels in the prior year. Given the

gher-than-usual sales pace in December, owing to

e unseasonably warm weather, the measure of

onths’ supply fell to 3.9 months, one of the

nnest levels of inventory recorded in the past 15

ars.

de from an increase in sales, the steady drop in

tressed properties over the past seven yearsupled with underproduction of new homes has

acerbated the inventory situation. Distressed

operties accounted for only 6.0 percent of total

es at the tail end of 2015, down from over 40.0

rcent in 2008-09.

e supply of new homes has averaged about

0,000 units per year since 2008. In fact, from

09 to 2015, a total of 5.6 million single-family

mes, condominiums, and apartment units were

ilt. Over the same period, approximately 1.7

llion housing units were demolished and removed

m the housing stock, as they were uninhabitable

obsolete. For the period, there were a net 3.9

llion housing units added to the country’s stock.

2 0 0 0

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2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

Exhibit 2.5: NAR Months' Supply of Existing

Homes

Source: NAR

-500

0

500

1000

1500

2000

2500

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

Exhibit 2.6: Completions & Household

Formation

New Housing Completions ('000s)

Household Formation ('000s)

Source: Census Bur




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As of the end of 2015, 94.1 million Americans 16

years and older were not in the labor force, of whi

1.8 million were estimated to want a job; this is in

addition to the 7.9 million Americans currently in

the labor force but unemployed. Even as the U.S.

population continues to grow and the Millennialsbecome the largest demographic cohort, retiring

Baby Boomers, and a low or contracting

participation rate will likely hold back economic

potential.

mployment

yroll employment closed the year on a positive

te, with almost 3.0 million net new jobs. Payroll

mployment rose at the strongest pace in the last

arter of the year, adding 837,000 new jobs. The

ctors with the largest gains were in the Education

Health, Professional & Business Services, andsure & Hospitality industries. With employers in

ese sectors growing, demand for commercial

operties has been on the upswing, leading to

wer vacancies and improved cash flows. The

employment rate declined from 5.6 percent in

e first quarter 2015 to 5.0 percent by the close of

e year. The average duration of unemployment

clined from 31 weeks in the first quarter to 28

eeks by the end of 2015.

wever, it is worth pointing out that there is a

ud casting a long shadow over the employment

dscape. The labor force participation rate rosem 58.0 percent in the late 1940s to over 67

rcent by the early 2000s, as women entered the

bor force in large numbers. The figure has been

clining over the past 15 years, but the decline

celerated during the Great Recession, and

ached 62.6 percent in December of 2015, the

me level as seen in the late 1970s.

00

00

00

00

00

0

00

00

2 0 0 7

- J a n

2 0 0 7

- A u g

2 0 0 8

- M a r

2 0 0 8

- O c t

2 0 0 9 - M a y

2 0 0 9

- D e c

2 0 1 0 - J u l

2 0 1 1

- F e b

2 0 1 1

- S e p

2 0 1 2

- A p r

2 0 1 2

- N o v

2 0 1 3

- J u n

2 0 1 4

- J a n

2 0 1 4

- A u g

2 0 1 5

- M a r

2 0 1 5

- O c t

Exhibit 2.7: Payroll Employment (Change,

'000)

Source: BLS

62

63

64

65

66

67

68

2 0 0 1 - J a n

2 0

0 1 - N o v

2 0

0 2 - S e p

2

0 0 3 - J u l

2 0 0 4 - M a y

2 0

0 5 - M a r

2 0 0 6 - J a n

2 0

0 6 - N o v

2 0

0 7 - S e p

2

0 0 8 - J u l

2 0 0 9 - M a y

2 0

1 0 - M a r

2 0 1 1 - J a n

2 0

1 1 - N o v

2 0

1 2 - S e p

2

0 1 3 - J u l

2 0 1 4 - M a y

2 0

1 5 - M a r

Exhibit 2.8: Labor Force Participation Rate

Source: B




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Exhibit 2.10: U.S. Economic Outlook—March 20

2014 2015 2016 20

Annual Growth Rate, %

Real GDP 2.4 2.4 1.6 2.

Nonfarm Payroll

Employment 1.9 2.1 1.4 1.

Consumer Prices 1.6 0.2 1.8 3.

Level

Consumer Confidence 87 98 95 10

Percent

Unemployment 6.2 5.3 4.8 4.

Fed Funds Rate 0.1 0.1 0.8 1.

3-Month T-bill Rate 0.1 0.1 0.6 1.

Corporate Aaa Bond Yield 4.2 3.9 4.2 4.

10-Year Gov’t Bond 2.5 2.1 2.1 2.

30-Year Gov’t Bond 3.3 2.8 3.1 3.Source: National Association of REALTORS®

12

Owners’ Equivalent Rent component of the

Consumer Price Index having increased at over 3.0

percent in 2015, consumer prices are projected to

notch up in the short to medium term

Outlook

The outlook for the remainder of 2016 remains

moderately positive, with GDP projected to close

the year 1.5 percent higher on an annual rate.

Payroll employment is expected to advance at an

annual rate of 1.3 percent. With the Federal Reserv

expected to continue increasing the funds target

rate, U.S. inflation is expected to remain below 2.0

percent in 2016.

Household formation—an important driver of

economic growth—has been rebounding toward it

long-term trend. While in 2015 household

formation advanced at a rather moderate pace of

191,000 new households, we expect it to continue

advancing over the next few years as Millennials—

currently considered the largest generational

segment of the U.S. population—mature and ente

the workforce in larger numbers.

onetary Policy

arkets spent the better part of last year trying to

ad the Federal Reserve’s decision on the funds

get rate. During the summer, the concern focused

the September meeting of the Federal Open

arket Committee meeting, which did not result in

ate hike. Mid-December brought a much-ticipated change, ending the Fed’s

commodative policy with a 25 basis point hike. Of

urse, since then, financial markets have been

ing a wild roller coaster, leading some to question

e timing of the Fed’s decision.

nger-dated bond yields had not moved up

easurably despite the Federal Reserve rate hike.

r commercial real estate investors the spread

tween the 10-year Treasury Note yields and cap

es remained at over 400 basis points. However,

th interest rates expected to rise, commercial

ce appreciation is expected to moderate.

spite earlier concerns about the potential forlation, 2015 recorded low inflationary pressure

e in large part to declines in prices of gasoline

d other energy products. Deflationary pressures

e expected to subside in 2016, as gasoline prices

l likely stabilize.

addition, with apartment rents having risen at 4.0

rcent or better over the past few years, and the

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2 0 1 4

2 0 1 5

2 0 1 6

Exhibit 2.9: FOMC Fed Funds Target Rate

(%)

Source: Federal Reserve Board




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COMMERCIAL REAL ESTATE

13

3


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OMMERCIAL REAL ESTATE

ndamentals

mmercial real estate continued on an upward

jectory in 2015, building on improving

ndamentals and investment momentum. In

ndem with rising economic conditions, leasingengthened during the year. Growing net

sorption led to declining vacancies and

celerating rent growth. As employment gains are

pected to continue into 2016, demand for

mmercial space is expected to advance.

ofessional and business services added the

ghest number of net new jobs in 2015. The

proving employment landscape in office-usingdustries drove demand for office space. Almost

f of office leasing activity during the year was

ade up of company expansions, a positive

velopment. Even with 44.2 million square feet of

w supply, office vacancy declined 40 basis points

ar-over-year, to the lowest level in eight years—

.7 percent by the fourth quarter. Rents for office

operties rose 2.2 percent during the fourth

arter, to $31.26 per square foot, according to JLL.

dustrial properties found favorable conditions in

15 due to international trade and solid gains in

line retail sales. National vacancies for industrial

ildings dropped in the single digits during the

ar, leading to higher rents.

t absorption of industrial space totaled 231.2

llion square feet in 2015, based on data from JLL.

th new supply clocking in at 177.3 million squareet, availability rates declined to 6.4 percent by the

urth quarter. Industrial rents rose 5.6 percent

er the year, to an average of $4.93 per square

ot.

th consumers keeping spending on an upward

jectory, the retail sector recorded positive

mand matched by restrained supply, leading to

clining vacancies and moderately growing rents.

Retail net absorption totaled 88.3 million square

feet in 2015, according to JLL. Constrained new

supply in high-demand areas lowered vacancies to

5.7 percent by the last quarter of the year. Rentsincreased 2.1 percent during the year, to an averag

$15.84 per square foot.

Demand for multifamily properties continued on a

upward path. Renter occupied housing units totale

42.6 million units in the fourth quarter of 2015, a

300,000 unit advance from the fourth quarter of

2014, based on U.S. Census Bureau data. National

vacancy rates averaged 7.0 percent for rentalhousing during the fourth quarter, unchanged from

the same period in 2014. Median rents for rental

units averaged $850 by the end of the year.




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In comparison to the high-end deals, 82.7 percent

commercial REALTORS® reported transactions belo

the $2.0 million threshold in 2015. Although many

REALTORS® participate in transactions above $2.5

million per deal, they frequently serve a segment o

the commercial real estate market for which dataare generally not as widely reported, which we ter

the small CRE transactions (SCRE).

Based on National Association of REALTORS® (NAR

data for the SCRE market, sales volume increased

20.5 percent on a yearly basis in 2015. The strong

increase mirrored the renewed investor interest in

stabile markets and properties offering higher

yields. Prices for REALTORS® commercial

transactions advanced 8.5 percent year-over-year,

slower pace than in LCRE transactions. The data

underscore an important point about the recovery

and growth in SCRE markets. The rebound in

smaller markets was delayed by three years and thrate of price growth has been shallower.

In 2015, inventory shortage dominated the list of

concerns for SCRE markets. Cap rates averaged 7.8

percent over the year, a 40 basis point decline from

2014. Yields in SCRE markets continued to offer a

premium compared with the 6.5 percent average

recorded in LCRE transactions during the year.

vestments

mmercial real estate (CRE) investment trends

ere positive in 2015, following on last year’s tail

nds. Sales of large CRE transactions (LCRE)—over

.5M—advanced 23 percent year-over-year,

taling $534 billion, based on data from Real

pital Analytics (RCA). Investor demand foroperties continued on an upward path, as

onomic fundamentals, broadening lending

urces and capital followed returns. Prices for

mmercial assets reached new records, surpassing

or 2007 peaks. Based on RCA’s Commercial

operty Price Index, commercial prices rose 12.3

rcent in 2015 compared with the previous year.

pitalization rates averaged 6.5 percent during the

ar across all property types, a 16 basis pointcline year-over-year.

th global economies hitting a slow patch in 2015,

S. property markets became an even strongerntender for cross-border investors, as well. Top-

r markets in gateway cities continued as the

ajor targets of investor activity. However, posting

gher yields and strengthening economies,

condary and tertiary markets remained on the list

investor destinations during the year.

0

20

4060

80

100

120

140

$-

$50

100

150

200

2 0 0 6 Q 1

2 0 0 6 Q 4

2 0 0 7 Q 3

2 0 0 8 Q 2

2 0 0 9 Q 1

2 0 0 9 Q 4

2 0 1 0 Q 3

2 0 1 1 Q 2

2 0 1 2 Q 1

2 0 1 2 Q 4

2 0 1 3 Q 3

2 0 1 4 Q 2

2 0 1 5 Q 1

2 0 1 5 Q 4

Exhibit 3.1: CRE Sales Volume & Prices

($2.5M+)

Sales Volume CPPI

Source: Real Capital Analytics

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

2 0 0 8 . Q 4

2 0 0 9 . Q 2

2 0 0 9 . Q 4

2 0 1 0 . Q 2

2 0 1 0 . Q 4

2 0 1 1 . Q 2

2 0 1 1 . Q 4

2 0 1 2 . Q 2

2 0 1 2 . Q 4

2 0 1 3 . Q 2

2 0 1 3 . Q 4

2 0 1 4 . Q 2

2 0 1 4 . Q 4

2 0 1 5 . Q 2

Exhibit 3.2: REALTOR® CRE Markets (YoY

% Chg)

Sales Volume Prices

Source: N




16/3116NATIONAL ASSOCIATION of REALTORS®

Government-sponsored enterprises (GSEs) were th

third largest debt holder, with 12.0 percent of tota

dominating the financing in the multi-family

segment. Life insurance companies continued as

active participants in debt markets, accounting for

11.0 percent of the debt universe.

On the equity side of CRE financing, where equity

investors held $2.6 trillion in assets, private equity

accounted for 43.0 percent of capital, followed by

listed and non-listed REITs, which made up 32.0

percent of financing in 2015, according to Situs

RERC. Pension funds, both domestic and cross-

border were the third largest capital provider grou

representing 14.0 percent of the equity market. Thremainder was evenly distributed between groups

comprised of life insurance companies, commercia

banks, corporations, foreign investors and others.

pital Markets

pital markets proved favorable for commercial

al estate during 2015, riding the rising tide of the

st two years. Major capital providers found new

ergy in the growing values of commercial assets

d competed for deals, leading to steep

celeration in prices for some property sectors,pecially apartments and CBD office buildings.

e U.S. investment market totaled $6.2 trillion in

15, with 57.3 percent of the figure comprising

bt-based investment assets and the remainder

counted for by equity-based properties. On the

bt side, chartered depository institutions (banks)

counted for the bulk of capital providers, with

out half the total market holdings, as the wave ofw interest rates continued through the end of the

ar. The second largest share of debt holders was

presented by commercial mortgage backed

curities (CMBS), collateralized debt obligations

DOs), and other asset backed securities (ABS)

lders, making up 18.0 percent of total, based on

ta from the Federal Reserve.

Exhibit 3.3: CRE Debt Universe

U.S. Chartered

Depository Institutions

CMBS, CDO, other ABS

GSEs (Freddie, Fannie)

Life Insurance

Companies

Foreign Banking

Offices in U.S.

Other

ce: Federal Reserve Board

Exhibit 3.4: CRE Equity Investments

Private Equity

REITs

Pension Funds

Life Insurance Cos.

Commercial Banks

Corporations

Foreign Investors

Gov't, GSEs & Othe

Sources: Situs RERC, NAREIT, PREA, AFIRE, Prequin, Real Cap



17/31

of REALTORS®’ commercial deals, on par with the

previous year. Private investors were the third ma

capital providers, accounting for 12.0 percent of

deals during 2015. National banks came in fourth

place, with 8.0 percent market share. The Small

Business Administration and credit unions shared aequal proportion, with 6.0 percent of the market

each. Life insurance companies were much less

active in REALTOR® markets, representing 3.0

percent of deals, while CMBS conduits accounted

for only 2.0 percent of funding, tied with REITs.

Public companies and international banks made

up about 1.0 percent of all sales.

The lending survey highlights the marked

differences in the LCRE markets versus the SCRE

markets. Debt financing represents a much-larger

portion of capital in SCRE markets, whereas LCRE

deals benefit from significant equity contributions.

For regional and community banks—which accoun

for 56.0 percent of all capital in REALTOR®

markets—compliance costs stemming from financ

17

nding

e lending landscape in large commercial real

tate (LCRE) markets broadened further in 2015,

mpared with the prior five years, as sources of

nding actively competed for deals. Based on RCA

ta, CMBS originators accounted for 21.0 percent

lending at the high end of the market.vernment-sponsored enterprises (GSEs) were the

cond largest source of lending, with 18.0 percent

total transactions, followed by national banks,

hich comprised 16.0 percent of deals. Regional

d local banks made up 15.0 percent of total

ume, while life insurance companies accounted

r 12.0 percent. Financial institutions, international

nks and private investors rounded-up the funding

urces, with 10.0 percent, 7.0 percent and 2.0rcent, respectively, of total sales.

sed on NAR’s 2016 survey data, capital markets

play a fundamentally different landscape. Local

d community banks were the largest lending

oup in REALTORS®’ commercial markets in 2015,

counting for 31.0 percent of transactions. Local

d community banks maintained market share

m 2014, when they made up 32.0 percent of the

arket. The second largest capital source in 2015

ere regional banks, which captured 25.0 percent

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2 0

1 1

2 0

1 2

2 0

1 3

2 0

1 4

2 0

1 5

2 0

1 6

Exhibit 3.6: REALTOR® CRE Lending Sources

Small Business

AdministrationREITs

Regional Banks

Public Cos.

Private Investors

Other

National Banks

Local/Comm. Ban

Life Insurance Co

International ban

Credit Unions

CMBS

Source: N

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

2011 2012 2013 2014 2015

Exhibit 3.5: RCA Lending Sources ($2.5M+)

Pvt/Other

Reg'l/Local Bank

Nat'l Bank

Int'l Bank

Insurance

Gov't Agency

Financial

CMBS

Source: Real Capital Analytics




18/3118

nding, continued

gulations have made a stronger impact on

ailable capital for CRE deals. With higher costs of

mpliance and higher capital reserve requirements

r CRE loans, regional and community banks have

en more cautious in their lending during 2015,

sulting in tightening of capital, a reversal of thend since 2013. In 2015, 33.0 percent of

ALTORS® reported tightening lending conditions,

mpared with 22.0 percent in 2014 and 28.0

rcent in 2013.

addition, 59.0 percent of REALTORS® reported

at insufficient bank capital remains an obstacle to

es in SCRE markets. The main reason comes from

w and proposed legislative and regulatorytiatives—Dodd-Frank, lease accounting, carried

erest, etc.—which were cited by 25.0 percent of

spondents. Another 17.0 percent indicated that

gulatory uncertainty for financial institutions was

important barrier to bank lending for CRE

ojects, tied with U.S. economic uncertainty. The

rd main reason was a combination of reduced net

erating income, reduced property values and

uity.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 2015 2016

Exhibit 3.8: Causes of Insufficient Bank

Capital for CRE Lending:

Other, please spec

Global economic

uncertainty

U.S. Economic

uncertainty

Inability of banks t

dispose of distress

assetsNew/proposed US

legislative and

regulatory initiativRegulatory

uncertainty for

financial institutioSlow-down in

pooling/packaging

CMBSReduced NOI,

property values, a

equity

Source: N

59%

41%

Exhibit 3.7: Does Bank Capital for CRE

Remain Obstacle to Sales?

Yes

No




19/3119

SURVEY HIGHLIGHTS4


20/3120

61% of respondents closed deals in 2015

REALTORS® closed an average of 8 commercial

nsactions

94% of sales were valued at or below $5 million

Cash comprised 26% of all transactions

61% of transactions had financing with LTV equal

or higher than 70%

17% of respondents had international

ents/investors

ales composition:

- Office CBD: 8%

- Office Suburban: 12%

- Industrial Warehouse: 14%

- Industrial Flex: 8%

- Multi-family: 15%

- Retail Strip Center: 12%

- Retail Mall: 2%

- Land: 18%

- Hotel: 2%- Other: 8%

Net operating income (NOI) of sold/leased

operties increased in 57% of markets over the

st eight years

ending conditions tightened for 33% of

spondents and eased in 31% of respondents’

arkets

ailed sales due solely to appraised values

clined from 22% in 2014 to 17% in 2015.

• Top sources of capital:

- Local/community banks: 31%

- Regional banks: 25%

- Private investors: 12%

- National banks (“Big four”): 8%

- Small Business Administration: 6%- Credit unions : 6%

- Life insurance companies: 3%

- REITs: 2%

- CMBS: 2%

- Public companies: 1%

- International banks: 0.7%

• 27% used the Small Business Administration

refinance program

• 40% of sales failed due to lack of financing

- Loan underwriting standards

caused 54% of financing failures

- 20% caused by appraisals/valuatio

- 12% due to financing availability

• 15% of deals failed to secure re-financing,

compared with 50% in the 2012 report

• Debt-to-service coverage ratio (DSCR) was 1.4.

• 59% of respondents find insufficient CRE bank

capital due to: - Legislative/regulatory initiatives: 25

- Financial regulatory uncertainty: 17

- U.S. Economic uncertainty: 17%

- Reduced NOI, values & equity: 13%

- Disposition of distressed assets: 7%

- Global economic uncertainty: 7%- Pooling/packaging of CMBS: 4%

• The main reasons for failed sales due to appraisals

- NOI (Net Operating Income): 31%

- Economic obsolescence: 15%

- Deteriorated property financials: 14

- Location obsolescence: 13%

- Zoning: 7%

- Environmental conditions: 5%

- Lack of energy efficiency: 2%

URVEY RESULTS: Highlights




21/3121

SURVEY RESULTS5


22/31


23/3123

arket Environment

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 2015 2016

Exhibit 5.4: Change in net operating

income ($/SF) of properties sold/leased

from 4th quarter of 2007 to 4th quarter of

2015Decreased 50% - 75

Decreased 40% - 49

Decreased 35% - 39

Decreased 30% - 34

Decreased 25% - 29

Decreased 20% - 24

Decreased 10% - 19

No Change

Increased 10% - 15

Increased 5% - 9%

Increased 1% - 4%

0% 20% 40% 60% 80% 100%

Office CBD

Office Suburban

Industrial Distribution/Warehouse

Industrial Flex

Retail: Mall

tail: Neighborhood Shopping Center

Retail: Strip Center

Apartment: Market-Oriented

Apartment: Affordable

Apartment: Student Housing

Hotel

Land

Exhibit 5.5: Expectations for Cap Rate Movement in Next 2-3 Years

Lower by more than 100 bp

Lower by 50-100 bps

Lower by 1-49 bps

Same

Higher 1- 49 bps

Higher 50-100 bps

Higher by over 100 bps

ork around the country and find differences in all the

arkets, mainly due to demand not appraisals.

- Illinois

od properties, well maintained and well managed,

ll leased are not having any issues with availability of

pital, appraisals, or LTV issues (cap rates). It’s the

k some people are putting out there to slide off into

meone else's portfolio that is having a problem, and

okers are looking for someone to blame. Buyers are

t stupid.

- Kentucky

ee that buyers ask for a higher cap rate than thearket will provide.

- Montana

y answers may be regional and not applicable

tionally. However, a serious employment issue exists,

lled and unskilled, and many industrial factories than

ed to employ 50-200 people are now nothing more

an distribution centers, employing 5 people: 4 forklift

erators and 1 warehouse manager!

- Ohio




24/3124

nding Environment

e majority of sales were financed in 2015, as cash

mprised 26.0 percent of all deals, a smaller

oportion than in 2014.

nk financing, in particular, was an importanturce of capital for commercial transactions,

mprising 64.0 percent of capital. Local and

mmunity banks played a central role, with 31.0

rcent of the market, followed by regional banks,

25.0 percent. National and international banks

counted for a combined 9.0 percent of capital.

nding conditions took a step back during the year,

cording to survey respondents. Over a third ofspondents indicated that lending conditions

perienced tightening. This change marked a shift

m the trend of the prior five years.

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

Exhibit 5.6: Change in Lending Conditions

over Past Year

Eased

Significantly

Eased Somewhat

Not Changed

Tightened

Somewhat

Tightened

Significantly

0%10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015 2016

Exhibit 5.7: Average Loan-to-Value for CRE

Transactions

Other

100% Cas

50%55%

60%

65%

70%

75%

80%

85%90%

Many commercial real estate properties are sold at the

cap rate of below 7%. To obtain an 80% LTV loan at 5%

interest for 10 to 15 years, loan will have a debt service

of equal or greater than NOI. That has to change soon!

- Tex

The regulatory environment is making the development

and acquisition business much harder for individuals an

small to medium players to compete against REITs and

institutional investors. Reporting requirements, fees,

legal costs related to transaction size have significant

impact on the yields for smaller investments.

- Tex

Commercial loans above $1 million are available.

Commercial loans below $1 million are difficult becausethey are not handled directly by commercial loan office

Lack of experience results in a fits and starts application

process with seemingly reluctant commitment and

closing process. It is easier to get a large loan done than

a smaller loan.

- Vermo

tional lenders have best rates, but are way too

nservative. They are not lending even for well

pitalized deals.

- Wisconsin




25/31

0%

0%

0%

0%

0%

0%

2011 2012 2013 2014 2015

Exhibit 5.10: Percent of REALTORS®

Reporting Failed Re-Financing Transaction

No

Yes

0%

20%

40%

60%

80%

100%

2016

Exhibit 5.11: Reasons for Lack of Re-

Financing Funding

Other (please specify)

Appraisal/valuation

Loan underwriting/lend

requirements

Financing availability

Local Banks are getting it done right now. Large

banks only want large deals. They are no longer

interested in small business

- Orego

Lending is still difficult unless it is an owner occupie

building or has long term leases in place.

- Pennsylvan

The Dodd-Frank act is the one greatest hindrance t

the commercial real estate market activity in the U

today. The Act constricts business and should be

eliminated.

- Colorad

25

nding Environment

dd-Frank has forced lending institutions to look

NLY at a business’s bottom line for income and only

d back in depreciation, which for LLCs and Sole

oprietors makes it almost impossible to get them

ancing for anything!

- Missouri

maller, local banks still are able to make a quicker

mmitment to borrowers.

- New York

nding problems are due to lack of quality

rrowers, not lack of capital by lending institutions.

- Oregon

0%

0%

0%

0%

0%0%

2011 2012 2013 2014 2015 2016


Reporting Failed Sales Transaction Due to

Lack of Financing

N/A

No

Yes

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2016

Exhibit 5.9: Reasons for Lack of Financing

Other

Appraisal/valuation

Loan underwriting/lend

requirements

Financing availability




26/3126

nding Environment

A—takes way too long, often limited knowledge

fine grain local circumstances, clients often must

able to move on their situation quickly or lose

eir opportunity. Thus there is a need for an

trepreneurial Warehouse' brain-trust to educate,oom and promote new entrepreneurs how to get

arted quickly and smoothly.

- Pennsylvania

vate Lenders and Hard Money Lenders lend

oney to Investors and they should not be restricted

the Dodd Frank Act. Commercial banks are

mited to Amounts and certain numbers of

operties a person can hold. - Arizona

ems lenders are having difficulties lending,

pecially to small and medium businesses.

- Arizona

ed further training of FDIC and OTC regulators on

e nuances of commercial real estate including

derstanding obsolescence, effects of changing

ying trends, retail uses, etc.

- California

e big banks are running freely and need to be

focused. Since they were given the second wave of

nds they have been out to close the market to all

t themselves and stay in control.

- California

ere is a concern that the regulatory environmentvery restrictive. Some commercial lenders have

pressed that they are having problems getting

ans approved.

- California

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015 2016

Exhibit 5.12: Involved in CRE Transaction

supported by SBA Loan

N/

No

Ye

8%

21%

6%

56%

9%

Did not know the program

existed

Burdensome application and

reporting requirements

Due to past SBA experiences

Client had other source(s) of

financing

Other, please specify

Exhibit 5.13: If answered "No“ to SBA

Loan, the reason was

The ongoing evolution of lending regulations will, overtime, change lenders from using their judgement and

relying on the numbers. Regional lenders won't be able

compete - national lenders will continue to be out of

touch. Here on the Delmarva - that's exactly opposite of

what we need to grow our economy and the next

generation of leaders.

- Maryla




27/3127

praisals

praisals for commercial transactions notched

provement in 2015. The incidence of failed sales

e solely to appraised values declined from 22.0

rcent in 2014 to 17.0 percent in 2015. The main

prit for low appraisals is reduced net operatingome (NOI), which was cited by 31.0 percent of

ALTORS®. Economic obsolescence and

teriorating property finances were the second

d third reasons for appraisal issues. Location

solescence and zoning were reported as

oblems by 13.0 percent and 7.0 percent of

spondents, respectively.

0%

20%

40%

60%

80%

100%

2015 2016


Reporting Transaction Failures Due to

Appraised Value

N

Y

0%

10%

20%30%

40%

50%

60%

70%

80%

90%

100%

2015 2016

Exhibit 5.15: Main Reasons for Appraisal

Problems Other

Lack of energy efficiency

Environmental condition

(air quality, contaminatio

Zoning

Location obsolescence

Economic obsolescence

Deteriorating fiscal issues

with property

NOI (Net Operating Incom

0%

20%

40%

60%

80%

100%

2015 2016

Exhibit 5.16: Mezzanine Debt Required

Due to Appraised Value Lower than Price

N

Ye

ere is a dramatic problem with how regional and

tional banks hire appraisers. There is no opportunity

proper selection by bank employees in the cities

ere the appraisals are being performed, often leading

hiring geographically incompetent individuals.

- California

ce in my state, lenders have to use an appraiser from

pool", the appraiser most of the time does not knowe area or product type.

- Illinois

e problem is lenders are concerned about finding the

eapest appraisal, which leads to lower quality work.

courage quality and be willing to pay a little more for

od work.

- Indiana

nding Officers are not allowed to select appraiser, so

e lending officer and appraiser are disconnected. That

gulatory requirement is hurting the tertiary commercial

arkets and hindering small business acquisition of real

ate.

- Tennessee




28/3128

praisals

ALTORS® reported that most appraisers are

familiar with local markets and property types.

ly 17.0 percent indicated that appraisers are

ways” familiar, while 65.0 percent indicated

ometimes.” Familiarity with the property typeplayed a similar picture, with 63.0 percent of

spondents stating that appraisers are

ometimes” familiar, while 27.0 percent reported

at appraisers are “Always” familiar. There was a

ud casting a longer shadow over the appraisal

uation—60.0 percent of REALTORS® reported that

nders generally seek quality appraisers who are

miliar with the local market and property types.

at means that two-in-five transactions arepraised by someone who may not be familiar

th the market or the property type.

0%

20%

40%

60%

80%

100%

2015 2016

Exhibit 5.17: How Familiar Are Appraisers

with the Market?

Not sure; N/

NeverRarely

Sometimes

Always

0%

20%

40%

60%

80%

100%

2015 2016

Exhibit 5.18: How Familiar Are Appraisers

with the Property Type?

Not sure; N/

Never

Rarely

Sometimes

Always

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016

Exhibit 5.19: Do Lenders Seek Appraisers

Familiar with Market and Property Type?

N

Ye

eems that the appraisal process is flawed. We have

t of area appraisers picking from a pool of local

praisal opportunities though they are not in the least

alified to do appraisals in the those areas. For

ample, appraisers from Annapolis or Baltimore or

isbury take on appraisal jobs in areas which are over

hour or two drive away from their home offices. Theyve to see the contract before they can give a value.

hat's the point of the appraisal if they are allowed to

e the contract price and then can make the price

praisal fit that price? It's so ridiculous and wrong.

- Maryland

ere is NO shortage of appraisers at this time. If there is

hortage in the future, it will be because our fees are so

w we cannot afford to hire trainees. I stopped doing

MC work after the crash. Now I no longer need

ortgage work so it is on the "back burner". They

reased requirements and liability, but NOT the fees.

good-bye AMCs!

- Virginia

praisers are generally aware of the market they serve

wever are restricted by Federal guidelines that are

w outdated.

- Washington




29/3129

ethodology of NAR’s 2016 CRE Lending Survey

thin the framework of improving market

nditions, the National Association of REALTORS®

nducted a national survey of commercial real

tate members, focused on lending conditions.

February and March of 2015, NAR invited a

ndom sample of 65,420 REALTORS® with an

erest in commercial real estate to fill out an

line survey. A total of 1,241 responses were

ceived for an overall response rate of 1.9 percent.




30/31

The National Association of REALTORS®, “The Voice for Real Estate,” is America’s

largest trade association, representing over 1.1 million members, including NAR’s

institutes, societies and councils, involved in all aspects of the real estate industry.

NAR membership includes brokers, salespeople, property managers, appraisers,

counselors and others engaged in both residential and commercial real estate. The

term REALTOR® is a registered collective membership mark that identifies a real

estate professional who is a member of the National Association of REALTORS® andsubscribes to its strict Code of Ethics. Working for America's property owners, the

National Association provides a facility for professional development, research and

exchange of information among its members and to the public and government for

the purpose of preserving the free enterprise system and the right to own real

property.

NATIONAL ASSOCIATION OF REALTORS®

RESEARCH DIVISION

The Mission of the National Association of REALTORS® Research Division is to collec

and disseminate timely, accurate and comprehensive real estate data and to conduc

economic analysis in order to inform and engage members, consumers, and policy

makers and the media in a professional and accessible manner.

To find out about other products from NAR’s Research Division, visit

www.REALTOR.org/research-and-statistics.

NATIONAL ASSOCIATION OF REALTORS®

RESEARCH DIVISION

500 New Jersey Avenue, NW

Washington, DC 20001

202.383.1000

30



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Commercial Real Estate Lending Trends 2016

2016 commercial lending trends survey

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