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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2015

Testing the Waters, Again

Mortgage professionals didn’t experience their hoped-for renaissance in 2014, but optimism remains for this year

Testing the Waters, Again

The high expectations that many commercial mortgage professionals took into 2014 didn’t pan out quite as hoped for in this past year, according to a large percentage of respondents in the commercial real estate lending survey conducted by Scotsman Guide Media and the Small Business Finance Institute this past November. Optimism for business volume and the economy remains strong for 2015, however.

For the second year, the organizations’ 10-question survey sought mortgage professionals’ evaluation of their business volume in the past year, as well as their take on what is in store for 2015. The results of the two years’ surveys reveal some striking similarities in expectations versus reported results, suggesting that many mortgage professionals are expecting and awaiting a breakthrough to greater business prosperity that hasn’t materialized yet.

The latest survey did reveal more satisfaction in regard to loan volume and optimism about the coming year than did 2014’s survey, however. In the 2015 survey,  34 percent of respondents said they were satisfied with their dollar-loan volume in the past year, compared to 29 percent in the previous survey.

The percentage of respondents more optimistic about the current year increased even more: nearly  89 percent in the 2015 survey expect the new year to bring an increased dollar volume, compared to  82 percent in the 2014 survey. In addition, nearly as many participants — 81 percent, compared to 64 percent in the previous survey — said they expect the ratio of funded loans to applications to increase in 2015.

Obstacles

Will 2015 be the year the high expectations are rewarded? Breaking down the survey respondents’ answers provides a clear picture of the areas where commercial real estate lending is lagging, and pinpoint what should improve to make for a year that lives up to the hype. The general optimism of respondents was tempered by concerns about a number of issues that could represent barriers to funding commercial real estate loans this year.

Given five choices, the majority of respondents identified restrictive lender-credit policies as the single biggest obstacle, although the number of respondents who cited the choice was just 24 percent, down from 38 percent in the previous survey.

The catch-all “all of the above” choice, which included depressed borrower demand for capital and real estate appraised values in addition to restrictive lender-credit policies, drew the largest response at nearly 46 percent, compared to 35 percent in the 2014 survey, suggesting less consensus than in the previous survey that any one particular issue is the greatest obstacle.

The survey also asked respondents to elaborate on their outlook for lending in 2015 by answering the following two questions:

  1. What conditions, terms or incentives could motivate more users/investors to acquire, construct or refinance commercial real estate loans in 2015?
  2. What conditions, terms or incentives could motivate commercial real estate lenders to extend more loans to property users/investors in 2015?

All survey respondents answered these two questions, with about 50 percent of the responses pointing to a need for less-restrictive lender-credit policies and procedures. The next most common concern of survey respondents related to either the economy, regulatory or government policies, which combined to make up nearly a third, 30 percent, of the answers. These two major concerns were followed by responses about real estate values (11 percent), interest rates (10 percent) and borrower issues (4 percent).

An examination of each of these concerns and their potential impact on commercial real estate lending this year provides a road map of what improvements could help make 2015 the breakthrough year mortgage professionals are eagerly awaiting, if the economy cooperates.

Restrictive lender-credit policies

Like last year, survey respondents recommended a vast array of solutions to relieve lender-credit  policies — from small changes to major overhauls. Many respondents urged lenders to ease borrower-credit standards or to remove burdensome lending regulations. A number of respondents repeated the common demand from the previous survey for higher loan-to-value leverage, which may have a more realistic chance of happening this year than in 2014, given the economic improvements over the past year.

Today’s regulatory environment and the slow recovery of lost real estate values inspired a number of suggestions that are plausible and even possible, including:

  • Implementing less-onerous loan closings. Technology is improving the speed and efficiency of the underwriting process, closing and due diligence, all of which would give some lenders a competitive benefit.
  • Lowering closing costs and U.S. Small Business Administration (SBA) guarantee fees. The former is controllable.
  • Returning to common-sense underwriting. This is the most frequently mentioned expression of frustration with lender policies.

The government

For the second year, many respondents blamed soft borrower demand on a lack of confidence in the U.S. economy and the perception of government gridlock in Washington, D.C. Because of slower-than-hoped-for economic growth and anxiety about expected rising interest rates, many business owners are seen reluctant to invest in expansion, which limits opportunities for lenders and mortgage professionals alike. Most complaints about the government were general in nature, appealing for lighter regulation and more flexibility from supervising regulators.

Property values

In this year’s survey, some 56 percent of respondents indicated satisfaction with the degree of property- value recovery that’s occurred since 2009, but some frustration was still expressed about the topic of appraised property values and the degree of leverage allowed by commercial lenders. Perhaps the expectations of greater  loan volumes ahead also reflect confidence that normal, or at least close, property values have returned.

Borrower and broker issues

Similar to the 2014 survey, a number of respondents wished for better-qualified borrowers with stronger balance sheets, liquidity, guarantors and solvency, but borrowers weren’t the only ones taken to task. Other respondents felt there was room for improvement for many commercial mortgage brokers, who need to develop a more thorough understanding of lender programs to be able to connect to deals, according to respondents.

Survey respondents also criticized some brokers’ presentation packages and described them as weak. These respondents noted that strong, complete presentations are likely to get faster responses and better results from lenders.

Interest rates

Despite six years of the mortgage industry enjoying record-low interest rates, a surprising number of respondents complained about high interest rates. This response may be a source of concern: If the commercial sector has become dependent on the current low interest rates, it could spell trouble ahead as the likelihood of rate increases in 2015 and beyond is almost a certainty.

Overall economy

Although the U.S. economy has steadily improved and unemployment has continued to decline over the past year, the economy remains a concern for many respondents who want to see more growth and lower unemployment. They see more robust growth in the economy and a higher employment rate as necessary to further revitalize commercial real estate values and deal flow.

Responses to the survey question about the prospects for economic growth this year revealed a generally positive outlook, even more so than in the previous year’s survey. Sixty-seven percent of respondents expected economic expansion, 23 percent didn’t expect expansion and 10 percent said they didn’t know.

This more upbeat sentiment in the latest survey isn’t reflected in as much overall optimism about 2015 based on the answers to one fundamental question: Does your company plan to hire more people to facilitate commercial real estate business loans in 2015?

The 43 percent who indicated that their companies planned to hire more people in the coming year matched last year’s response, while a higher number, 37 percent, said they were not and  20 percent indicated they did not know. These numbers do not indicate widespread certainty of business growth among respondents.

Summary

Commercial real estate lending has been through a challenging and often painful recovery period over the past seven years.

Although much has been gained back from the industry-wide devastation that came out of the recession, the 2015 survey reveals that few mortgage professionals believe the industry has fully recovered, but the underlying sense of optimism in most of their responses points to cautious belief that 2015 may be the turnaround year.

Still, legacy issues remain: Loan demand was reset by the downturn and remains lower, the hangover of problem loans continues, and ongoing flat interest rates have made profitability and commercial-loan growth problematic for many lenders. These ongoing issues, combined with tighter oversight of lender performance by supervising regulators and the frequent turnover of many market players who couldn’t originate loans in recession-era conditions, make for a market that remains tighter and more restrictive than before the crash.

The resilience and optimism shown by the collective commercial real estate finance sector, however, bodes well for the long-awaited renaissance to be realized when the hoped-for economic and regulatory factors finally all line up.

Will 2015 be the breakthrough year for commercial real estate lending? Only time will tell, but this year’s survey suggests that commercial mortgage professionals are ready to make the most of this year’s opportunities.

Visit SBFI.org for the complete survey results.


 
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