Broad Availability of Capital Could Drive a 15% to 20% Growth In Core Real Estate Investment Volume
An increasing number of institutional lenders are looking to park significant levels of capital into commercial real estate this year as a “safe haven.”
According to Jones Lang LaSalle’s Capital Markets experts, real estate debt financing remains an attractive risk-return option for many lenders in spite of economic volatility.
“We saw the commercial mortgage-backed securities (CMBS) market make a formidable return to $48 billion in issuance last year and that additional liquidity led to improved pricing and terms for borrowers,” said Mike Melody, co-head and executive managing director of Jones Lang LaSalle’s Real Estate Investment Banking business. “This has drawn a tremendous amount of liquidity in both debt and equity into the commercial real estate funding arena from a broad spectrum of lenders. That availability is causing an expanded level of competition for core product.”
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With a continuum of low interest rates and government debt yields, Jones Lang LaSalle said it expects the broad availability and aggressive cost of capital to support a 15% to 20% growth in core real estate investment volume year-over-year in the United States.
The relatively low indices have created an attractive lending environment as all-in loan pricing remains attractive compared with alternative investments, according to Tom Melody, another co-head and executive managing director of Jones Lang LaSalle’s Real Estate Investment Banking business.
“We’re more bullish on capital availability this year than we have been in the last five years," said Tom Melody. "Lenders all have greater allocations and equity capital is as available, or more available, than we’ve ever seen it before. Despite some near-term macro-economic headwinds, investment in United States real estate remains one of the few 'safe havens' relative to other developed markets.”
“The most aggressive deals are only happening at the very high-end of the market, so this isn’t an industry-wide phenomenon,” said Tom Fish, the other co-head and executive vice president of Jones Lang LaSalle’s Real Estate Investment Banking. “We’re at an inflection point, as property fundamentals are holding up in a slowly improving economy, but there are uncertainties on the horizon with respect to long-term rates."
At some point, Fish explained, the Fed will slow down its quantitative easing efforts, which could lead to rising long-term interest rates and consequently upward pressure on cap rates.
Given the relative increase in debt options for borrowers and a continued low rate environment, Jones Lang LaSalle said it expects favorable competition and pricing throughout the rest of 2013 will continue to favor commercial real estate borrowers with increased capital availability. Among the sources expected to make money available for commercial real estate investment are:
• Insurance companies, which are expected to increase or exceed their real estate allocations in 2013 over 2012 reportedly by 10% in 2013.
• Domestic banks are also actively seeking new commercial mortgage capital allocations and will remain a competitive source of funds for Class A properties in primary markets.
• Foreign banks are an active and competitive source of funds for institutional quality sponsors and trophy properties. Chinese (Hong Kong) banks remained the most competitive capital source in this lending subset during the fourth quarter 2012, with strong activity also by the Singaporean, Canadian and German banks.
• CMBS lenders have increased their activity and finished the year strong at a post-recession high of $48 billion for new issuance. New issuance levels are forecasted in the $60-$75 billion range for 2013.
• Alternative lenders, pools of opportunistic equity and newly formed mortgage REITs continue to raise significant amounts of equity to finance transitional properties, with combined capital raising levels for both debt (35%) and equity (65%) at record peak level of $73 billion for 2012.This should produce increased activity in Class B assets in primary markets and Class A assets in secondary markets
Pension Commitments to Real Estate Increased Significantly In 2012
Meanwhile, commitments to real estate managers by U.S.-based public pensions increased materially in 2012, according to data tracked by FPL Associates Consulting.
Per FPL, more than 300 commitments were made in 2012 representing $31 billion in equity. This compares to the $24 billion committed in 2011. Tracked commitments include those made to managed vehicles such as closed-end commingled funds, open-end commingled funds, separate accounts, club funds, and programmatic joint ventures.
Investmnent managers pursuing core strategies represented 41% of aggregate commitment volume, making them the most popular among public pensions in 2012. Opportunistic funds represented 30% of aggregate commitment dollars, with value-add strategies making up another 21% of commitments. The remaining 8% went to investments pursuing senior/mezzanine debt or securities strategies.
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