Newmark Q&A: What’s Driving Southwest CRE Lending?

Newmark recently released its Q1 2018 production totals, after hosting more than 50 of its correspondent lenders at a Phoenix summit to discuss 2018 commercial mortgage finance trends, lender allocations and market conditions in Arizona and key Western State markets. With that in mind, Connect Media asked Newmark’s Tim Storey the following questions about how these trends affect Arizona markets and commercial finance in general.

Q: Are lenders confidant with their capital allocations, preferred asset classes and targeted markets? Where are they looking, and what’s their appetite?
A: During our recent meeting, I had an opportunity to visit with a number of different lenders (life company, CMBS and banks).  From a life company perspective, in the Arizona market, all of the sources I talked to were quite happy with the performance of their current portfolio. The preferred asset classes remain multifamily and industrial with office and retail following. I would say that self-storage properties have also become a very desirable product type in the past 3-5 years from a life company standpoint. Most of the groups indicated a desire to continue to grow their portfolios, especially in Arizona as most are “under-weighted” in loans in our market. Retail will continue to get the most scrutiny among our life companies. Grocery-anchored centers will gain the most traction, followed by well-located, infill, strip centers that have demonstrated strong occupancy over the past 5 years. From a CMBS perspective, most of the folks I talked to were experiencing a bit of a decrease in production early in 2018. They are all open for business and aggressively seeking quality business, but the number of opportunities has decreased as compared to the same time period in 2017. The good news is that spreads have compressed a bit early in the year, so while the yield on treasuries has increased, spread compression has minimized some of the increase.

Q: Arizona, and particularly Phoenix, was a productive market for Newmark in 2017. How does the overall market look at the close of Q1 2018, and what insights would you share into the current Arizona trends moving into Q2 2018?
A: Overall, the market remains very steady. The apartment developers that we talk to still think there are opportunities for new development, albeit at a slower pace than the past five years. There is strong demand in the industrial sector, with a number of large distribution buildings under construction with little to no pre-leasing. Retail and office will still be on a case by case basis, but opportunities exist for both of those asset classes.

From an economic perspective, a recent report showed that the state was in the top three for personal income growth, top 10 for employment growth and top six in terms of population growth. One of the key takeaways in the employment sector is the diverse nature of the companies that are relocating and expanding in our market. In the past, the state has been overly reliant upon the construction industry, specifically with residential and commercial construction. That economic engine has yet to fully hit stride, and yet the state is luring companies such as Bank of the West, Northern Trust, State Farm, Charles Schwab and ZipRecruiter.

Q: What do you think borrowers, investors and developers should be thinking about looking to the year ahead?
A: In general, we all need to be thinking in terms of where we are in the current cycle. At some point this run will come to an end, like all cycles do. At present, the 10-year treasury has experienced a fairly significant increase (just over 2% in Q4 2017 to nearly 3% in recent weeks), with the rise in short-term rates even more dramatic (.75 a year ago to over 2% today). Given the noise surrounding the Fed and their plan to continue to increase short-term rates, the question in borrowers’ minds should be the impact on the bond market and long term interest rates. Most of the loans we originate with our life companies are based on the 10-year treasury. It is still possible to get 10-year rates in the low 4% range (in some instances even lower), but now is the time to take advantage and lock in a low rate.

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For comments, questions or concerns, please contact Dennis Kaiser