Four Key Takeaways From CREFC 2021

Forgoing the Art Deco majesty of Miami's South Beach for the comfort (and safety) of the home office, the Commercial Real Estate Finance Council (CREFC) gathered virtually to discuss the market outlook under the umbrella of the “Building a Better Future” theme as the industry emerges from the pandemic. Below are some takeaways from sessions attended by SS&C Intralinks colleagues listed in no particular order.

1. The outlook is positive

Speakers and panelists were optimistic. Widespread vaccination and business reopenings are helping to drive both a decline in loan delinquency rates and increasing issuance. Many participants acknowledged that this turnaround was due to the collective efforts of the industry working together during the pandemic, specifically by quickly adopting new CREFC reporting standards, efficient special servicing and forbearance approvals.

The commercial mortgage-backed securities (CMBS) market is currently characterized by tight spreads, a high volume of dry powder, and heightened competition among investors and lenders — but underwriting processes remain solid and disciplined.

2. Issuance and performance depend on property type and transaction structure

While the overall sense is that of a resurgence in CRE, there was hesitation around certain property types: specifically, nonessential retail, office and business lodging. Meanwhile, industrial facilities and multifamily properties are attracting issuance activity and investor interest. Currently, the market is favoring single-asset-single-borrower (SASB) and CRE collateralized loan obligation (CRE CLO) financing structures, which both allow for more flexible borrower terms and transitional capital when compared to conduit CMBS.

3. Location, location, location still matters

While the adage in real estate still applies, geographic trends are apparent. For example, investors are keen on office properties in the Sun Belt states, as a number of companies have relocated to those areas. There’s also a shift toward "secondary and tertiary" markets such as Florida, Georgia and North Carolina, as population growth has created more demand outside of “gateway cities” such as New York and San Francisco. The pandemic may have facilitated the migration to the suburbs of those dense cities, but panelists noted that the trend may reverse as workers are called back to the office. Those cities will continue to attract large, multi-billion-dollar transactions such as the recent USD 3 billion refinancing of One Vanderbilt in New York City, one of the largest SASB transactions in a decade.

4. Waiting on Washington

Momentum and a full economic recovery hinge on government policy. Eyes are on Washington as uncertainty around infrastructure spending and tax reform continues. The consensus of the "Update from D.C." session was that bipartisan action on infrastructure is likely, but who is footing that bill — somewhere between the Democrats’ proposed USD 2.5 trillion and Republicans' half-trillion — remains uncertain. Various tax proposals are in play, including raising gasoline, corporate and capital gains taxes and doing away with some or all of the carried interest tax and 1031-type exchanges in commercial real estate. The last point is controversial to some in the CRE industry, as 1031 makes it possible for investors to defer capital gains tax liability, and restrictions on this could dampen investor activity and the overall CRE recovery from the pandemic. On top of policy and spending debates, there are the 2022 midterm elections — the results of which may just further the existing tensions and narrow divisions in Congress, thereby reinforcing opposition to the tax increases and elimination of tax incentives backed by the White House.

Conclusion

How the industry performs in the long-term hinges on continued economic activity, government policy and interventions as well as how issuers and investors create opportunity in the post-pandemic world.