/perspectives/sector-views/commercial-real-estate-debt-anticipating-a-strong
Commercial Real Estate Debt: Anticipating a Strong Fourth Quarter
While year-to-date sales volumes lag last year’s totals, originations continue at a strong pace.
Sales continue to lag last year’s volume by approximately 7 percent through the third quarter. With the decline in sales, logic and history would indicate that originations would generally correlate to this trend. However, originations have exceeded last year’s first-half totals and market participants believe that third-quarter volumes will surpass those of the second quarter. While banks have significantly reduced originations in the first half, other lenders have increased their appetites, particularly Agency and CMBS lenders. New supply has come to the market from a variety of sources, including the refinancing of the end of the wall of maturities from 2007 and new construction projects on apartment, industrial, and office buildings that, due to robust leasing and stabilized cash flows, have easily converted to permanent loans. Recent sales have also seen an increase of almost 30 percent in August over July and a slight increase from the second quarter to the third quarter, mostly due to a resurgence of portfolio transactions. This increase in larger transactions can be directly attributed to the continued recovery in the CMBS market, and the ability to efficiently finance these larger transactions. If sales continue to rebound—and they usually do in the fourth quarter—the volume of originations may be closer to last year’s totals than previously anticipated. While overall values may have peaked, lenders continue to be bullish on commercial mortgages due to continued low interest rates, solid economic growth, a significant reduction in new development projects, and continued purchases from foreign investors. We see this as likely to boost fourth-quarter sales and originations.
Commercial Real Estate Sales Volumes Remain Below 2015 Peak
Sales volumes fell from their peak in 2015, but third-quarter sales have increased over the second quarter, and there are signs that the fourth quarter may see another increase as portfolio sales are starting to pick up.
Source: Real Capital Analytics, Guggenheim Investments. Data as of 9.30.2017.
Cap rates have inched higher from historical lows in all sectors except industrial. However, positive net operating income growth has held valuations steady, and commercial real estate prices posted a soft 1.1 percent increase in the third quarter, according to Green Street Advisor’s U.S. Commercial Property Price index.
With CMBS, Agency, and life company lenders quoting aggressively on 10-year terms, we like five- and seven-year paper, and longer terms up to 15 years where pricing is less competitive. The bridge and mezzanine space is still attractive, especially as Libor has increased significantly from the beginning of the year and borrowers are more willing to look at 4.5–5.5 percent fixed rates for these transactions on three- to five-year terms.
Origination Volumes Remain Strong in 2017
The pace of originations has not declined, despite a slowdown in the volume of sales for 2017. New product, especially for apartments and maturing loans, makes up the difference.
Source: Mortgage Bankers Association: Commercial/Multifamily Quarterly Databook Q2 2017.
—William Bennett, Managing Director; Ted Jung, Vice President
Important Notices and Disclosures
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.
Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management. ©2017, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.
VIDEO
Brian Smedley, Head of Macroeconomic and Investment Research, and Portfolio Manager Steve Brown share their outlook for the third quarter 2020.
Brian Smedley, Head of Macroeconomic and Investment Research, discusses major trends likely to shape markets this year.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 12.31.2020 and includes leverage of $13.7bn. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.
This is not an offer to sell nor a solicitation of an offer to buy the securities herein. GCIF 2019 and GCIF 2016 T are closed for new investments.
©
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.
By choosing an option below, the next time you return to the site, your home page will automatically
be set to this site. You can change your preference at any time.
We have saved your site preference as
Institutional Investors. To change this, update your
preferences.
United States Important Legal Information
By confirming below that you are an Institutional Investor, you will gain access to information on this website (the “Website”) that is intended exclusively for Institutional Investors and, as such, the information should not be relied upon by individual investors. This Website and any product, content, information, tools or services provided or available through the Website (collectively, the “Services”) are provided to Institutional Investors for informational purposes only and do not constitute a recommendation to buy or sell any security or fund interest. Nothing on the Website shall be considered a solicitation for the offering of any investment product or service to any person in any jurisdiction where such solicitation or offering may not lawfully be made. By accessing this Website, you expressly acknowledge and agree that the Website and the Services provided on or through the Website are provided on an as is/as available basis, and except as partnered by law, neither Guggenheim Investments and it parents, subsidiaries and affiliates nor any third party has any responsibility to maintain the website or the Services offered on or through the Website or to supply corrections or updates for the same. You understand that the information provided on this Website is not intended to provide, and should not be relied upon for, tax, legal, accounting or investment advice. You also agree that the terms provided herein with respect to the access and use of the Website are supplemental to and shall not void or modify the Terms of Use in effect for the Website. The information on this Website is solely intended for use by Institutional Investors as defined below: banks, savings and loan associations, insurance companies, and registered investment companies; registered investment advisers; individual investors and other entities with total assets of at least $50 million; governmental entities; employee benefit (retirement) plans, or multiple employee benefit plans offered to employees of the same employer, that in the aggregate have at least 100 participants, but does not include any participant of such plans; member firms or registered person of such a member; or person(s) acting solely on behalf of any such Institutional Investor.
By clicking the "I confirm" information link the user agrees that: “I have read the terms detailed and confirm that I am an Institutional Investor and that I wish to proceed.”