/perspectives/sector-views/commercial-real-estate-debt-musical-chairs
Commercial Real Estate Debt: Musical Chairs
With falling sales volume and normalized maturities, the supply of mortgage loan opportunities will be significantly less this year.
Mortgage origination volumes of $540 billion in 2017 broke the record set in 2007, but we do not believe this trend will continue in 2018. While lender demand remains strong, supply is likely to wane due to declining sales activity and lower new construction completions for most property types. Additionally, most borrowers likely to refinance have already done so, and Agencies have signaled skepticism about the potential for continued origination growth after two years of frenzied activity, particularly in multifamily originations that accounted for 44 percent of new loans.
Mortgage Origination Is Likely to Slow in 2018
Mortgage origination volumes of $540 billion in 2017 broke the record set in 2007, but we do not believe this trend will continue in 2018. While lender demand remains strong, supply is likely to wane due to declining sales activity and lower new construction completions for most property types.
Source: Mortgage Bankers Association CREF Database. Data as of 12.31.2017.
Our sector has attracted nontraditional lenders to the market, which warrants some attention as it could lead to an oversupply of capital. Private funds have seen a significant increase in lending volume over the past two years, and this is expected to increase again in 2018. Private funds have raised equity capital faster than they are investing it and have turned to mortgage debt to provide short-term high yields to their investors. These private funds initially tried to fill the void left by banks on first-lien construction loans and have since migrated to bridge financing to deploy funds and provide yield. Banks and life insurance companies have a strong appetite for bridge financing. As with any supply/demand imbalance, spreads have tightened for this product and all product types other than construction loans in the first quarter. We do not expect this trend to change for the rest of the year barring an unforeseen disruption in the markets. Instead, competition for product will put downward pressure on pricing and, perhaps more worrisome, underwriting will get more aggressive to win transactions.
As Libor rates continue to rise, we see opportunities for lenders that can provide fixed-rate coupons for bridge transactions as a way to differentiate from the pack. With the cost of new construction still increasing, we are constructive on the bridge transitional product as a way for borrowers to compete at a lower rental basis. With 10-year Treasury yields near 3 percent, longer-term loans beyond 10 years are becoming more attractive and have less competition than traditional seven- and 10-year terms.
Debt Funds Show Signs of Significant Growth
Closed-End Private Real Estate Dry Powder by Fund Type
Strong demand has attracted nontraditional lenders to the market. Private funds have seen a significant increase in lending volume over the past two years, and this is expected to increase again in 2018 given substantial dry powder. This could result in an oversupply of capital and may lead to further deterioration in underwriting standards.
Source: Preqin, Guggenheim Investments. Data as of 3.31.2018.
—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. ©2018, 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.
FEATURED PERSPECTIVES
September 18, 2020
Guggenheim’s 2020 Election Portfolios
Our portfolios are constructed based on the key aspects of each candidate’s policy agenda that we believe will move markets. We will publish daily updates in the run up to the presidential election on Nov. 3, 2020.
July 29, 2020
China Matters More Than Ever
Cooperation and understanding between China and United States is vital as global economic and environmental challenges mount.
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 06.30.2020 and includes leverage of $13bn.
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. Only a Guggenheim Credit Income Fund 2019 (GCIF 2019) prospectus makes such an offer. This material is authorized only when it is accompanied or preceded by a GCIF 2019 prospectus. Neither the SEC nor the Attorney General of the State of New York nor any other state regulator has passed on or endorsed the merits of this offering. Any representation to the contrary is a criminal offense. Securities are offered through Guggenheim Funds Distributors, LLC, member of FINRA/SIPC, as Dealer Manager.
©
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.”