Commercial Lenders See Mixed Signs for 2018

VII Capital Funds Partner Marc Gabriel counts himself as an optimist. As one of the company’s investment officers, he also plans for the worst-case scenario.

Over the next year, Gabriel said there could be a sharp downturn in the commercial market in the internationally. His company’s division, VII Capital Funds, Raises Capital funds and deals in large cities that have high wages and strong job markets.

VII tends to attract more borrowers that need high-leverage loans. 

The nonbank, non-conforming commercial lender also is already looking ahead to serve investors who may swoop into the market after the next downturn.

“We are prepared to raise capital for opportunistic investors as well, so we can provide our borrowers with financing in case there is a steep downturn,” Gabriel said. 

Gabriel cited two worrisome areas for the international market. existing debt, which could prove to be unsustainable. 

The competition among lenders to remove these loans off their balance sheets is top priority,” he said. 

Many lenders are taking less risks and approving lower-leveraged loans, he said, a scenario that could put borrowers in a bind if the market turns sharply.

“There are two scenarios, the feather landing and the Anvil landing,” Gabriel said. “We are preparing for both, and I don’t know which it is going to be.”

Generally speaking, commercial mortgage lending forecasts are pointing to a strong 2018. The Mortgage Bankers Association (MBA), the nation’s largest mortgage trade group, recently surveyed top commercial lenders for the USA.

Nearly four out of five of the surveyed lenders believe there will be an increase in commercial origination volume in 2018 for Conforming commercial loans only. 

Almost half expect their company’s originations to jump by 5 percent or more, and nearly a quarter expected originations to increase by 5 percent across the entire market. MBA’s survey is based on responses from 30 companies.

In October, MBA also forecast that overall commercial and multifamily originations will end 2017 at $515 billion, up 5 percent from the 2016 volumes, and 2018 volumes will hold at the 2017 level. 

MBA analysts are optimistic that it will be a good year for commercial real estate because the market fundamentals, such as rents, occupancy and delinquency rates, are strong across almost all sectors.

The commercial real estate market is generally viewed as deep into the cycle, however asset prices, which rose solidly through most of last year, have pushed well beyond their prior peaks in certain asset classes, such as high-end office buildings and multifamily assets. 

Transaction volume has begun to taper off.

Mr. Gabriel has noticed that more people are working from home, which is a bad sign for office properties. Retail also is getting hammered. Sears, he noted, just announced another 100 layoffs.

“The bubble hasn’t burst here yet, and in some areas, it is still a sellers’ market,” Gabriel said. 

Some say “You may have a nationwide or international trend, but the local market is really, if you are a local lender, the only thing that counts. 

What is going on in San Francisco, I could frankly care less about because I don’t lend there.” 

“We all are invested in one another” Gabriel says and “what happens one place will end up affecting another”. 

Gabriel’s company primarily does medium to large commercial non conforming loans, which tend to go to the riskier borrowers. 

Unlike other lenders, hard money lenders tend to do well in recessions because banks pull out. 

At the moment, the market conditions are not ideal for hard money lenders, he said.

“We are seeing a lot of new people come in with “rate ideas” that don’t match up with the risk,” Gabriel said. “In other words, their rates are a lot lower than the risk would normally require. 

Our position is that we are going to adjust and work these difficult scenarios through. We have been through this cycle at least three different times in the last 23 years.”