Remarkable economic strength and unpredictable volatility are bringing challenges – and opportunities – to innovative lenders.

On October 7, 2019, M&T Bank and its President for the Greater Baltimore/Chesapeake Regions, Augie Chiasera, hosted an event focused on the company’s outlook for the U.S. economy and the implications for the commercial real estate market.

Watch the video recording of the event available on LinkedIn. (Duration: 1:1:54)

The panel included four of the organization’s thought leaders in a discussion moderated by Mike Murchie, Mid-Atlantic Area Executive for M&T Bank:

• Luke Tilley, Chief Economist for Wilmington Trust, M&T Bank’s wealth advisory and investment management subsidiary
• Barb Simmons, M&T Bank Senior Group Manager, leading commercial real estate business in the Baltimore region
• Michael Berman, President and CEO of M&T Realty Capital Corp.
• Don Pettit, Executive Managing Director for M&T Realty Capital Corp.’s capital markets origination team

Economic Volatility Mitigated by Positive Job Growth — For Now

Against a backdrop of heightened trade issues and a volatile tariff situation, it is no surprise that Americans are increasingly anxious about the economy. Indeed, the prevailing U.S. macroeconomic environment seems to be raising uncertainty regarding its nearer-term trajectory.

“People start to get a bit nervous when they hear we’re in the longest expansion in U.S. history,” Tilley said. “It’s only reasonable they think there must be something unpleasant coming, and there must be another shoe to drop. Something must make it all come to an end.”

Yet, while there are uncertainties arising in this cycle — which recently surpassed the expansion of 1991 to 2001 — the Wilmington Trust economist still views the economy as being in “pretty good shape.” The Fed, for its part, remains clear and consistent in telegraphing its commitment to a normalized fiscal environment. Despite the tariffs’ short-term effect on the economy, the consumer sector and the services sector continue to perform well. Year-over-year job growth also remains positive.

“Over the past 12 months, the U.S. economy added, on average, about 170,000 jobs per month,” Tilley added, “more than enough to push the unemployment rate down on a monthly basis. That’s why we just saw a new, multi-decade low for the unemployment rate.”

A Solid Foundation for CRE

It is reasonable to expect this pace of job creation to be unsustainable over the long term, and US GDP growth will likely slow in 2020. However, the commercial real estate market appears to be on solid footing. The most recent Federal Reserve CRE data, a composite representing an amalgamation of all categories in the space, indicated that prices have jumped 4.2% year over year.

A significant portion of commercial real estate development is still being supported by growth in bank loans, the M&T Bank panelists explained. After a bit of deceleration earlier this year amid financial market volatility, bank loan activity into the commercial real estate sector last quarter was up nearly 5%.

“From where we sit, this is a positive sign,” Tilley said.

Interestingly, the net number of banks tightening CRE lending standards over this stretch has been “fairly mild” compared to increases in the past, the panelists noted. More importantly, loan demand has remained strong. The panelists pointed out that as the interest rate environment has changed significantly over the past nine to 12 months, both commercial and residential demand have increased.

However, Simmons noted what she described as “fickleness” among lenders in certain product and tenant types. This comes into play, for example, with retail and office tenants.

Simmons also noted that with recent interest rate cuts, the widening of spreads is becoming more important for lenders. “With rates declining, the word ‘floor’ may start coming back into the language again,” she surmised.

Synergy Matters

This period of what Berman described as both an “environment of change” and “unheard-of strength” in CRE presents interesting and unique opportunities for lenders like M&T Realty Capital Corp. and borrowers alike. As one of only 19 lenders holding licenses with all three agencies (Fannie Mae, Freddie Mac and HUD) in addition to its capital markets offerings, this wholly owned subsidiary of M&T Bank offers off-balance-sheet loans for longer-term financing of multifamily and other CRE property types. According to Berman, these types of loan offerings create natural synergies with the bank.

“Part of our strength is that, in each region, there exists a business plan in the commercial real estate sector that’s focused on the distinctive characteristics of that particular region,” Berman explained. “The challenge, then, for [us] is to figure out how we can team up with each of those regions to help bring our strength to their strength.”

The new volume cap on the government-sponsored enterprises (GSEs) – Fannie Mae and Freddie Mac – is another trend that borrowers need to watch. Fannie Mae and Freddie Mac’s multifamily loan purchases are capped at $100 billion each over the next five quarters. As a result, “We’re going to see times when Fannie and Freddie are going to widen out their spreads to slow down production,” Murchie said.

Beyond the GSEs

Meanwhile, the Mortgage Bankers Association expects life insurance company lending to grow significantly in 2020. Predictions call for a total of $700 billion in originations next year, with life insurance companies originating 20% to 25% of that volume.

“Life insurance companies like commercial mortgages for a number of reasons,” Pettit said, “not least of which is the yield, which today is a 25- to 50-basis point premium over corporates. [They] also like it that historical delinquencies are at record lows.”

Larger lenders are offering interest rates as low as 3%, while smaller lenders are closer to 3.65%.

To compete, Pettit suggests life companies will have to be creative on features. “There’s a lot of competition out there, and everybody’s moving into each other’s space. For our part, we compete best on long-term financing, 10 years or longer.”

It’s All About Execution

While no one can predict precisely how the economy or the market will turn, companies managing loan portfolios need to be prepared, focusing every day on creative solutions.

The commercial real estate market today, according to Simmons, is both highly competitive and highly liquid. “There’s a continued flight to funded balances. For our part, we want to go beyond funded balances and be a full-cycle relationship lender,” she said.

Forward-thinking lenders such as M&T will continue to innovate new products to meet the needs of a broad range of borrowers. In such a competitive market, borrowers need creative solutions to help them manage their risks. As the market expands and contracts with interest-rates moves, the leading lenders will manage their balance sheets to make certain their partners are well capitalized.

“We always want to have continuity,” Simmons added.

Learn More

Watch the recorded version of the event on LinkedIn. (duration 1:1:54).