Last week, we discussed some interesting findings from the 2014 Emerging Trends in Real Estate report that was recently published by PricewaterhouseCoopers (PWC) and the Urban Land Institute (ULI). Specifically, the report’s commentary on a shift in emphasis in the commercial real estate market from higher cap rates to increased cash flows, the increased importance of operators and day-to-day management of facilities, and increases in the amount of debt and equity capital that are flowing into the marketplace. In addition to these findings, the report also provides some interesting thoughts on where lending is headed in the future. A strong lending environment is important for continued growth in seniors housing and the report indicates that such an environment will be in play going forward.
According to the Emerging Trends in Real Estate report a number of industry professionals believe that commercial real estate lending will increase this year. Since the end of the recession, for financial and regulatory reasons, banks have been conservative with new lending while trying to get as many outstanding loans repaid as possible. But the report states that this could change going forward and supports this assertion with numerous statements from industry professionals. For example, one industry association executive believes that the industry could see, “the first expansion in bank lending since the first quarter of 2008.” Another believes that, “All of a sudden, the banks are comfortable with real estate which scared the living daylights out of them from 2007 to 2009 and they are looking for opportunities.” Lastly, a commercial real estate fund manager told PWC and ULI that “Community and regional banks are increasingly eager to lend and have lots of capital to do it in their own backyards.” Other respondents agree with these statements and believe that the trend of increased commercial real estate lending by community banks that started in 2013 is likely to continue this year and into next year as well. There are multiple reasons why lending is expected to increase this year. First, as interest rates begin to rise and lending becomes more profitable, banks will adjust to this new environment by issuing more loans. Second, over the last few years, many banks have improved their balance sheets by shedding a significant number of bad assets. Because of this, they are now in a position where they can absorb more losses and take more risks than they were a few years ago. Third, real estate loan delinquencies have also fallen in recent years, giving banks and other lenders additional capital to lend.
The report does identify some headwinds to additional lending and those include the uncertainty that can be caused by excessive government regulation and inconsistent fiscal policies. Too much uncertainty in these areas could dampen job growth and also have an adverse effect on capital pricing and the cost of doing business. The report also notes that as lending picks up and competition increases, this could encourage banks to reduce their debt underwriting standards in order to better compete in this new environment. Indeed, according to one commercial real estate manager, “lending rules are trending to [those seen in] pre-recession times.” Banks will need to be careful here as they have made significant progress in shedding bad assets and should not negate that progress by taking on too many risky loans that could end up defaulting.
Overall, the report indicates that as the economy continues to improve, lending for senior housing and other commercial real estate properties continues to trend upwards. Senior housing participants and others who are interested in obtaining capital to take advantage of this situation should contact the successful financing firm Cambridge Realty Capital to learn more about the many different options it offers.