Trends in US commercial real estate mortgage purchasing and re-financing

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Trends in US commercial real estate mortgage purchasing and re-financing

Commercial real estate mortgage purchasing is set to grow at a modest rate for 2018, overall. Growth will vary greatly by industry. Commercial real estate refinancing may drop, depending on banking conditions following the repeal of parts of Dodd-Frank. The major trends in this market are changing interest rates, the manner in which businesses are set to expand and the roll back of Dodd-Frank. Below is an in-depth description of these trends and how they pertain to commercial real estate mortgage purchasing and refinancing.


Interest rates in the US have been on the rise. In 2016, the effective federal funds rate began to pull up and away from the 0% mark, it was reported at 1.42% or February 2017. The 10-year US T-note rate bottomed out in mid-2016 at 1.34% and sits at 2.82% before market open 3/15/2017.
The trend is not seen to be troublesome for the issuance of new loans, but it is of concern for those looking to refinance at the end of their term. The combination of tighter banking regulations than were in place a decade ago and the trend of higher rates will make it harder for a riskier borrower to refinance even though they were qualified to before Dodd-Frank was enacted. This is estimated to be 30% or approximately $300 billion in maturing loans backed by commercial mortgage-backed securities (CMBS) that may encounter refinancing pressures.


The sectors that likely expand the most are the industrial, retail warehousing, data/technology infrastructure/centers and elderly housing. Retail sector construction, private and public university construction and office space construction are set to decline. This means that the purchase of or refinancing of mortgages in these areas will either increase or decline because of industry growth or declination trends.
Changes in the landscape of business expansion can hinder the ability for some commercial mortgage holders to refinance, as refinancing partially depends on the outlook of the sector one is refinancing their mortgage in.
As far as the housing market is concerned. Rental occupancy remains at highs, with a slight dip in Q3 of 2017. The trend here, however, for inner city markets will be to expand through the transformation of normal-sized apartment units to micro-apartments, similar to what is seen in places like Tokyo. This is projected to occur over the next ten years and could support the commercial real estate refinance market over the years to come.


When Dodd-Frank was enforced the commercial real estate lending industry pointed out some places where changes might occur. The two sections that affected this industry were the risk retention of securitization and the Volker Rule. These regulations mean that banks are held to higher standards as far as the amount of risk they can take and they restrict banks from proprietary trading of their own accounts. The latter is the Volker Rule. We will not go deep into depth on this, but it is common for banks to trade different collateralized assets on the interbank private market. The Volker Rule restricts this. It was believed that both of these factors would reduce commercial real estate lending over the coming years. Please note, this source was published around the time that Dodd-Frank was being enforced.
As a result, the commercial real estate lending and pricing growth markets have grown somewhat asymmetrically. Prices have risen greatly while new lending and refinancing have not grown at the same rates. This points to a reduction in overall qualified participants, while overall demand remains high.
On 3/14/2018 the US Senate passed a rollback of some Dodd-Frank regulations. Currently, banks with more than $50 million in assets are considered “too big to fail” and were subject to strict regulations. If this bill passes the house in its current form, that number will be moved to $250 million in assets. This would release institutions and banks such as Barclay’s, and AmericanExpress from the increased scrutiny.
The bill would also exempt banks with less than $10 billion in assets from the Volker Rule. These banks would no longer be required to report detailed lending information to the government.

However, in the House, Republicans are looking to more aggressively cut regulations. However, since the Senate gave the bill bipartisan support, it is highly likely that the bill will be passed by the house and on the president’s desk in the near future.
As far as the commercial real estate mortgage purchasing and refinancing industries are concerned, the passage of this bill would reopen smaller banks and other financiers to a pre-great recession regulatory atmosphere. This would be positive for both commercial mortgage purchases and refinancing.


With the election of President Trump, business deal making in the US were said to take a hit. Now, there is a better understanding of how his presidency is affecting the business world, especially after the recent tax overhaul. The bid/ask spread for transactions is projected to come back in. A wider bid/ask spread is an indication that there is uncertainty in a market. These fears are subsiding, therefore deal transactions should pick up along with commercial real estate mortgages and refinancing.
One warning sign that we picked up on for the commercial real estate market is the recent increase in commercial loan charge-offs. Granted, they are nowhere near recession levels, that is one metric to watch. One related piece that may be causing this is the inability of organizations to refinance loans and mortgages due to the Dodd-Frank regulations, not to mention rising interest rates.


The major trends for the 2018 US commercial real estate mortgage purchasing and refinancing market growth are interest rates, changes in business expansion landscape and a rollback of Dodd-Frank. These factors are reasons why the mortgage purchasing side of commercial real estate lending looks positive for 2018. They are also reasons that the outlook for refinancing in this sector is unclear, with trends having both positive and negative affects in this sector.