The commercial real estate market made some severe shifts last year that will drive its lending landscape throughout 2018. The overall U.S. economy is boosting confidence for institutional investors, despite rising interest rates. The Tax Cut and Jobs Act will impact commercial real estate as well, it is just a matter of how soon.
- The U.S. economy will continue its substantial growth for another two years
- Construction in the commercial market will decline further
- Lenders are becoming more selective about the types of construction projects they finance
- The hospitality sector is gaining steam as tourism is booming worldwide
Another year of economic growth – According to a poll of major U.S. economists, the country is in for another two years of economic expansion. That would make 2018 the ninth consecutive year of growth in the U.S., the second-longest growth period in U.S. history. Continued economic and job growth will continue to provide a foundation for solid property fundamentals in 2018.
Decrease in construction – Real estate capital markets remain robust, with commercial property sales on pace for the fourth-greatest annual total ever recorded. But sales volume has declined year over year for four straight quarters. Overbuilding of Class-A assets in top markets has led to an increase in concessions and rising vacancy rates. Investors have seen decreased returns, leading to a pullback on construction borrowing.
More selective (and cautious) underwriting – Rising interest rates last year did little to deter commercial real estate investment. But in 2018, higher rates could impact property acquisition costs and development financing. Lenders have also become more selective about the types of construction projects they finance, and borrowers have to confront lower loan-to-cost ratios and heavier due diligence.
Continued transition from institutional to private direct lenders – Private lenders will continue to gain momentum in 2018. Dallas-based HALL Structured Finance lent close to $300M in construction loans last year across 11 loans, and 10 of those loans were for hotel projects. HSF intends to lend up to $600M this year.
Hotel construction predominantly in the top 25 markets – Americans are traveling more than ever. The growing economy has led to a rise in both business and pleasure trips, prompting renewed activity in the hospitality sector. Investors are focusing on top markets with diverse economic output that supports hotel activities. Projects surrounded by robust retail corridors, entertainment venues, green spaces and large employers will fuel the attractiveness of the hotel.
View the original article at Bisnow