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Newmark’s George Mitsanas on What’s Driving Commercial Mortgage & Investment Finance

December 7, 2018

Newmark Realty Capital’s George Mitsanas offered insights into the trends driving commercial real estate mortgage finance and investment decisions today. As we head into 2019, Connect Media asked him to share a few thoughts about the future in our latest 3 CRE Q&A.

Q: How has the past year shaped your thoughts and expectations for 2019?
A:
 The reality of 2018 offered a robust and healthy market landscape for commercial real estate investors, owners and lenders. Unemployment is low, vacancies are tight in most markets across the full spectrum of asset classes, retail is benefiting from consumer spending, underwriting reflects performance, and lender allocations remain abundant. So, even if interest rates climb into 2019 (which is an expected cycle transition), the continued relatively historically low rates will hold compared to pre-recession levels. This should ensure that commercial real estate markets remain stabilized to a large degree for the foreseeable future. We expect to see vigorous interest in early 2019 from investors and owners not wanting to miss the window of current rates. While we don’t anticipate a dramatic near-term spike in rates by any means, many of the lender’s economists are certain they will rise incrementally in 2019. Current rates are expected to remain in a position to optimize returns, especially for long-term hold assets.

Q: How did Newmark perform in accordance with your expectations coming into 2018?
A:
 Newmark marked its seventh year in 2018 exceeding $2 billion in total production. This volume represents an appetite from the marketplace and our clients (new and existing), not necessarily a growth in our workforce. Since we are very selective in who we bring into the company, I will mention we did onboard a highly qualified five-member team that joined our San Francisco production office in 2018. They did provide an increase of market share alongside a new pipeline of existing clients. We expect that organic growth and lateral recruitment will continue in 2019. The fourth quarter will be an active period for our production teams, so while we know we’ve exceeded $2 billion in total transactions, we will wait and see by how much in January 2019. The focus for the remainder of the year is working with clients, new and established, to optimize their structured financing needs in what remains an historically low interest rate environment. This is a primary motivator for stabilizing long-term hold assets as we move into 2019. It is also exactly what real estate investors facing maturity in the next two to four years should be actively looking at to see what options exist. Acquisition, cash out, repositioning or refinance. This is a compelling time in the cycle to look at all options and price capital accordingly.

Q: What is your professional intuition telling us to look for as we prepare for 2019?
A:
 Newmark expects to see continued appetite in 2019 for lender allocations, especially to industrial and multifamily assets in all national markets. Commercial real estate as a general asset class will remain a preferred allocation for lenders across the nation, however it is underwriting that will be a key differentiator for identifying and securing prime rates in primary, secondary and tertiary markets. Mixed-use assets should still see significant lender allocations, especially in major MSAs. However, retail and hospitality will remain challenged asset classes, although our producers understand asset specific storytelling that resonates with a defined lending community, and we expect to continue providing our clients superior options for well-positioned retail and hotel assets.

Newmark serves a national marketplace, however we are headquartered on the “creative West Coast” and expect that the visionary urbanists driving Southern California, Bay Area, and Seattle development will continue assembling locations, securing appropriate funding and delivering viable property into these supply-strained, high-barrier-to-entry regions. We can expect to see a slow-down in new construction as materials costs rise and entitled land in preferred markets becomes increasingly scarce. However, we have identified a construction to permanent funding model for qualifying projects that makes sense in face of these market realities. These loans often include a life lender structure that locks in historically low rates in advance of construction, includes land valuation as equity when desired, and assures an interest rate at delivery regardless of any dramatic change in market climate.

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