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Underwriting Holds True Across Portfolios for Q2

May 1, 2019

Newmark Realty Capital Inc. closed $316.5 million of commercial mortgages across 56 transactions and expects much greater production in second quarter 2019.

SAN FRANCISCO—Towards the end of the first quarter, interest rates dropped significantly. Newmark Realty Capital Inc. believes this sudden drop contributed to increased activity, namely, $316.5 million of commercial mortgages across 56 transactions closed by the firm. Moreover, NRC has an expectation of much greater production in second quarter 2019.

“Underwriting and performance are holding true across our servicing portfolio for the start of 2019 and we are confident in current market fundamentals, anticipating a strong second quarter 2019,” said Michael Heagerty, principal and CFO with Newmark Realty Capital. “Market analysts are watching for a major cycle correction; however, this correction could be just as likely a series of minor adjustments as we reach a manageable plateau. Barring any unforeseen events that might disrupt market conditions, we move into second quarter 2019 with genuine confidence.”

The first quarter commercial mortgage production was led by multifamily, office and self-storage assets in descending order of value of funds placed. Additionally, NRC’s San Francisco, Los Angeles and Phoenix production offices led the firm’s production totals.

Newmark Realty Capital services a national portfolio valued in excess of $12 billion that covers the full spectrum of commercial real estate asset types, including construction. This provides NRC a unique position to understand the underwriting standards for the correspondents it represents in debt placement, Heagerty tells GlobeSt.com.

“Realistic and strong underwriting of proformas has continued to impact our industry, helping create a low loan loss environment. Commercial real estate in the top markets is a preferred allocation in 2019 for most life company, bank and fund lenders,” Heagerty tells GlobeSt.com. “However, even with an eager institutional transaction market, abundant allocations appear to continue to be underwritten in a more disciplined manner as they have since 2007.”

He goes on to say that there are no primary MSAs where supply can’t meet demand in the current economic landscape.

“These fundamentals are broad and employment seems to mirror a continuation of the current economic cycle in our major cities,” Heagerty tells GlobeSt.com. “Secondary markets are substantially performing as well, and even tertiary markets are benefiting from what seems to remain a strong up-cycle. However, since we service the loans we place, we constantly mine broad economic and portfolio data to identify any potentially struggling submarket, asset class and borrower profiles; before the market landscape changes.”

Additionally, NRC’s principal leadership noted the following trends as worthy of consideration moving into second quarter 2019:

2019 Production–NRC remains optimistic for commercial mortgage production in 2019, barring significant or sustained interruptions to the domestic economy.

2019 Interest Rates–Most lender economists anticipate interest rates remaining in relative equilibrium as market fundamentals indicate no drastic change in macro-economic conditions. NRC concurs.

Diversity–Gender and racial parity and inclusion programs are driving today’s professional best practices in commercial mortgage finance. NRC can point to a national trend of state-by-state legislation compelling compliance with this sound business practice.

Structured Workouts–Local market dynamics and project specific challenges require a focus on navigating distress in even healthy up-cycle markets. NRC has yet to see a negative shift in the performance of its $12 billion loan servicing portfolio, however best practices require a renewed focus on the new data and proper analysis of the portfolio as commercial real estate economists discuss cycle shift and submarket stresses become apparent.

Capital Sources–NRC works with more than 70 lenders each year and allocations are abundant in 2019. Growth in capital sources is expected to pursue a finite number of primary market placements, and there is continued interest in pursuing value in secondary and tertiary markets where underwriting and local market economic fundamentals meet risk assessment models.

Multifamily–All trends point to a continued lack of housing supporting underlying values, strong performance and new multifamily development. NRC continues to source appealing rates and structures for this asset class. The firm makes a point of staying on top of upcoming GSE reform efforts.

Self Storage–This relatively boutique asset class continues to offer compelling fundamentals for underwriting and performance. NRC expects it to be an active asset class in 2019.

“We begin each year with the MBA’s national conference and then Newmark hosts a lender summit in Phoenix with more than 40 lenders in attendance,” said Adam Parker, principal with NRC’s Phoenix production office. “At both events, we heard many of our lenders outline their increased appetite to lend more in 2019 in comparison to 2018. With increased lender allocations, we are projecting the marketplace to be hyper competitive. As lenders compete for business, this means it is a good time to be a borrower.”

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