JPMorgan Traders Finance Development Amidst Real Estate Sector Concerns

May 30, 2017 by Melissa C. Martorella, Esq.

As New York real estate development continues to surge, JPMorgan’s Commercial Mortgage-Backed Securities (CMBS) trading department has surfaced as a preeminent construction financier in the New York metropolitan area. They appear to be seizing a prominent development role by committing nearly $3 billion to construction loans over the past couple of years.

The CMBS’s escalated lending commitment takes place amidst JPMorgan Investment Bank’s recent cautionary approach regarding high-risk real estate investments. In demonstrating its willingness to fund commercial projects, JPMorgan is taking the lead on providing the $1.5 billion in construction lending for the American Dream shopping complex in New Jersey. They have also partnered with Oaktree Capital and HFZ Capital to provide $500 million in financing for a major condominium project, as well as lending another $505 million for a Times Square Hotel.

Market experts have noted that JPMorgan implements a conservative approach to the risk they are willing to take on issuing loans for construction projects. CMBS lenders are hesitant to finance loans earmarked for construction projects because it is challenging to package them into bonds. Accordingly, JPMorgan’s real estate bond transactional desk is not converting its construction-based loans into bonds. Instead, the bank retains between ten to forty percent of their value on its ledger, auctioning off the remainder directly to investors.

Although Non-CMBS loans constitute only a minor portion of JPMorgan’s diverse investment portfolio, a company spokesperson recently affirmed that the bank would not hesitate to participate in a potentially lucrative business opportunity in coordination with one of its clients. JP Morgan’s mortgage-bond transaction team began issuing the construction loans nearly two years ago, with the loans steadily increasing over the course of 2016, as earlier market volatility and regulatory requirements impeded CMBS business development.

Amidst bank regulators’ warnings of a potential bubble following a property price surge of more than twenty percent over their 2007 peak, other banks are currently hesitant to invest in the hotel and condo construction sector. JPMorgan’s commercial bank, which comprises one of its four principal divisions, has already garnered substantial attention for its recent expansion in real estate lending. The bank’s transactional activity demonstrated a nineteen percent growth in the third quarter, totaling $83 billion in loans for commercial term lending and real estate investments. This number is on top of any debt advanced by the investment bank for these transactions.

JPMorgan can safeguard against any potential losses on its construction loans by capping the amount of capital it is willing to commit in proportion to the overall net cost of a project, and by ensuring it gets reimbursed if problems start to surface over the course of development. By utilizing such a cautionary approach, JPMorgan’s investment banks can continue to work with investors and developers to take part in potentially successful transactions even as the company’s commercial banking division signals restraint over participating in riskier commercial projects.

 

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