By Charlie Kokernak, Director & Tony Kaufmann, Director
Overall Market
There is an abundance of caution in the market; however, optimism abounds that economic market fundamentals remain sound. Creative financing solutions are being crafted to meet market need on a case-by-case basis and some lending programs are expanding to offer mezzanine financing, preferred equity, participating loans or layering in other novel products to decrease capital cost.
Equity is plentiful yet patient and waiting on the sidelines to transact at the right basis.
That said, increased rates are still trickling through the financial sector leading to maturity distress. The market is starting to see loan workouts and extensions.
While the industry may hope that interest rates will decrease soon there is a high likelihood that, unless volatility suddenly exits the market, this may be the new normal for the near to mid-term.
Life Insurance Companies
Life companies remain the most active and competitive capital source in the market; however, they are becoming more selective due to both caution and high demand caused by lack of competition.
Preferred asset types include multifamily, industrial, grocery-anchored retail, and self-storage.
Leverage is still dictated by DSCR. 1.50x DSCR on 25yr am awards top pricing.
Many life companies are behind in their yearly allocations and seek to put out the same if not more funds in 2024.
Some have construction-to-perm, transitional / bridge (fixed and floating), and participating programs.
Spreads range from 1.75%-2.25% over the UST for permanent debt.
Spreads range from 1.40% – 1.75% over the UST for select low-LTV Class-A multifamily, industrial, or grocery-anchored retail deals above $10-15M.
Agency Lenders
While pricing has drastically increased from the agencies throughout the year, they still offer an attractive and flexible financing solution for multifamily.
Decreased transaction activity has resulted in agencies currently achieving only 35% of their 2023 allocation goals.
Increased interest in short-term lease-up deals expected to stabilize in 3-4 months from rate lock.
Interest-only is still available and due to the inverted yield curve; this has a minimal effect on overall spread.
Spreads in the 1.40% – 2.20% range over the UST, with the best pricing on low leverage and affordable projects.
Debt Funds
Many are having their busiest year ever as the pull-back in banking has caused a flood of deals to move their way. However, not everything fits as most are still underwriting loan proceeds to a realistic take-out at the end of the business plan.
Some are engaging borrowers in workouts for loans arranged on properties in the last 2-3 years where the business plan may not have come to fruition, project costs or floating rates have increased, the sale market is not active, or a realistic conventional payoff is not available.
Preferred equity and mezzanine programs are available but may be cost prohibitive at 12-16%.
Typical bridge loans have a rate range of 8%-12% fixed, or SOFR + 3.0% – 7.00% floating. The higher cost of capital is often not accretive to the project.
Bank / Credit Unions / CMBS
Turmoil in the banking sector in 2023 has caused significant retraction from commercial real estate lending in today’s market, taking a risk-off approach by shoring up liquid reserves and focusing on existing clients.
While credit unions do not seek a depository relationship and can offer flexible prepayment structures, their programs are typically recourse and rates at the high end of the conventional lending spectrum. They are active but certainty of execution can be quickly upended through closing by changing credit perspective.