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  • Writer's pictureCharlie Kokernak

The Year Thus Far - The Great Recalibration

The real estate capital markets, and the investment realm as a result, have been through a volatile year. The Federal Reserve’s July increase ushered in the highest target rate since 2001 and their surge since mid-2022 has been the steepest climb in 40 years, bringing us out of an era of unprecedentedly low coupons and ever-compressing cap rates.

What is now clear is that banks, many of which played a significant role in providing low-cost and non-recourse capital from 2020 to early 2023, represented an outsized share of the lending market. Their pullback was exacerbated by turbulence in the banking sector brought upon by the collapse of three large banks. This led to increasing scrutiny of all bank liquidity at hand and a re-examination of their lending guidelines and existing portfolio. As a result, most banks have either sequestered new business to existing relationships, increased deposit requirements, reduced leverage, or required personal guarantees.


Debt funds and bridge lenders, as well, have quickly tightened their credit standards to ensure a property proforma can realistically be underwritten. While previously buying into an ever-increasing rental rate and decreasing cap rate expectation environment, these lenders now predominantly constrain their proceeds to where loan payoff may occur upon completion of a borrower’s business plan, sizing to current interest rates. Bridge lenders are also facing headwinds as previously low floating interest rates established 1-2 years ago on floating rate loans may now be approaching double digits, commanding much of a property’s cash flow to cover debt service.


Not All Crab Grass

However, there are green shoots in our market. A reliable, robust, and active lending pool exists with Gantry’s correspondent life insurance companies and both Fannie Mae and Freddie Mac (Agency / GSE lenders). These lenders are focusing heavily on in-place income, and for commercial transactions, our correspondent life company lenders will also focus on the term and credit of tenants. Life company lenders and agency lenders are sizing to a minimum DSCR (debt service coverage ratio) of 1.25x. They can also provide interest-only and non-recourse terms depending on property type and leverage.


Life company lenders will lock a borrower’s interest rate at loan application. Freddie Mac can also lock rate at application with the use of an Index Lock while Fannie Mae can lock rate shortly after signing a loan application via their Early Rate Lock program. By locking in an interest rate at application, it removes most, if not all, of the uncertainty of the loan proceeds.



Life companies, as well, have discretion of funds. Their source of funding is cash derived from policy premiums that already exists on their balance sheet and they are not regulated in the same manner as banks, so they will never require a depository relationship and infrequently seek structure or covenants.

Besides life company lenders and agency lenders, other capital sources are stepping up to fill the void that decreased bank lending has created. Credit unions, debt funds, private lenders, and opportunistic sources are becoming viable options as well. As experienced mortgage bankers, we are leveraging our relationships to ensure we are finding the best capital source for our clients’ needs.


Onward into 2024 and Beyond

Overall, the capital markets continue to evolve. Some market participants anticipate that we have experienced the last of the Fed’s rate hikes prior to a potential about-face in the near term. So, while the field of active lenders has certainly decreased since 2022, we are relying on our long-standing life company and agency relationships and continuing to build relationships with the new alternative capital sources.

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