In February, District Capital traveled to San Diego and hosted 100+ lenders over the course of 3 days. This presented the perfect opportunity to obtain multiple opinions on the state of the capital market in 2024. We met with Life Companies, CMBS lenders, Debt Funds, Bridge, Agency, and Specialty Lenders.
Life Companies:
• Plenty of liquidity…. for now. Life companies traditionally have a big appetite at the beginning of the year. Don’t wait around if you have a life company-eligible deal. With national and regional banks on the struggle bus, Life Companies remain very competitive.
• Pricing remains very aggressive, especially for conservative CM1 level loans (1.50x DSCR) pricing in the 140-160 over treasury range. However, most of the market remains in the 175-225 range for traditional 60-70% LTV, 1.25x dscr deals.
• We continue to see forward rate locks for up to 6 months in advance.
• More shops are rolling out construction-to-perm loan options. That makes life companies a one-stop shop, locking in your rate before putting a shovel in the ground!
• Participating debt programs (up to 100% loan-to-cost) are gaining momentum. This provides high-leverage debt to the borrower wherein the life company lender participates in the upside value creation. The developer still receives all the benefits of the debt (i.e. participation interest write-off, depreciation, full control).
• Life companies are becoming more active in the bridge space. Traditional bridge loans are very expensive priced in the range of 350-500 bps over SOFR (currently at 5.33%). Our life companies see this as an opportunity to achieve higher yields while undercutting the debt fund lenders. Life company bridge loans are fixed at application, through the loan term and typically price at rates up to ~100 bps lower than the debt funds.
• Life companies continue to provide JV equity, structured as a purely limited partnership, so our clients remain the sole general partners. The return calculations feature traditional waterfall returns with incentive hurdles. The best execution for this program will be in the value-added multifamily and industrial space.
• Multiple Life lenders indicate they are not afraid of well-positioned OFFICE deals.
As always, Life Companies continue to win deals with a “no drama” approach.
Features include:
- Rate lock at application for up to 90 days, free of charge
- Prepayment flexibility
- Up to 30-year terms with rate resets available (3-,5-,7- or 10-year resets)
- No escrows, no covenants, no reserves
- 30/360 interest rate methodology (less expensive than actual/365)
- No global cash flow underwriting of sponsor
- No depository relationship
- District Capital is your local servicer for the life of the loan
- Loan sizes from $1-$100million.
CMBS:
CMBS remains a viable non-recourse funding source for all property types, making them competitive for borrowers requesting higher loan dollars than offered by life companies. CMBS can also maximize cash flow to borrowers by offering full-term interest-only loans and the ability to buy down the interest rate. Debt service coverage typically tends to be the constraining factor for loan proceeds. CMBS will allow a significant upfront rate buydown, allowing borrowers to stretch loan proceeds.
CMBS remains a viable non-recourse funding source for all property types, making them competitive for borrowers requesting higher loan dollars than offered by life companies. CMBS can also maximize cash flow to borrowers by offering full-term interest-only loans and the ability to buy down the interest rate. Debt service coverage typically tends to be the constraining factor for loan proceeds. CMBS will allow a significant upfront rate buydown, allowing borrowers to stretch loan proceeds.
Pricing – like life companies, CMBS spreads have decreased over the past several months. Currently, we are typically seeing 200 – 275 over corresponding treasuries, depending on leverage and cash flow certainty.
Our team has been successfully navigating the world of CMBS since the mid-1990s. Due to this extensive experience, we provide the following value to our clients:
- We will properly underwrite the loan so the cash flow we present will match the lender’s final underwritten cash flow. We do this by properly analyzing historical financial statements and current rent rolls, along with reading all of the leases for the property and understanding all terms including properly calculating expense reimbursements
- We work with lenders with whom we have a long-standing relationship and have historically closed loans matching application terms.
In addition, District Capital serves as a sub servicer for the majority of our CMBS loans, so we are involved in the transaction for the life of the loan. During the loan term, we will be your primary point of contact and assist in the relationship with the master servicer to facilitate the following:
- Capital expenditure and tenant improvement/leasing commission reserve releases
- Lease approval for future leases, as needed
- Annual property inspections.
In addition, we will coordinate the collection and review of property quarterly and annual financial statements. We will review and analyze these statements prior to submitting to the master servicer to ensure any potential concerns are addressed.
Interest rate takeaway:
• So, what does the CRE lending world predict interest rates will do in the foreseeable future? Here are a few takeaways from conversations with the heads of the largest CRE lenders in the world.
• Most lenders believe we are living in a new normal – at least to some extent. Gone are the days of free money. Institutional lenders surveyed believe expectations should be set to see the 10-year treasury trade between 3.75% - and 4.75% over the course of the next year. Most are looking to the forward yield curve for these ranges. However, it should be noted that during an election year, anything can happen.
• REMINDER – The Fed rate cuts that are expected in 2024 and 2025 do not directly correlate to the price of long-term US treasuries. When the Fed cuts the target for the Fed Funds Rate, this should impact shorter-term interest rate benchmarks such as SOFR and Prime. The longer-term benchmarks such as the 5-yr and 10-yr US treasuries contain a wide variety of assumptions of which a certain expected amount of rate cuts is already baked into the longer-term US treasuries. The thinking that the next 25 bps of Fed Funds rate cut will translate into a lower 10-year Treasury rate is not an accurate assumption.
• Sponsors waiting on the sidelines for CRE interest rates to drop back down to pre-inflationary levels should get comfortable, it might be a while…. or never.
