June 1, 2020

Capital Corner: Optimism returns as lending resumes from many sources

During the past two weeks, capital sources have indicated an interest in signing up new deals across the country. Favored property types continue to be multifamily and industrial, with some self-storage, grocery-anchored retail, and selective office being considered as well.

In addition, our multifamily investment sales team has seen increased activity with new requests for broker-opinions-of-value, which should lead to new listings coming to the market

Equity
Institutions are allocating more capital to multifamily as the asset class continue to perform well with continued stable fundamentals for rent payments and occupancy. Our Equity Advisory team believes that family office equity will likely lead investment in this space. Institutional investment funds are expected to quickly follow since they have available capital ready to deploy in the near team.

While the capital is coming back into the market, we anticipate a steady increase in investment opportunities. Core-plus multifamily properties are most in favor, but industrial is still a significant part of the capital allocation. Some equity sources are keeping an eye out for other asset classes with good economics.

Agencies
Volume with Freddie Mac, Fannie Mae, and HUD continues to pick up steam. The biggest changes in the past two weeks are continued price contraction and softening up-front reserve requirements for select transactions. The agencies are considering both the sponsor’s historical performance and the collection track record over the past three months. Because reserve requirements acted as more of an insurance policy against the unknown in mid-March, improved property performance is minimizing the need.

We are currently financing our marketed acquisitions at 80% LTV, 1.25x DCR, half-term interest-only at all-in coupons in the low-3% range. Right now, sponsors and properties with good history can achieve similar results on refinance business as well.

HUD volume ramps up every week, with the safe-haven approach to capital. Borrowers who are seeking maximum leverage (85% LTV/LTC for market-rate properties), and who have some flexibility with timing, are good candidates for HUD financing and will benefit from pricing that ranges from +/- 2.50% for acquisition/refinance transactions to approximately 3.20% for new construction/permanent loans. These current HUD rates have held quite steady for the past 30-45 days, and it is expected these levels will remain for the foreseeable future. HUD continues to be an active source for cash-out refinance transactions, as long as the underlying fundamentals of the loan are sound. This allows borrowers to recoup equity while enjoying the security of a long-term loan at historically low interest rates.

Life Companies
Many life companies are coming in with lower spreads leading to interest rates from 2.75 to 3.25%, and are focused on coming back in with more volume. While they are evaluating many markets and property types, they have not yet returned to consistent deal flow.

While multifamily and industrial are still the target asset class, retail assets are still being pursued. Transactions are closing at attractive levels, but it is selective. What’s most meaningful is the returned interest from many sources previously cautious in the market, fueled by uncertainty over the past two months.

The big picture trend, from an investment perspective, is that commercial lending exposure is still of interest to life companies. Groups are lowering their coupons to chase both multifamily and industrial.

However, headwinds are still in office properties, with questions of the future demand for office space. For those office assets with longer-term leases, the best fit tends to be bridge products, which are priced higher to account for the risk of the unknown. Rent rolls are getting a new level of scrutiny for the tenant mix, rent history, and the type of additional amenities. Questions remain over what overall changes will occur in the category, but there’s some sense that suburban office will return to a favored asset class.

In Closing
An optimistic tone has returned to most lenders as the strong fundamentals of real estate demonstrate the investment value. While other external forces could change the trajectory in some cities with recent protests, real estate remains a stable, active investment for all capital sources in this environment.