Nate Prouty, co-managing director of NorthMarq's San Francisco office, which completed $1.42 billion in financing across 50 transactions in 2018, spoke to Connect Media to discuss financing trends he noticed in his transactions as well as predictions for 2019 based on an equally strong pipeline for the first quarter.
What are the big trends you are tracking in the finance sector this year?
Availability of capital. With respect to the capital markets overall, both life companies and the agencies are expecting stable to rising supply of funds for 2019. Commercial banks, largely due to the perceived late stage in the cycle, continue to curtail their construction activity in 2019. Much of this void has been filled by debt funds. This capital source has been a large source of growth in our origination activity. The CMBS markets, with “loss retention” now fully in place, had another solid year and the number of players seems stable at this point.
One of the biggest trends we’re tracking is the availability of construction financing for projects in the pipeline for 2019. Following a steady trend of annual construction cost increases the last several years due to competition for labor and rising material costs, developers are increasingly having to get more creative in their approach to project financing. While equity investors may be willing to place equity in new projects in core markets at a return on cost below five percent based on optimistic future rent growth expectations, which can often translate into a potentially under-leveraged project using traditional lender exit underwriting. If lenders are not able to underwrite rent growth assumptions in line with historical trends, the resulting loan will fall significantly short in terms of desired leverage—in some cases below 50 percent loan-to-cost (LTC).