February 13, 2017
Recent national and global developments have introduced a bout of volatility into the capital markets that have otherwise been steady and predictable in recent years. It’s becoming more complex for borrowers to navigate today’s commercial real estate market.
The unprecedented low-rate environment that institutional borrowers have become used to has shifted. Floating rate commercial bank loans, which had been tracking consistently in the LIBOR plus low 200 basis point range through much of last year, have moved into the LIBOR plus 275 range and are likely to head even higher by the end of this year. When combined with the fact that LIBOR is highly correlated to the Fed Funds Rate (which the market expects to move 2-3 times this year), debt becomes more expensive.
Maturing loans in 2017
Upwards of $90 billion of 10-year debt is set to mature this year, representing the last vestiges of what was the largest year for commercial mortgage backed securities (CMBS) origination in history, (2007). Much of this is higher leverage debt that took advantage of last cycle’s looser underwriting standards.
It will be a competitive market for borrowers who have yet to address their refinancing needs since lenders may not be willing to cover as much of a property’s value as they have in previous cycles. This will force some borrowers to explore more creative bespoke financing options.
Some lenders pull back
This combination of higher rates and intensifying demand also comes at a time when some lenders are reducing their exposure to commercial real estate, given the flurry of deals that have increased exposure to the sector over the past three years. Values of many commercial real estate properties, such as office buildings, are historically high and going-forward, lenders will be cognizant of keeping leverage levels in check while approaching growth and value assumptions with a careful eye.
In such an environment, some borrowers may do well to establish or re-establish their connections to “relationship banks”. These institutions – typically larger national or regional banks – are primarily balance sheet lenders, meaning they hold loans for their own portfolio rather than selling them into the CMBS market.
As such, these lenders may be more flexible and look beyond pure numbers to a borrower’s track record, reputation and plan for the asset, some things CMBS or other lending sources may not do. Of course, all lenders desire a strong sponsor, credit quality and some level of borrower equity. But, in a tightening loan environment, relationship lenders may be vital once more for many borrowers.
About the author:
Alex is a Managing Director in the Real Estate Investment Banking practice at JLL in San Francisco, where he specializes in the placement of debt and equity for real estate investors. He’s been particularly active raising joint venture equity and construction financing for new development, and has helped clients capitalize speculative office developments and the first residential condo towers in San Francisco and Los Angeles after the Great Recession.
Contact Alex directly by phone at +1 (415) 395-4976 or via email at firstname.lastname@example.org.