Activity in the capital markets has significantly increased as we
near the end of summer and as lenders and borrowers settle in to a “new
normal”. Lenders still have a strong
demand for commercial mortgages and are actively lending on all major property
types. Most of the activity has come from refinance requests as property owners
seek to capitalize on interest rates that have moved lower since the start of
the pandemic. Competition for mortgages
is increasing, and borrowers are set to reap the benefits.
The team at Essex has been actively marketing a variety of new
loan requests in recent weeks, and has identified the following trends:
Multifamily and industrial loans are
in especially high demand, with lenders offering the lowest rates and best
terms we’ve ever seen for these property types. It is not uncommon for interest rates for these loans to be
in the low-to-mid 2.0% range for a 10-year loan term for a well performing
property. Given the high degree of competition for these specific properties,
some lenders are branching out and looking for additional yield, and are
finding it by lending on small bay industrial and flex properties, which are
seeing rates in the 2.50% - 3.25% range, which is lower than at the start of
the year for this property type.
Lenders are re-starting their
value-add, bridge loan programs as a way to find yield in an ultra-low rate
environment. Lenders have shown interest in value-add deals on industrial
and office properties, with floating rate quotes ranging from 1-month LIBOR
plus 375 bps to 450 bps, funding up to 70% loan-to-cost. Pricing is more competitive on lower
loan-to-cost requests.
Commercial real estate loans are no
longer a commodity product, as loan programs
have changed significantly since the start of the year and continue to change
on a weekly basis. Lenders are constantly adapting to highly variable economic
news, interest rates, and credit spreads and are adjusting their lending
allocations and pricing accordingly.
This places a greater importance on frequent communication between
sponsors, mortgage bankers, and lenders as mortgage bankers seek to match each
specific financing request with the complementary lender’s appetite.
Life companies continue to underwrite
and size loans more conservatively than at the beginning of the year,
especially for office and retail properties. However,
more conservative underwriting allows for life companies to offer lower
interest rates and more flexible prepayment options than we’ve seen in some
time. Grocery-anchored centers,
free standing retail, child-care facilities, and automotive repair centers are
still attractive property types for lenders. Unanchored strip centers are also
being considered at the right leverage for borrowers with existing lender
relationships. Regardless of the property type, funding a loan in this
environment is likely to require more time to close and possibly additional structure,
which can take form of funded debt service reserves, free rent holdbacks, and leasing
capital reserves.