As we all begin a new (and hopefully better) year in 2021, the team at Essex is keeping its eye on several important trends in the commercial mortgage markets that we’ve identified after having conversations with lenders and marketing a variety of new loan requests. Some of these trends are a continuation from what we saw in the second half of 2020, but others reflect the patient approach of lenders to the economic recovery.
Multifamily and industrial loans continue to be in high demand, with lenders offering the lowest rates and best terms for these property types.
- While rates have increased slightly from late 2020 lows, it is not uncommon for interest rates for these loans to be in the mid-2.0% range for a well-performing property at the right leverage.
- Given the high degree of competition for stabilized multifamily and bulk industrial properties, some lenders are branching out and looking for additional yield by lending on small bay industrial/ flex properties and multifamily properties in lease-up.
- Rates for these property types are commonly in the 2.75% to 3.50% range.
Activity in the value-add, bridge loan space has rebounded to near pre-pandemic levels, as lenders have identified alternative sources of capital with a strong appetite for these high-yield loans.
- Approximately 80% of debt funds and bridge lenders are actively placing money as of January 2021, and these lenders have a strong desire for increased deal flow with many lowering their minimum loan amounts and increasing their maximums for the right deal.
- Bridge lenders are commonly securing funding commitments from life insurance companies and other capital sources that lack the human capital and expertise to develop their own bridge lending platforms. This has lowered bridge lenders’ cost of capital and allowed them to offer loan terms that are more attractive than they were pre-pandemic.
- Bridge lenders are active in most asset types but are placing more scrutiny on office or retail loans, especially those that seek to refinance a maturing bridge loan. Maximum loan-to-cost on bridge loans is 70% - 75%.
- Properties with some in-place cash flow and a modest need for leasing capital or capital improvement funds are commanding all-in rates ranging from low 4.0% to mid-5.0%, depending on how low lenders set their LIBOR floors.
- For loans secured by vacant properties or those that require a more capital-intensive repositioning, all-in rates are commonly in the 5.0% to 7.0% range.
Life Company loan allocations for 2021 will look similar to year-end 2020 numbers, as lenders are less willing to look beyond multifamily and industrial loans for volume.
- Unfortunately, the daily stream of news detailing struggling retailers and continued remote office work are greatly reducing the demand for loans secured by retail and office properties.
- Many life company loan portfolios were overweighted towards office and retail even before the pandemic, so the focus on industrial and multifamily loans is expected to continue throughout 2021.
- This may change in the second half of the year if the vaccinated percentage of the population increases enough to allow for the easing of pandemic-related restrictions.
While these three high-level trends are shaping the current direction of the capital markets, there are always exceptions to be explored.
- Life companies will still look at grocery-anchored retail centers and unanchored strip centers at the right leverage and for borrowers with existing lender relationships.
- Loans on office properties are still being considered although the appetite is somewhat polarizing - some lenders prefer large credit tenant users with long-term leases while others prefer a more granular rent roll with small tenant spaces and minimal lease rollover concentration.