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.