This article appeared in the Colorado Real Estate Journal's August 18th Publication LINK
As we enter the second half of the year, the debt and equity markets continue to be very active, albeit with some lingering areas of caution brought about by the pandemic. Below are some key takeaways through the first half of 2021.
Life company allocations update. At the start of 2021, annual life insurance
company mortgage allocations generally mirrored 2020 year-end figures,
reflecting a steep decrease from original 2020 allocations. The conservative
projections reflected continued uncertainty surrounding the timing of the
economic recovery, the distribution of vaccines, and thus, the transaction
As we reach the midyear point, many life insurance companies are either on track to reach their year-end targets or ahead of schedule, but volumes are still below midyear 2019 figures.
Industrial and multifamily continue to dominate the market share of 2021 loan volume, with competitive interest rates in the sub-3% range. Given the low interest rate environment, some lenders have begun to selectively seek strong retail and office opportunities in a search for higher yield.
Capital Market Trends by Property Type
Industrial. Industrial proved to be the most resilient property type throughout the pandemic and continues to be the primary safe haven for lenders and equity investors alike. Despite the upward shift in the yield curve since Jan. 1, it is not uncommon for interest rates on 10-year loans collateralized by core industrial properties to be in the mid to high-2% range at modest leverage levels. Rates for five-year money can be close to 2%.
Bulk distribution product commands the best pricing and terms, but we have seen increased lender appetite for small bay and flex product. There is also significant depth in the market for bridge financing products on transitional industrial assets. Life companies and debt funds will lend up to 70% of cost, nonrecourse, on noncash-flowing industrial properties at rates in the low- to mid-3% range, with light bridge pricing even tighter.
Multifamily. Despite a period of stagnant rent growth and longer lease-up timelines, multifamily has performed well during the pandemic and continues to be a sought-after product type for lenders and investors. Interest rates on core multifamily properties are in the low-2% range at sub-65% leverage.
Multifamily bridge lending has also been very attractive, with heavy value-add transactions commanding interest rates in the 2.75-3.25% range for up to 75% loan to cost.
Retail. As we enter the second half of the year, more lenders are beginning to quote retail deals. As lenders return to the market, they have placed an increased emphasis on historical occupancy, submarket fundamentals, and tenant sales in their underwriting. Overall leverage for a core execution will top out at 60% loan to value. Commercial mortgage backed securities lenders will quote up to 65% or 70%, depending on debt yield.
First-tier grocery-anchored centers yield the most lender interest and command the best pricing, but lenders will quote unanchored centers with sound economics and a good story. Interest rates on anchored centers can be as low as 2.75% at the right leverage points, while rates on unanchored retail tend to be in the low- to mid-3% range.
As the leasing velocity picks up in urban submarkets, bridge lenders are beginning to selectively quote on transitional street retail assets. Interest rates range from the low-4% to mid-6% depending on leverage.
Office. Although some uncertainty looms over the office market, more lenders are beginning to selectively quote deals, with an increased emphasis on sponsor strength as the asset class becomes more operationally intensive. There still is some polarity in lender opinion on the office market; some favor small-floor-plate office product with granularity in the rent roll, while others prefer larger-floor plate buildings with corporate credit. Some lenders are still on the sidelines, waiting to see how work-from-home trends play out as companies start to return employees to the office.
Interest rates on stabilized office deals can be as low as 2.75% at 60% leverage on a five or seven-year term, while rates on bridge loans can range from 3.5% to 5% depending on the asset, the leverage, and the sponsor.