Q3 Market Update: Lender Segment Insights

We believe it is vital to keep our clients informed concerning the major lending sources in the market. We asked a few of our producers in our LA office to call our lenders and provide insight into how these various lending segments are performing in the market. Keep reading below to find out more:

Life Insurance Companies

Life Insurance companies remain active and well-capitalized. After a very active start to the year, many have met or are within striking distance of their lending targets despite a slowdown in volume during the third quarter that was driven by the sharp increase in underlying rates. While the prevailing trend among lenders at the start of the year was to focus on increasingly larger loans, we are now seeing more openness to considering strong requests that are below stated minimums as lenders look to capture high-quality deals. With the uncertainty and volatility in the market that we have seen as of late, and with the economic outlook being somewhat unclear, there is growing support for placing "smaller bets" as the market adjusts to higher rates.

While it is true that mortgage spreads have increased in tandem with those of corporate bonds which typically compete with mortgages for their investment allocations, insurance companies continue to compete on pricing with the low price leaders being in the +165-175 range for deals that command their best pricing. Typical spreads for core requests are more in the T+200-250 range for permanent financing. Among most, the appetite remains strongest for industrial and multifamily assets, followed by grocery-anchored centers and well-located strip retail with essential businesses and/or strong credit tenants, followed by office and hospitality. Life insurance construction and bridge programs remain fairly active as well.

-David Sarnoff, Vice President

Banks

Banks have quickly reached the point where capital charges and rates have risen to impactful levels for both big banks and regional banks. The unfortunate reality of pricing exploration and programmatic adjustments towards more conservative lending can change abruptly for borrowers, affecting loans mid-process in some instances. While most banks are sizing new business to a 1.20x DSCR, some are widening out to a 1.25x or even a 1.30x and pulling back LTV to between 55%-60%. Multifamily and Industrial continue to see the best rates from banks, ranging from the low- to mid-5% range. Grocery-anchored retail continues to receive competitive pricing, while strip and single-tenant retail incur some premiums. Office product is on a deal-by-deal basis, with suburban preferred over urban. Flagged-Hospitality with a consistent post-covid track record are seeing rates start in the high 6s. Construction bank financing has become more conservative with the rise in rates, as lenders adjust their exit assumptions to account for today’s market volatility.

-Jacob Lee, Vice President

Credit Unions

Credit Unions are affected in their own way by recent market volatility. Being that we are closer to the end of the year, many are already fully allocated for 2022 and need to “participate” with other credit unions, especially on larger loan requests. One of their main value propositions, having no prepayment penalty, is still intact. However, they have narrowed their “box” a bit as well. They, as well as other lending institutions, are barely doing office loans. Additionally, they are selective on retail and even some industrial property. In general, they have reduced their risk appetite. We're seeing quotes between 5.50% - 6.25% and sometimes even higher on Class B or C industrial. One recent quote was a 5.50% rate on a single-tenant, 30,000 SF industrial building in Commerce. Pricing generally is all over the place. Some credit unions offer a discount on pricing for opening an account with them or becoming a member, but they are generally priced within the market. The “outlier” credit unions are still quoting, but let the rate float until the loan doc signing some 60-75 days later, making it too risky for any borrower to proceed.

-Jonny Soleimani, Vice President

Agencies

After a hot first half of the year, the agencies have slowed down in Q3 and Q4 largely due to the sharp rate increase. Both Fannie and Freddie are expected to come up short of their 2022 cap of $70B, per enterprise, and are not planning to aggressively win business to make up the gap prior to year-end. The focus remains on mission-driven, affordable properties that reduce the baseline pricing by 40-50bps. Agency experts believe both Fannie and Freddie will either keep their caps at $70B or slightly below with the mandate for mission-driven, affordable to increase in 2023.

Current baseline pricing is 180-230bps over the corresponding index, swaps, or US Treasuries, and DSCR is the key metric that drives leverage, which is the same as every other lender currently. There has been an increase in borrowers taking on 5-year fixed rate deals and paying an additional 40-50bps in rate for a step-down prepay or a 5-year floater to allow flexibility for a sale or refi in the next handful of years. While the agencies aren’t very competitive on market-rate apartments, they remain extremely formidable and aggressive for any mission-driven, affordable assets.

-Grady Seldin, Vice President