As COVID-19 has brought on unprecedented market disruptions, 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:
Three months into 2021, Life Companies in general have never been busier. Life Co’s have shown a willingness to go above and beyond for deals they want to win,
particularly for industrial and multifamily assets. Whether it’s a low-interest rate, higher proceeds, or prepayment flexibility, Life Co’s have found ways to win strong industrial and multifamily deals. Office and retail deals are getting done, albeit on a case-by-case basis. Retail deals are reliant on the historical performance over the past 12-months, and the strength of the tenants. Quality office assets with strong history or a medical component are also receiving favorable terms from Life Co’s.
Given the recent rise in treasuries, Life Co’s spreads are adjusting accordingly. We’re continuing to see interest rates between 2.75%-3.25% for high-quality assets, with low leverage requests that are owned by experienced borrowers. Life Co’s have also utilized interest-only periods and flexible prepayment structures to produce more favorable terms for borrowers. Globally, Life Co’s are on pace to reach their goals for 2021, if
not surpass them.
Just like most of
the country, debt funds are opening their appetite for all asset classes versus the pandemic focus of multifamily and industrial. This is driven primarily by two factors: insanely competitive pricing for multifamily and a positive outlook with the pandemic almost in the rearview.
The competition for multifamily is driving rates down to the high 2’s to low 3’s for the lenders with the inexpensive cost of capital looking for core-plus assets. These deals are in the 70-80% LTC range, well located, A-class with little risk on the value-add and/or lease-up strategy. For B-class, deals pricing widens to the mid 3’s, still historically low. Debt funds who cannot compete with this pricing only win multifamily deals if there is a significant lift, an existing relationship, or if the borrower needs a quick and certain closing. This leaves a swarm of debt funds who are historically in the 400-600 over range expanding their horizon to other asset
classes, specifically retail and hospitality.
With the vaccine distribution and local governments removing restrictions, debt funds share a positive view on these assets with the idea that travelers and consumers are itching for vacation and shopping/dining. While grocery-anchored retail has always been a sweetheart, debt funds are active in well-located retail with strong sponsors who have weathered the storm that was the year 2020. Like hospitality assets, there is capital available for experienced hotel operators. Pricing will wind up in the 4.5-7% with leverage around 65-70% LTC. One common theme across all debt funds is to put out more dollars than pre-covid days such as 2019. The near-term outlook is positive for sponsors and developers that have had trouble in the past 12 months finding capital.
Credit Unions remain active and continue to focus their attention on filling the need for financing traditional CRE with no prepayment penalties. Many are still lending on multi-tenant retail with smaller tenants but have lowered the leverage and increased the DSCR at which they are comfortable lending from their pre-Covid levels. At the upper end of the credit union spectrum, we are seeing
larger credit unions getting very aggressive on multifamily and industrial deals above $10mm with both their pricing and ability to offer non-recourse financing on lower leverage requests.
Fannie started 2021 with an emphasis on lending on “mission-driven” (affordable component(s)) housing. Rumor has it that they blew through $10B of their $70B 2021
mission-driven allotment in January 2021 alone. The residual effect has been that their spreads and all-in interest rates are way wide of where many banks, credit unions, and life companies currently are priced. This has opened the door for life companies to present competitive rates and terms on products that agencies would have gobbled up last year, especially lower-leveraged and well-located products. However, on the affordable side, the gap between agencies and everyone else is much wider than the gap that existed both last year and currently. No one can come close to agency rates and terms on affordable products.
CMBS:
Fannie started 2021 with an emphasis on lending on “mission-driven” (affordable component(s)) housing. Rumor has it that they blew through $10B of their $70B 2021 mission-driven allotment in January 2021 alone. The residual effect has been that their spreads and all-in interest rates are way wide of where many banks, credit unions, and life companies currently are priced. This has opened the door for life companies to present competitive rates and terms on products that agencies would have gobbled up last year, especially lower-leveraged and well-located products. However, on the affordable side, the gap between agencies and everyone else is much wider than the gap that existed both last year and currently. No
one can come close to agency rates and terms on affordable products.
