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Debt and equity availability update The guide to f inancing in commercial real estateFebruary 2014
In the last three years, commercial property lending has continued to gain momentum and it is fundamentally strong, while still maintaining disciplined underwriting standards. The fundamentals of the real estate markets also are improving via the growth in the housing markets, construction, industrial production, and the further strengthening of the consumer psyche. The convergence of these factors leads us to an optimistic 2014 forecast for the real estate lending markets. Banks now trust the improved value of real estate again, which results in increased lending competition that should keep spreads tight and fuel strong performance up the risk curve to broader geographies and asset types this year.
Tom FishManaging Director Capital Markets Jones Lang LaSalle
Tom MelodyManaging DirectorCapital Markets Jones Lang LaSalle
Mike MelodyManaging Director Capital Markets Jones Lang LaSalle
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Northeast debt and equity market
Northeast debt and equity marketWithin the Boston market, increased competition from all sectors of lenders (commercial banks, CMBS, life companies, debt funds and bridge lenders) is creating an environment of modestly compressed spreads and leverage thresholds for non-recourse lending are beginning to tick upward. We are now seeing non-recourse construction financing on multifamily, office and luxury condominium development in isolated circumstances. Boston traditionally does not see a high volume of Class A, trophy assets trade and, therefore, lenders are increasingly becoming more aggressive on downtown Class B assets and stronger suburban markets. In 2014, we expect CMBS lenders to take a larger piece of the lending pie across all property types. We anticipate isolated instances of speculative lending as well.
Northeast debt and equity marketLenders continue to rely on strong, proven sponsorship and focus on seasoned markets. In these instances, debt and equity are plentiful. Tertiary markets are continuing to be financed by local lenders. Debt capital remains strong and all indications are that it will remain so throughout 2014.
Northeast debt and equity marketAs commercial lenders remain more conservative in terms of leverage levels, debt yield and location, CMBS is filling a needed void. The largest increase in CMBS originations are occurring in the stronger suburban markets. Leverage levels are typically in the 70-75 percent range. Increased competition is allowing for some structural flexibility and increased interest-only periods. More and more CMBS lenders are holding some structurally challenged assets on balance sheets for future conversion to securitization. On the positive side, CMBS allows for higher leverage debt in B-markets, typically up to 75 percent LTV and a 9 percent debt yield. However, on the flip side, more and firms are servicing their own loans; but there remains little flexibility as situations arise. The level of documentation and level of review by B-note buyers and rating agencies has created a more arduous closing process.
Northeast debt and equity marketInstitutional capital (domestic and international) continues to focus on Boston based on its strong Education, Medical, Life Sciences and Innovation industries. More and more equity sources are searching for well-located luxury condominium opportunities given Boston’s near two-month supply of housing inventory. From 2012-2013, international investors, in particular, have invested $1.6 Billion in Boston, predominantly in the office sector. Switzerland, Norway, Canada and Germany have led the way.
Jonathan SchneiderSenior Vice President Jones Lang LaSalle’s Capital [email protected]+1 617 531 4119
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Southeast debt and equity market
Southeast debt and equity marketThe Southeast saw increased transaction volume in most markets during 2013. For instance, Florida saw a nearly 30 percent increase in sales transaction volume over 2012, with total sales increasing from $68.7 billion to $89.1 billion. Loan origination volumes followed a similar path and we see transaction activity only increasing during 2014 as continued economic growth gives both lenders and buyers increased comfort with investing in the Southeast. More and more life companies are seeking to put out shorter term floating rate debt to limit their exposure in what was, and still remains, a very low interest rate environment. Similarly, we expect both CMBS and Agency lenders to increase volumes in Florida and certain markets in the southeast.
Southeast debt and equity marketIn the multifamily sector in 2013, Agency lenders reduced their target volumes in many markets in the Southeast, which gave an opening for Life companies, Banks, and CMBS shops to gain market share. Rising treasury rates also pushed many borrowers to consider floating rate financing over fixed rate. During 2014, we expect Agency lenders to compete with a renewed vigor for assets and to be the best option for maximum-leverage borrowers. For borrowers with value-add assets or lower-leverage needs, Banks and Life companies will continue to be an attractive source of financing, with flexible prepayment penalties, future funding options, and low rates. CMBS shops will continue to increase originations and will be competitive with agency lenders for loans from 70-75 percent and will offer decent periods of interest only – important for buyers focused on initial yields.
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Southeast debt and equity marketFor borrowers with stabilized Class A office and/or retail assets in core locations, Banks and Life companies will be the best option for acquisition financing and for refinancing existing loans. For the best assets, we have seen spreads below 200 basis points on floating-rate loans from these lenders. For borrowers with higher leverage needs or secondary locations, CMBS shops will be the best option.
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Southeast debt and equity marketWe see CMBS loan volume increasing in 2014. This will likely go hand in hand with the continued increase in debt maturity volumes between 2014 and 2017. There are number of new players in the market and more groups equals more origination. For the U.S., we anticipate more than $100B in loans this year on the CMBS front. Underwriting standards have been and will remain tight. However, CMBS lenders are more willing to increase leverage and go to secondary/tertiary markets than banks and life cos. The average amount of leverage for these loans is 70-75 percent. The target (or best) CMBS borrower is seeking 70-75 percent leverage on a variety
of assets (particularly office, retail, and hotel). Sponsorship (or investor type) is less crucial than the asset and market specifics.During early 2013, debt yield was the main limiter on loans. As interest rates have increased, we see debt service coverage ratios being the main limiter/determiner of leverage amounts.
Southeast debt and equity marketLast year proved to be an interesting one for raising capital in the Southeast. With major treasury rate swings during the middle of the year, many acquisition groups found themselves renegotiating or rethinking fixed-rate loans as they were faced with lower loan proceeds and/or higher interest rates. However, core deals in core locations fared well during 2013 because they were often backed by floating-rate loans from either banks or life insurance companies that were pegged to LIBOR, which experienced limited movement during 2013.
Looking to 2014, many of the lenders we have spoken with have indicated they have increased their allocations to Florida and other key Southeastern markets. All things equal, we see slightly higher interest rates for fixed-rate financing during 2014, reducing leverage levels slightly as underwriting standards (such as DSCR’s) will not be relaxed. Attractive rates and the prepayment flexibility provided by floating-rate loans, both for core and transition properties, will continue to drive investors to partner with these types of lenders.
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Southeast debt and equity marketFor multifamily borrower’s seeking max leverage, Agency lenders will continue to be the “go to” source of financing in most southeastern markets.
Life Companies and Banks will offer attractive terms for moderately leveraged (+/- 65 percent) core assets or Class B assets in core locations with a clear value-add story.
CMBS lenders will continue to be an outstanding option for office, retail, multifamily, and hotel owners/buyers with either Class B assets or assets in Class B locations.
During 2013, the majority of development in Florida and the Southeast has been multifamily residential, which has attracted the lion’s share of Institutional joint-venture equity. During 2013, these investors were inundated with development opportunities which increased their selectiveness. We see this trend continuing as opportunity (and a resurgent development pipeline in many markets) causes these groups to increase scrutiny and to demand better terms.
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Southeast debt and equity marketInternational investors continue to pour capital into South Florida. They are generally focused on multifamily or major mixed-use projects, for example the $1.0+ billion Brickell City Centre. South American investors will continue to be a major source of equity for both development projects and stabilized Class A assets in core locations as capital from these sometimes turbulent economies seeks refuge in the relative safety of the U.S.’s strong asset protection and banking laws. However, as many of these investors have been priced out of the Southeast’s top markets, they have increasing looked to secondary markets/value add assets for investment opportunities.
We see significantly more debt financing than equity financing. JV equity providers continue to evaluate projects based on location, sponsorship, and returns – in that order. Equity remains extremely selective, however certain markets (such as the condo market in South Florida) are attracting significant capital and attention from equity investors.
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Denny St. Romain Managing Director Jones Lang LaSalle’s Capital [email protected]+1 305 728 7395
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Southern California debt and equity market
Southern California debt and equity marketIn 2013, the economic recovery solidified in Southern California. Transaction volumes increased, investors became more aggressive and lenders more interested in our markets. Life Company lenders had good volume but the bigger news was that banks are aggressively back in the market and CMBS lenders more than doubled their volume. Over the year, the increase in the 10-year treasury yield along with a steep yield curve pushed borrowers to choose floating-rate financing and/or shorter term (5 year) fixed-rate execution. In 2014, we expect continued improvement in the supply/demand leasing fundamentals in the major Southern California markets with increased lender volumes across the board (Life Companies, Banks, CMBS and Debt Funds).
Southern California debt and equity marketWe saw a significant increase in CMBS financings in Southern California in 2013. Overall, CMBS volume nationally totaled approximately $90 billion, which is double 2012 volume. • CMBS underwriting standards are much
more stringent than what we saw in 2005-2007 and lenders seem to be maintaining their discipline. Average leverage is 65-70 percent given our low cap-rate markets that put pressure on in-place debt yields.
• Investors looking for higher leverage and/or those buying non-trophy properties are more likely to use CMBS financing.
Southern California debt and equity marketCMBS loans provide higher loan proceeds and liquidity for non-trophy properties with solid occupancy and operating histories. However, they don’t size well for non-stabilized properties and additional funding is problematic. Non-responsive servicing agents are a concern for many potential CMBS borrowers.
There is currently a healthy amount of capital for real estate investment at all levels of the capital stack with, perhaps, more capital than opportunities. As a result, lenders and investors are becoming increasingly competitive thereby putting pressure on spreads and testing underwriting assumptions.
As the economic recovery continues in 2014, expect a continued strong market for real estate financing.
Southern California debt and equity market
2014 Trends: multi-family development losing some steam, hotels getting closer to equilibrium, new construction of industrial, office beginning to rebound, retail slow to recover but could be the next opportunity.
Southern California, particularly Los Angeles, always attracts international investors given the size and diversity of our markets and population. Hotels, apartments and trophy office seem to generate the most interest from the international investment community.
Chris Casey Managing Director Jones Lang LaSalle’s Capital [email protected]+1 213 239 6332
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Northern California debt and equity market
Northern California debt and equity marketAs the economic recovery hit full swing in gateway markets in 2013, San Francisco witnessed the ready availability of various pools of debt and equity.
Life Insurance Companies remained the best choice for historically low-rate, mid-leverage loans on well-leased, core assets and have been the most conservative recently – requiring 80 percent or higher occupancy and minimum debt yields of at least 8.5 percent. In assets with occupancy in the low 80 percent range, some implement funding holdbacks until certain lease up hurdles are met.
Northern California debt and equity marketBanks provided competitive, shorter term, mid-leverage funding and differentiated themselves by their ability to provide future funding on projects requiring upfront capital investment to unlock their potential value. Bank debt was available on a non-recourse basis in 2013 but was highly sponsorship focused. Banks also provide maximum prepay flexibility. Banks are very sponsorship focused but can be flexible on lending criteria. To help with capital improvements, banks offer prorated future funding and in cases of low occupancy – burn off recourse clauses.
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Northern California debt and equity marketCMBS issuance increased from $48B in 2012 to more than $90B in 2013 – though still well below 2007 peaks of $229B. CMBS lenders were willing to provide higher leverage, lent in secondary markets and demonstrated the ability to work in front of mezzanine debt. CMBS lenders, like Life Insurance Companies, aim for 80 percent or higher occupancy but are more willing to lend on Class B assets or Class A assets in secondary markets. Additionally, CMBS lenders usually include debt service coverage covenants of 1.25x with cash flow traps imposed if the collateral’s cash flow falls below agreed upon levels. However, CMBS debt may be interest only from two years up to the term of the loan – depending on leverage level.
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Northern California debt and equity marketCMBS debt-underwriting standards have certainly tightened from the boom days of the mid 2000’s. Leverage levels are lower, debt service coverage requirements are higher, and lenders are more selective than in their heyday. However, CMBS loans still offer up to 75 PERCENT leverage with the ability to work in front of mezzanine debt which proves to be attractive to an array of borrowers.
Investors seeking higher leverage on assets outside of the Central Business District often find CMBS debt to be a viable financing option. CMBS debt is available in markets in which Life Companies have yet to return after the recession and provides terms longer than those offered by banks.
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Northern California debt and equity marketOn the positive side, CMBS loans offer a high (up to 75 percent) leverage option in “B” markets. In certain cases lenders are also willing to work in front of mezzanine debt. Though debt service coverage requirements have tightened since the mid 2000’s, they remain reasonable – usually in the 1.25x range. CMBS debt may also be interest only from two years up to the term of the loan – depending on leverage level. On the flip side, being a securitized financial product, CMBS loans offer the least flexibility in troubled scenarios. CMBS loan docs include structure to protect the interest of their bond holders. These covenants, when triggered, can greatly inhibit the operational autonomy of ownership. CMBS loans are also inflexible to prepayment – requiring yield maintenance prepayment to ensure bond holder yield.
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Northern California debt and equity marketInstitutional, joint venture equity was also available for office and residential development. San Francisco proved to be an active, and lucrative, market for residential JV equity placement in 2013. Strong demand has propped up a staggering shortage of new supply, a booming tech sector, and increased foreign investor interest.
In San Francisco, 2014 is poised to start off where 2013 left off with lenders set to increase allocations. Extremely low cap rates have driven yield hungry investors out of the city and into other Bay Area markets. Financing has been, and will continue to be, available throughout the region. There are a substantial number of experienced developers evaluating opportunities – most will require joint venture equity and construction financing.
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Northern California debt and equity marketIn 2013, we executed almost equal amounts of debt and equity deal flow. We witnessed an active market for acquisition financing across the major asset classes and a spike in refinancing interest from long term holders hoping to take advantage of historically low interest rates. Rates varied throughout 2013 due to fluctuations in treasury rates but lenders stood firm to general location, occupancy, debt yield, and debt service coverage requirements. Attractively priced construction debt was also available for condo, residential, and industrial development with experienced sponsorship. Due to strong market fundamentals and a drastic lack of new supply in the city, residential development JV equity was also available to the right sponsor.
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Northern California debt and equity marketIn general, foreign investors are looking for stabilized, “A” assets, in the core submarkets of the city. Some see it as a safe, long term, alternative to park money which allows them to underwrite higher acquisition prices. These buyers tend to be conservative in nature and require low leverage, long-term financing – if any financing at all.
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John Manning Managing Director Jones Lang LaSalle’s Capital [email protected]+1 415 395 4953
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