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Q3 Capital Markets Update

published July 16, 2024

Lending and Capital Flows Continue to Tighten

With economic uncertainty persisting, lenders continue to be extremely selective.  Inflation fell 0.1% in June, and now sits at a 12-month rate of 3.0%.  And with unemployment at a 3-year high up to 4.1%, the door is opening for the Fed to cut rates to help prevent deeper job loss and a recession, if they aren't already too late.  There is a 96% probability of a rate cut in September.  While this would help short=term rates (ie- construction and bridge loans), the forward curves for the 5 and 10-year treasuries remains above 4% for the foreseeable future.  With this implying long-term permanent loan rates will remain relatively high (in the context of the past 5 years), pressure will remain on finding creative ways to push loan proceeds to alleviate cash-in refinances. 

 

 

 

 

With roughly a third of the loans held by CMBS, CLOs, and private credit companies maturing this year, more distress could apply downward pressure on values. The CMBS delinquency rate is back above 5% in June, with office continuing to take the biggest hit.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lenders have become more cautious about underwriting.  With fewer options in the market, CMBS lenders have become compelling alternatives for financings requiring higher loan proceeds and less credit scrutiny, especially with the ability to buy the rate down thus increasing proceeds further. Our focus generally remains on flexible prepay and pushing leverage through negotiating underwriting assumptions, coverage ratios, and utilizing buy-downs.

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Rate and Economic Indicators

  • 10 Year Treasury drops to 4.20%:  The forward curve is pinning the 10-year in the low 4%'s for the next several years.

  • Term SOFR remains unchanged at 5.33%:  Not expected to fall below 4.0% until early 2026. 

  • Unemployment Rate inches up to 4.1%:  0.30% increase from last quarter.  Shift from CPI to Unemployment as the biggest indicator of the Feds next move.

  • Core CPI​:  drops to 3.0%.  

Hot Money

4.95% 5-Year Fixed Rate

LTV: Up to 70% LTV

Underwriting: 1.25x DSCR

Rates: 4.95% fixed for the first 5-years, then re-set for the remaining 5-years.

Property-Type: Stabilized Industrial, Retail, Office

Geography: Select West Coast Markets

Term: 5+5 years

Prepay: Stepdown

Recent Financings

Cannon Beach hotel.png

Four-Property Hotel Portfolio
Coastal Oregon

$7,000,000 Cash-Out Refinance

Lender: Credit Union

 - 45 lenders pitched

 - 70% LTV, 1.30x DSCR

 - 5-Year Fixed at 6.75%

 - Stepdown Prepay

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Retail Center
National Credit Tenants
Central California

$8,500,000 Refinance

Lender: Bank

 - 65% LTV, 1.25x DSCR

 - 5-Year Fixed at 4.95%

 - 10-Year total term

 - Stepdown Prepay

Lender Notes

Fannie Mae & Freddie Mac are offering competitive rates in the low-5% (with buydowns) to the low-6%'s.  Buydowns have remained an accretive solution to increase loan proceeds by 2-3% net of the buydown cost.  

Life Companies remain open to being creative on prepay structures, but still require "down the fairway" deals.  Competitive for pre-stabilized assets in lease-up. 

Banks and Credit Unions are selectively underwriting to 1.15x DSCR's for multifamily.  Credit Unions have remained a great option for no prepayment penalty.

CMBS has become a viable lending option to maximize loan proceeds with buydown options

Bridge Lenders are active with spreads in the mid-200's to low-400's over Term SOFR, depending on leverage and stabilized debt yields.  

Preferred Equity has expanded with more groups entering this space.  Certainty of execution remains important before selecting any group.  General market terms remain at 7%/14%, but we are seeing some higher coverage groups as low as 12-13% total pay rates for strong deals.

Construction Lenders are being selective, with a focus on experienced Sponsors.  Leverage is lower with the banks around 55-60% LTC, which has created an opportunity for Debt Funds to compete for higher leverage requests of up to 80-85% LTC.

Lender

Max LTV

Rates

Closing

Notes

Fannie/Freddie
5-Year Fixed

80%

5.25% - 6.25%
(buydowns available)

45-50 days
 

LTV & DSCR dependent

FHA Refinance
35-Year Fixed

85%

5.20% - 5.70%
 

120-150 days

not including MIP
 

Life Insurance
Companies

65%
 

5.60% - 6.25%
 

45-50 days
 

DY dependent
 

Bank, CMBS, &
Credit Union

70%
 

5.85% - 7.0%
 

45-60 days
 

DY & term
dependent

Bridge
Debt Funds 

75%
 

7.55% - 9.50% +
Spreads of 2.25%+

14-45 days
 

LTC & stabilized DY dependent

Construction
Lenders

65%
 

7.75% - 9.25% +
 

45-60 days
 

LTC & size
dependent

Tim Gerlach Headshot - smile.jpg

Tim Gerlach, CPA  |  Principal

CPA Lic. 130463  |  Broker Lic. 02038912

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