
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.


Rate and Economic Indicators
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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.
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Term SOFR remains unchanged at 5.33%: Not expected to fall below 4.0% until early 2026.
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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.
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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

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

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, CPA | Principal
CPA Lic. 130463 | Broker Lic. 02038912
Direct: 323-505-9222