Anyone have a current sentiment on the where non multifamily spreads are today for development vs bridge vs perm?
i.e. for multifamily, I am seeing perm options via agency CMBS (fixed rate) are 175-200bps over corresponding treasuries. That same asset, assuming it were coming out of a construction loan today and needed 24 months of a bridge loan to stabilize before perm, I am seeing spreads in the 275-325 range over SOFR. Backing up a step further, that same project would price construction today at 500 over (I am taking a guess here, not sure if that's accurate or not).
So call it 100-150 bps between perm and bridge, and then some spread between bridge and pure construction.
Would same math apply to say, a Class A office building in a Tier 1 market, or a luxury hotel in a Tier 1 market (in terms of the spread between perm/bridge/construction pricing?
Based on the most helpful WSO content, the spread between different types of loans (permanent, bridge, and construction) can indeed vary significantly based on the asset type and market conditions. Here’s a breakdown of how these spreads might differ across asset types, using multifamily as a reference point:
Multifamily: As you mentioned, permanent loans via agency CMBS are seeing spreads of 175-200 bps over corresponding treasuries. Bridge loans for the same asset, post-construction, are ranging from 275-325 bps over SOFR. For construction, the spread is estimated at around 500 bps over.
Class A Office Building in a Tier 1 Market: The spreads for office buildings can be influenced by factors such as the economic stability of the market, tenant quality, and lease durations. Typically, office buildings might see slightly higher spreads compared to multifamily due to perceived risks like tenant turnover and longer lease stabilization periods. You might expect the spread for permanent financing to be slightly higher than multifamily, with bridge and construction loans following a similar pattern of increment.
Luxury Hotel in a Tier 1 Market: Hotels generally carry higher risk due to their dependence on economic conditions, consumer spending, and travel trends. Therefore, spreads for hotels are likely to be higher across all loan types compared to multifamily and possibly even office buildings. The volatility and operational risks associated with hotels can lead to wider spreads, especially in uncertain economic times.
In summary, while the basic structure of spreads between permanent, bridge, and construction financing might follow a similar pattern across different asset types, the actual basis points over benchmarks like SOFR or UST can vary more significantly depending on the specific risks associated with the asset class and market conditions. For non-multifamily developments like Class A office buildings and luxury hotels, expect higher spreads reflecting the increased risk profile.
Sources: Spreads on New Multifamily Development, https://www.wallstreetoasis.com/forum/real-estate/state-of-the-cre-debt-markets?customgpt=1, Loan Terms, S&T vs Capital Markets Long-Term, Is there an ideal spread between Unlevered and Levered IRRs?
Fixed rate market is non-existent for office atm and practically only available for large SASB level transactions on the hotel side.
Office loans are just hard to price right now, since there's no one really lending in the space. Stabilized (going-in 10+% DYs) hospitality spreads are starting to tighten as debt funds are feeling pressure to deploy, can get pricing in the low-mid 300s over for quality product.
What would you wager true bridge pricing is today for hotels, coming out of a construction loan, needing 2-3 years of ramp up in order to prove out the NOI? Assuming debt funds are solving to a stabilized DY metric, assuming the market cap for the asset at stabilization is a 7.5% cap, is there a rule of thumb for where the DY should be relative to cap rate? Obviously a 15% DY would imply that loan is going to be 50% of stabilized value, which seems reasonable.
Thoughts?
going to depend on quality of sponsorship as it relates to interest/carry guarantees, but likely starting in mid 400 range for true bridge.
We have done several office/hotel conduit loans in the last few months. Just signed up a very nice hotel in South Carolina at 195 spread over treasuries. conduit CMBS is best option for office/hotels. Probably only option for office.
I’d highly advise against encumbering a hotel with CMBS debt. Most hotel owners are well capitalized and sophisticated, so using CMBS to finance and execute any strategy other than a stabilized long-term hold will likely suppress value when a subsequent buyer wants to structure their own capital stack.
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