State of Market Discussion
Hi all,
Wanted to see how everyone's pipeline is doing this summer. Would be great if you could share what you're seeing out in the market as well as give your professional background for context. I'll go first.
Debt placement, US nationwide, mostly multi, $40-80M+ average deal size
- Sales pipeline has slowed way down, deals that were signed up months ago are either being retraded or getting walked away from, very few are closing as-is
- most deals being closed right now are either rehab/value-add deals or new construction lease-up. Very few core/core-plus deals with older vintages. Lenders aren't believing the rent growth story anymore, the debts just not there
- Lenders have shifted their acceptable metrics requirements, LTC down 5% for every lender type, going-in & exit DYs up 100 bps, and really it's a matter of sizing to a 1.25x DSCR on a stressed constant (usually 5.75%/30-year), on exit
MF and SFHR lender
3-5 deals a week, down a bit
Loan sizes vary, but borrower is mainly bigger PM, REPEs, borrowers, ex. MF1/Rialto, doing about 100-150m a week. We do then go through like 2 weeks slumps with 1-2 deals only then a 3-4 week period of 3-5 deals a week.
Very inconsistent and volatile. From the brokers out there they still say every deal is being shopped hard but rarely are LifeCo or BNY touching them right now.
Does seem the bigger borrowers are just adjusting and waiting to see were rates will flush out to as a norm and then regardless will jump back in.
Multinational developer - still getting hammered on construction costs, lenders are sizing predominantly on DSCR now instead of LTV/LTC with outrageous floors so also getting hammered on financing. Bad times all around. We're looking to pivot to a more acquisitive strategy in the mid-term.
I feel this
Your constant is 5.75% or your rate is 5.75%?
rate - banks are using that as a "stressed" rate DSCR test for stabilized NOI, needs to cover at 1.25x or 8.75% DY equivalent. sometimes lower, like 5.25%.
I put stressed in quotes because honestly it doesn't feel all that stressed
My bank has raised internal stresses rates from 5.25% to 6.00% this year, so currently underwriting against a 7.19% mortgage constant (assuming 30yr am). Has definitely made it much harder for deals to pencil.
You wrote constant, as in debt constant. I was asking for clarification on whether the 5.75% is the debt constant you are using or did you mean interest rate. A debt constant and interest rate are two different things.
A debt constant of 5.75% on a 30 year am is an implied interest rate of 3.95%
National Office Investor/Operator - Focused on institutional deal sizes ($150mm+) in major MSAs. My first couple bullets are purely what we're seeing in the office space but candidly, many of the below points are relevant across asset classes. Curious to hear what others are seeing. Things definitely aren't great but we're hanging in there. Ultimately, office operators in the trophy/AAA space will do just fine as the space has really become a tale of two cities.
Thanks, this is super insightful
Helpful. I’d agree w these points. Many debt funds/lenders I’m familiar with are effectively out on office … for foreseeable future… many have been for couple months now. Shits even trashed in securitized mkt (albeit shit across the board rn). Hate the expression but “flight to quality”… the last couples years a few decent sized funds (sure some know a few), pushed into call it secondary office markets / low cost alternative assets vs the trophy buildings (thesis being: “good” basis, folks moving out of gateway cities, LA/SF/NYC are cesspools, can offer 50% discount rents to premium assets and deals can pencil)… thing is no wants or wants to lease these assets. These guys are fucked. Failed thesis across the board/country. I’m in a orig seat at debt fund. Most deals don’t pencils… too tight acquisitions / bid ask not adjusted enough yet, rates ripping, fucking stupid modeling assumptions, etc. Not just speaking to office but most classes. Deals still closing but earlier pipeline deals and selective new ones. Shit coming across rn is very tough. Rarely understand the equity play on most deals. Many bids/TS dying bc PSA are being terminated… they finally see it also.
great insight! thank you. Quick question - when you say 'NNN LONG TERM LEASED ASSETS are being hosed in terms of valuation what do you mean by this? retail NNN? Why so and in what way? rent escalations?
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