State of the CRE Debt Markets
For all the borrowers, lenders, and brokers out there, how have the debt markets looked throughout COVID? I'm an associate focusing on Agency/CMBS and some balance sheet lending and was curious how competitive we have been. On the agency front, we've been locking a number of deals sub 3.00% and had one as low as 2.50% all in (that one was green). Are people seeing that from other brokers/lenders?
Also curious what the CMBS market has looked like. We're starting to open back up and our quoted rates range from the low - high 3.00%, but didn't know if that is competitive with what other desks are quoting since agency rates are so low right now.
Also wanted to know how aggressive balance sheet lenders have been. I assume not very?
Thanks for the replies all.
Had to switch from CMBS to Freddie when COVID hit my firm.
We've seen CMBS deals come in and we are extremely selective (of course), but I think we have soft-quoted a few at high 3's, maybe even low 4's but have not issued any term sheets yet. Tbh, I don't think my boss knows where the market even is.
On the Freddie side (this is strictly SBL for me), we are continuing to get deals in and close. Most of them are under app at mid to low 3's (10 year fixed and hybrid), yet it depends on location. For example, we're about to close on an apartment in Brooklyn, 10-year fixed at 3.57%. Still can get up to 80% LTV in top markets with solid pricing, so that has helped us continue to bring in fees.
What type of shop do you work for?
Debt fund/direct lender
We have a couple funds, as well as a Freddie SBL license
NYC?
Does it matter?
Mid-sized sponsor/operator here. Most of our lenders have really tightened. The difference in attitude from the AM on the debt side is striking. Whereas before there was generally some leeway approving leases, funding, etc., now everything is being enforced to the letter of the loan agreement.
On the origination side, regional banks are pretty active but they generally require some recourse and substantial reserves. There is less activity on the higher end of the spectrum, as I think there is a lot uncertainty on the syndication side right now. On office deals, we are seeing L+250/300 with a 1.0% LIBOR floor.
Our AM team is on the exact same stuff. Literally following only what the loan agreement states. We've officially cut off mezz deals from our fund too.
I would echo what you said here. I work for a big 3 brokerage on a national coverage team for context and we've seen the big banks tighten up considerably focusing on existing clients on a selective basis and regionals have stepped in to the fill the gap. With that comes higher pricing, punitive reserves, and some level of recourse depending on sponsor. 1.0% LIBOR floors across the board.
Balance sheet lender on the institutional side here. L+250-300 bps is spot on and 100 bps Libor floor is the ask, but you can negotiate it down to 50-75 bps which seems to be where the market is.
From what I've seen, Agency (non-SBL) has been the most aggressive lending. We have some Life Cos that have been pricing in the high 2s but at lower leverage than Agency. However I think at this point, pricing is at record lows. We recently priced a spec industrial deal at 3.5% during construction and 3% at perm locked PRE-CONSTRUCTION as a 10 year deal.
The most competitive product that one of correspondents currently has which competes favorably with Agency and has been doing well for non-multi and smaller deal sizes goes as follows: Max Leverage: ~60-65% (based on a number of metrics which are deal and market specific) Pricing: 2.85%-3.00% Amortization: 30 years with 4-5 years of IO Prepay (for a 10 year): 4,3,2,1,open* (If rates go down, there is a variable prepay which is effectively capped at .5% unless we start to see negative interest rates)
I do all balance sheet underwriting and most of our deals are hybrids at mid to low 3s. Pretty heavy deal flow even through covid, lowest rates I've seen recently is around 3.05 for some multis in Brooklyn. Office or retail space is usually around 3.375ish.
Can anyone shed light on agency versus CMBS in terms of loan provisions and rates? What’s the index usually for both types?
Is one preferable over the other? I heard that CMBS is a nightmare to deal with and desperate owners only go the CMBS route - or is that not true?
Also what would agencies require for a loan? Stricter standards?
A full answer to your questions would be very long so I will drop a few highlights. Obviously Agency only deals with multifamily while CMBS deals with all property types. Rates and terms such as leverage really depend on timing in the market. In our currently low cap rate environment, the constraint for CMBS seems to be hinging on Debt Yield and DSCR for Agency. Lately we have been seeing higher leverage and much lower rates for Agency than CMBS with Agency rates below 3% and CMBS closer to the mid 3s. Typically it is easier to obtain IO from CMBS than Agency although during the past couple of years Agency has been flexible on IO and this has become more moot. CMBS typically prices over swaps while Agency prices over T-bills. There is much more flexibility in Agency product such as floating rate money and not having to pay a ~50bp premium to do a 5 year deal. Prepayment is Defeasance vs. Yield Maintenance which typically function and amount to be about the same. A large advantage of Agency is early rate lock which you really can't do in CMBS without purchasing a hedge. There is better servicing in Agency since those loans are typically serviced by the originator's company rather than a third party and there is more flexibility in terms of remedies such as supplementals etc.
At the moment, unless there is a special circumstance that prevents a multi deal from going Agency, I wouldn't even consider CMBS.
Cannot emphasize this point enough. Quality of servicing is so important and I've such a bad experience with CMBS, Not in the multi space, but I am inclined to avoid CMBS based on servicing alone.
I work in the CRE CLO space and we are expecting decent prepays from multistory as a result in the agency rate drop
@CRESEA this is a great and thorough response. Thank you!
SFR paper is super hot rn
Heard about a 2.35% quote for a Fannie deal earlier this week. Top sponsor, 65% LTV, full term IO, and a green waiver to get through the pricing floor. Hard to fuck up with debt that cheap...
Probably an accurate quote. Fannie has 90bps UST floors and Freddie has 50-55bps UST floors. Both are closing deals around 150-200bps over the index for most deals. Some deals (like yours with a great sponsor) would get more favorable quoting.
I cannot possibly understand how one would got the CMBS route in the past five years but that is neither here nor there.
The lending environment has been extremely challenging and at the forefront of discussions on new opportunities
Banks - reluctant to go long without recourse. Mostly seeking to do 2-3 bridge type deals given the level of uncertainty. I have been told that barring any unique circumstances, new sponsors are a non-starter. It is about relationship lending at the moment. In terms of product, multi-family and industrial are in the strike zone. Generally speaking, this is not a time when guys are out trying to extend loans, the banks are on defense. Rates are L + 250 - 400 depending on product. with a 1% libor floor that is seemingly non-negotiable. interesting someone on the thread mentioned it is. I'll give it a whirl.
Lifeco: similar to above, industrial and MF are the in the strike zone. Larger portfolios are the preference to spread the risk and not concentrate in any particular MSA. Surprisingly competitive in the construction to perm space on spec development.
Care to share which Life Cos you've seen are are most competitive on Construct-Perm? I've noticed some are super selective on construction but others are going full steam ahead.
New York Life has been surprisingly active.
Can you shed light on the nuances of construction to perm loans and how earn outs work?
How do banks issue perm loans if the building is going through stabilization?
Also especially during these Covid market conditions at a slower lease up?
Unsure of nuances. I may be able to provide some info in coming weeks as we solicit for debt.
Generally earnouts work best when a sponsor has a solid balance sheet and when a project has a strong enough upside. For example, if the construction loan is capped to 60% LTC and the proforma indicates that upon stabilization it will be a 40% LTV deal. The earnouts could be pre-determined that upon hitting certain metrics, the sponsor has the ability to borrow up to for example 65% LTV assuming that 1.35x DSCR is achieved. This way the sponsor is incentivized to stay with their construction lender.
In terms of perm loans through stabilization, if it's a bank, it is typically achieved through a swap and some compensatory deposits. The bank would receive floating rate money either way and have additional cash collateral to be able to lockbox in case the project royally misses its proforma (kinda like Freddie's Covid reserve).
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