Lenders ‘Chasing Every Dollar’ As Capital Markets Open Up In Houston
A lack of deal flow and a need to mitigate risk are forcing lenders to offer attractive terms while keeping a close eye on structure.
The debt market is very liquid and balanced right now, with banks, insurance companies, CMBS and private credit vehicles all making funds available. That leaves them chasing after the few worthwhile deals looking for funding, JLL Capital Markets Managing Director Michael Johnson said at Bisnow’s Houston Capital Markets & CRE Finance Event at the Omni Houston Hotel on Nov. 18.
“We're at this great moment in time,” Johnson said. “There's really $4 or $5 chasing every dollar available in the marketplace.”
This has forced lenders to get granular and creative to secure deals while also ensuring they still pencil, event panelists said. Debt sources are requiring significant preleasing and equity to fund a project, but they’re willing to modify loans and adjust terms for established clients.
JLL Capital Markets has seen a 55% increase in year-to-date activity compared to the year prior, Johnson said, adding that debt sources are very balanced with no one source making up more than 30% of capital.
Banks have made up 28% of JLL's funding, he said. Banks funded about 38% of commercial real estate deals nationally this year after spending the past year cleaning their books of underperforming debt.
Since deals can be compelling for banks, insurance companies, private credit and CMBS to all chase, lenders are finding ways to differentiate themselves, Johnson said. That can be done economically, like through spread compression, or structurally, like allowing for interest-only payments.
But lenders are still strictly managing risk.
IBC Bank Houston has seen its dollar volume increase this year, though the number of transactions is down, CEO Jeff Samples said. That means it is underwriting large deals, like a $255M construction loan for the St. Regis-branded condominium project near Memorial Park.
“What we're requiring there are significant presales, if it's a sale, or preleasing, if it's any type of retail,” Samples said.
Development firm Levcor is helping to mitigate risk by using more conservative leverage, President Justin Levine said. Loan-to-cost ratios were historically in the 70% to 75% range, but they’re now in the 65% to 70% range, he said.
“That's just a function of math … and what the banks require,” Levine said. “We're also being more concerned with our pro formas, and in communicating it to investors, making sure to underpromise and overdeliver.”
It may now be harder to secure the equity needed to fund a project, but it’s possible, said Toby Kettle of Lee & Associates-Houston. It used to take one or two phone calls to secure equity from a life insurance company or the like, but now he finds himself looking under many more rocks.
Many family offices or high net worth individuals have been on the sidelines for years, Kettle said.
“We're starting to make those calls saying, ‘Hey look, we've got a great project here. We've got a great developer. Everything's working out. We need $5M, $7M, whatever it is,’” he said.
This can help complete the capital stack, making it worth the extra work.
“At the end of the day, we're trying to make the returns for the investor, for the developer, and as long as it pencils out, we’ll make it happen,” Kettle said.
With tariffs, interest rates and other economic factors rapidly changing, Samples finds himself taking a loan back in for modification almost every month. This can happen six months after a deal is signed because numbers have changed, or maybe a developer needs more time to get a project stabilized, he said.
“If they feel like they’re ahead of the curve down the road, and they can rob Peter to pay Paul and certain bills, we will entertain that,” he said. “If it makes sense, we’ll try to work with our clients.”
That isn’t something he advertises, but it is an option for established clients with a good track record, Samples said.
