What ACORE, RXR And GreenOak Are Paying Attention To In CRE Finance Right Now
Every time an asset comes across ACORE Capital co-founder Warren de Haan’s desk for refinancing, he asks his team if the asset has been for sale and, if so, what the bids were.
“We know that sellers are sticky on their prices and are holding out … many of them are looking to the financing markets to get higher leverage loans and return a bunch of their equity, instead of selling the properties at a lower price,” said de Haan, who is speaking at Bisnow's National Finance Summit Sept. 6 in Midtown Manhattan.
“It’s a cautionary note to lenders that we need to be cautious around whether or not an asset has been up for sale, and that if we really are financing at 75% — is it 75% of the true value as opposed to 75% of what an appraiser might say?" de Haan said.
Across the United States, assets are priced high and a delta between buyers and sellers is slowing down deals. Meanwhile, there is ongoing uncertainty about how much a pullback in Chinese capital and increasing interest rates are going to impact the market.
Bisnow spoke to some of the biggest players in real estate financing about the issues in the market right now.
Equity Players Still Covet the Debt Space
RXR Realty Managing Partner and President Michael Maturo: The banks are still somewhat restricted by regulation so they've kind of contracted on their lending criteria. They've pulled back pretty substantially on their construction lending, particularly with for-sale housing. So there needs to be a replacement for that. Since the equity markets are not generating a lot of transaction activity, there's more activity in the lending market.
Moinian Capital Partners Managing Director Jonathan Chassin: [Private equity firms] have always been there. I think what's somewhat new is that there's a lot of smaller firms that have raised smaller amounts of money that are in this space now. It's a function of where we are in the cycle.
ACORE Capital Founder and Managing Partner Warren de Haan: There have been a number of private equity-oriented shops enter the debt lending spaces. It’s a very interesting, defensive way to deploy capital towards the end of — if we are coming towards — the end of the cycle.
Will we see a bunch more entrants? I don’t know that we will. I think we’ve seen the majority of entrants enter the space already. We may see a couple more around the edges join but most of the guys who were going to join, for the most part, have joined already. If you look at the big equity shops they are already playing in some way, shape or form in the debt space.
Interest Rates Are Rising, But Their Impact Is Not
Harbor Group International CEO Jordan Slone: If we look at where the 10-year Treasury was about a year ago, let's say last September, the 10-year Treasury was somewhere in the 2.3 range. As of this minute, the 10-year Treasury is at 2.84, so we've gone up 54 or 55 basis points. However, a couple months ago, everybody was saying that we are heading toward 3.5. The 10-year Treasury actually for a little while went over 3.
But now it's settled back in. Spreads have also come in, so the overall effect on the increase in Treasuries has not been dramatic and has not necessarily had a significant impact to the market.
de Haan: The buyers of real estate are pausing and being as thoughtful as they can about the correlation between rising interest rates and rising cap rates and the impact on value. Our clients don’t think cap rates are going to compress any further. If they think anything, they think cap rates are going to widen.
Maturo: Leverage around the market is probably around 60% or so. The leverage returns are obviously higher because the debt pricing is lower. That gets you to a levered return of between 8 and 9%. And those are the numbers that I think people are looking at now and trying to calibrate where interest rates are going. And that's causing a little bit of an unsettled market in terms of where people are pricing the returns.
RFR Chief Investment Officer Mark Weiss: I think the stability of spreads, you see the 10-year Treasury has really stayed in a band, for the last three months, of 2.8% to 3%, and you've seen spreads on the CMBS side relatively stable.
So it hasn't been a hiccup in the market, which sometimes forces lenders to sit on the sidelines. There's a tremendous amount of money raised from debt funds. And so for the mezzanine perspective, spreads have probably come in 100 or 200 basis points in the last several months. That's simply because there's so much money chasing fewer deals.
It's A Good Time To Be A Lender, But Borrowing Isn’t Bad Either
Weiss: If you are a tiny first-time developer, looking to do a condo deal in not the perfect location, you struggle to get financing. But you still probably can. It's a leverage question. The market is still wide open.
de Haan: We are very long into the cycle. Looking at historical patterns, we would think we are in the later stage of the cycle. However, fundamentals continue to remain strong across the assets types. Supply is generally in check in most markets. Retail is the outlier in terms of the demand patterns. Fundamentally, the other food groups are looking very stable. Folks are not expecting to see big, hockey stick-like returns. Upside expectations have been moderated to adjust for the flows of capital and where we are in the cycle.
Chassin: The economy is doing well, I think certain aspects of the commercial real estate market have a seen a dip. We went through, at least in New York and across the country, we saw hotels take a dip as the various markets absorbed new supply. We are starting to see that improve. Hotels are increasing rates this year for the first time in a few years. [But] we are obviously seeing a significant glut in the condo market … There is a decent number of deals coming out of the investment sale market as people capitulate really to newer prices. It's still not anywhere where it was a couple of years ago.
GreenOak Real Estate Founder Sonny Kalsi: I think we continue to have a positive view overall on places like Los Angeles and New York City because of job growth. Our view is that asset prices are down somewhere between 10 and 20%, and some asset classes down more.
Slone: Apartments are still very much in demand. Industrial is actually an asset class that is gaining popularity, with e-commerce having a big impact on the industrial sector. I would say those [are the] two main asset classes that are in demand today. There is less appetite in retail, that's for sure. And I would say office is steady.
I think there are some people that are really focusing on the secondary markets, because cap rates are a little higher in the secondary markets. I would say primarily for the last couple of years, when some of the major markets like New York, Washington, D.C., Atlanta and San Francisco have extremely low cap rates that a lot investors have started to look elsewhere.
China’s Pullback Has Left Its Mark
Maturo: There is no outlier bid in the market right now. So there's nobody in the market that is really driving pricing. We've seen over the last five, six or seven years a number of foreign buyers [like from China or other Asian countries] that were that outlier bidder that was keeping pricing above those levels. That's come out of the market. So there's nobody really driving pricing in the market right now. There is not a lot [of] trading going on in the market. The bid-ask spread between buyer and seller is still pretty wide.
Weiss: You don't see a tremendous amount of office buildings on the market right now, and that's because a lot of buildings have traded. When you think of New York, there's still a tremendous amount of foreign capital coming in. Obviously there's been a lot of articles written about China capital, which is drying up. But there's still a tremendous amount of capital coming in.
Kalsi: This year, and the last couple of years, have been the market low in terms of transaction volume. 2015 was an excessive year. There was so much foreign capital that’s not there now. [Going forward] the market [is going to] find a higher degree of equilibrium in terms of transaction activity.