Q&A: Lending In NYC With Eastern Consolidated's Jonathan Aghravi
Lending in the Big Apple is as stable as ever, but the factors at play are shifting. Bisnow chatted with Eastern Consolidated managing director Jonathan Aghravi to grapple with the past, present and future of lending in the Big Apple.
Bisnow: What is the current lending environment for commercial real estate?
Aghravi: The current lending environment remains healthy for high-quality projects. Prime, stabilized, cash-flowing assets at low leverage levels continue to achieve excellent long-term financing solutions from banks, life companies, agencies and conduits. However, since the middle of 2016, we have seen tighter underwriting standards as many traditional lenders have taken a more cautious approach to deploying capital, particularly for construction projects and hospitality assets.
This trend has forced less established borrowers, and those seeking financing solutions for heavy value-add and transitional assets, to turn to alternative funding sources at higher yields and lower leverage. Eastern Consolidated has worked creatively to both navigate the new criteria demands in the traditional funding environment and tap into these alternative sources to develop optimal solutions for our clients.
Bisnow: How have banks and other lenders changed their lending standards?
Aghravi: As banks become more discerning in their lending appetite, it is critical to stay ahead of these shifts in capital when placing deals. In the face of increased base rates, banking regulations and concerns of oversupply, lenders are taking a step back and looking at deals more conservatively with a primary focus on sponsor quality.
Many lenders have turned off the spigot for new development business, preserving capital for existing borrowers. In the past, regional banks outpriced the agencies and conduits on mixed-use and multifamily assets in prime NYC markets. But thus far in 2017, these regional players have become a lot more selective. For larger, lower-leverage deals, the major banks and insurance companies continue to have a competitive advantage.
Additionally, there are still a number of foreign banks and a tremendous influx of new private lenders, which are not subjected to the same banking regulations, actively competing for such loans. We’re finding creative ways to get deals financed and identifying new lenders that are interested in funding specific asset classes.
Bisnow: Are there lenders actively providing construction loans?
Aghravi: Yes, but very selectively, based on the quality of the transaction and strength of the sponsor. We’re fortunate to have established excellent relationships with banks and private lending institutions that have available capital for construction financing. As a result, we currently have a number of construction loans in our pipeline. These lenders underwrite a transaction’s risk in part by evaluating the developer’s level of experience, balance sheet, portfolio, net worth, overall liquidity and cash flow.
These same banks have reduced their lending exposure by setting maximum leverage limits at 50% to 55% of total project costs, as compared to offering 65% of costs or greater six to 18 months prior. In order to bridge the gap in proceeds, borrowers are now engaging fund providers for subordinate capital. In most cases, senior lenders view mezzanine lenders’ participation in the capital stack as a credit-positive.
Many mezzanine lending groups are experienced investors and operators, which provides an added layer of protection to the senior lender and ensures the completion of the project should it run into difficulty.
We've seen this trend in a handful of our recently closed construction loans whereby we secured a senior loan and identified a mezzanine lender to push proceeds to meet our client’s leverage requirements.
Bisnow: What pricing trends have you seen on deals your team is actively marketing or recently closed?
Aghravi: Index rates have increased significantly since the election, however, borrowers are still able to lock in favorable fixed-rate terms. Since the beginning of the year, we have successfully locked in a number of 10-year facilities for multifamily assets with all-in interest rates of approximately 4%. The Fed raised its benchmark Fed Funds rate in December and indicated there may be additional rate bumps in 2017 if the economy continues to strengthen and the job market continues to tighten.
Since the election in November, the 10-year Treasury rate has risen to nearly 2.5%, an increase of approximately 100 basis points over 2016 lows. While some lenders are still calibrating their strategy in a rising rate environment, many traditional lending sources continue to provide favorable terms on stabilized low-leverage assets by keeping spreads tight.
Bisnow: Where will Eastern Consolidated’s Capital Advisory group be most competitive moving forward?
Aghravi: Last year, our team closed or put into contract over $1B of financings, including permanent, refinance, bridge, acquisition and construction loans across all property types. We are already projecting 2017 to be just as active, as we have closed several loans and have signed up others, including many construction projects.
As in past years, we’re processing many requests to finance multifamily, mixed-use and office acquisitions and refinances, given the continued strength in the market and the long-term orientation of many of our borrowers. We’re continuing to work with regional banks, agencies and conduits that have been active in the New York City area historically, but are also expanding our network to include international banks and private debt funds seeking to enter or expand their presence in the U.S. and put their capital to work.
Additionally, we’re working with several life companies that have exhibited the most competitive pricing and loan terms on lower leverage requests. It’s no secret that the lending market has been strong over the past 24 to 36 months, and with increased rates still plotting below the 10-year average, we believe lending activity will remain strong through year-end.
While many of our industry peers have mentioned a fear that higher interest rates will impact the amount of lending activity in 2017, we believe it will motivate a large number of longer-term borrowers to act now and benefit from locking in today’s fixed rates over the next seven to 10 years prior to further rate increases.
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