Commercial real estate debt markets are starting to ease after two years of elevated interest rates, but equity is becoming harder to secure — a disconnect that panelists at Bisnow’s Denver Industrial Outlook said is holding back deal flow.

Lenders speaking at the July 30 event at Simms Technology Park in Broomfield described a noticeable uptick in financing activity, even for speculative construction, while developers said equity partners remain selective and slower to commit.

“I am seeing a fascinating misalignment in debt appetite versus equity appetite right now,” Confluent Development President Celeste Tanner said.

On a recent project in Arvada, Tanner said her team went to 20 equity partners before finding the right fit.

“Conversely, on the debt side … we ended up with 11 or 12 very qualified term sheets for the construction financing on that deal, and all great groups with solid terms,” she said.

Those term sheets included nonrecourse financing at 60% leverage — better than the company had underwritten.

Banks sidelined during the height of interest rate volatility are coming back, compressing spreads and competing for deals, Wintrust Senior Relationship Manager Jason Weimer said.

“It feels like spreads have come down to the mid-200s versus low to mid-300s,” Weimer said, adding leverage has crept up toward 60% for good sponsors.

But he also cautioned that industrial deals aren’t seeing the same movement as other asset classes, partly because “it's kind of always been a you-do-it-or-you-don't-do-it deal, specifically with a regional bank,” when it comes to spec projects.

That stance, Weimer said, reflects how little lender behavior has shifted when it comes to spec: They generally tend to take a binary approach to funding those types of projects.

Speculative development has slowed but still makes up more than half of all Denver-area construction activity, and the trend could set the stage for tighter conditions and rent growth down the line.

On the equity side, panelists pointed to slower fundraising and capital recycling as major constraints.

Investors are “turning the money slower,” Comunale Properties founder, President and Managing Partner John Comunale said. Projects that once returned capital in two years may now take twice as long — limiting new commitments even when appetite exists.

The capital gap is compounded by market perception. Tanner said some national investors are hesitant to deploy in Denver when they see the metro’s industrial availability rate reaching 10.1%.

That hasn’t stopped local and regional players from moving forward in targeted submarkets. Tanner and Comunale both said they are focusing on high-barrier-to-entry, infill locations and smaller-bay product that meets core tenant demand in the 35K SF to 40K SF range.

Still, the panelists said that without a better balance between debt and equity capital, the market will remain in a slow gear.

“Liquidity begets liquidity,” Weimer said, expressing hope that increased lending activity will “start to shake loose some equity.”