Real Estate Finance: Shutdown – Restart – Pause – Reopen – Stop – GO!
By now we’re all used to the whipsaw effects of pandemic life. It seems every day we encounter a new set of rules, a shifting of the playing field, a new normal.
The very same can be said about today’s commercial real estate finance market as well. We’re in “unprecedented” times with interest rates for many loans at truly record lows. But low rates are only a very small part of the story. What we’re finding is, like pandemic life, the rules of the commercial real estate finance space are constantly adjusting. It’s one of the most dynamic markets we at Slatt have ever experienced.
Take the Agency lending space as an example. Last year starting in April, Fannie and Freddie issued new loan origination guidance that required payment reserves, more conservative underwriting, and higher loan spreads on most loans. Because the multifamily loan market is currently highly liquid and fairly efficient, these actions effectively slowed Agency loan originations down to a trickle while brokers and borrowers shifted their attention elsewhere. The Agencies continued to adjust their pricing and structure after the 2021 caps took effect, and their more “mission focus” on affordable units has continued to shift gateway market and Class-A apartment origination to other capital sources such as regional and national banks, debt funds and CLOs, CMBS lenders, and life insurance companies. In response to the flood of new business, those capital sources became much more aggressive on pricing and structuring loans for apartments, and ever since it’s been a constant give/take between the agencies and non-agency lenders for market share. It seems at least every two weeks we hear of another fundamental shift in appetite for these usually much more stoic capital sources.
The same sort of effects are being seen throughout our business. Retail financing is more difficult, yet grocery-anchored centers are earning record-low rates. Office product is challenging but medical office post-pandemic is the new hotness. Industrial is the latest sub-4% cap rate and sub 3% interest rate and by George, no one can get enough.
Now, with a surging delta variant, an extension of the eviction moratoriums, and the likelihood of a smooth reopening of the economy less certain every day, it’s likely these “waves” of change are going to continue. Time to suit up, hit the sand, and hire a surf coach (that’s us) to help you tackle the wildest surge in a lifetime.