Commercial/Multifamily Financing Update - May 12, 2023

Articles of Interest:

Please see many resources and publications?below intended to provide perspective on the evolving situation, as well as implications for the real estate industry.

Debt Market Sentiment

With CBRE's nationwide?proprietary data sharing system we are able to keep?a pulse on the everchanging debt market.

Short term, fixed rate programs with prepayment flexibility are in high demand. That said, lenders are in spread/rate discovery given the quick move.

Fed Watch: Currently, the odds for a 25bps rate hike?from the FOMC per the CME Fedwatch Tool is only 7.2%. Even though Powell said the Fed will continue to monitor data to determine if more rate hikes are needed, expectations?are for rates to hold steady.

Life Companies?have been quoting rates between?4.95% to 5.90%?for leverage 65% or less. Rates vary widely due to the large range in rate floors being applied. Life Company?spreads are around 180-220bps for most deals. Most are still 60% or less for best pricing. Some Life companies are still pushing debt yields and in-place coverages below 1.20x for value-add deals toward a higher stabilized DSCR, however most are sizing to an actual 1.25x DSCR in-place for core and core-plus deals.?

Banks have really pulled back the last month. That said, we are seeing?quotes in the?5.95-6.25% range?for deals with steady collections and a strong tenant mix. Banks on their fixed rate programs for core deals are 3, 5, and 7-year fixed rates with a step-down prepay. Floating rate options are around 275-350bps + SOFR. There continues to be a flight to quality and most lenders have reduced their target LTV’s by 5% to 10%. Deposits matter, relationships matter. Deposits and existing relationships are meaningful to attract better interest.

Debt Funds?are starting to see more opportunity as pricing is finally starting to come in with SOFR steadily increasing. Most are around 60-70% loan-to-cost with primary focus on stabilized debt yield and in-place cash flow. You can expect to see spreads range between?290-400 bps?over?SOFR.

CMBS?prefer 10-year terms as 7- and 5-year terms are more difficult to price. CMBS spreads have come in over the last few weeks.?We have?seen?rates?around 6.25-6.75%?depending on lean size, quality, property type and debt yield. Loan terms are anywhere from 5- to 10-years, fixed rate, up to 75% LTV and often full term IO.?

Agencies:?Fannie and Freddie continue to compete strongly on heavy mission business, especially on properties with 5-50 units. 2023 caps will be difficult to achieve, and they will have tough competition on class A deals.?Overall, Agency pricing is around?5.05-5.50%.

Our team is here to help you navigate financing options and provide color on what we are seeing in today's market.

CBRE U.S. Construction Market Trends & Outlook

Despite easing supply chain conditions and weakening economic fundamentals, the U.S. construction industry still faces significant pressure on costs in 2023. After a tumultuous environment following the onset of COVID 19, prices for labor and key materials spiked due to intense labor shortages and global supply chain disruptions. Rising demand for new construction across many asset classes added fuel to rising construction costs.

San Diego Key Takeaways

• Construction costs in the San Diego market scaled sooner than many other markets because construction activity ramped up in late 2020 and into 2021 before most markets saw a construction boom. Activity in San Diego leveled off in 2022 and the market ended the year with the slowest year over year change in NBCI. Since the end of 2019, however, costs have grown more than the average market.
• Though activity has slowed, several large and transformative projects are underway. One such project is IQHQ's Research and Development District (RaDD) which is underway on San Diego's Bayfront. The $1.6-billion project will be the first dedicated life science campus in Downtown San Diego, and it is the largest urban commercial waterfront site on California's Pacific coast.?A 372,000 sq. ft. headquarters for the U.S. Navy was delivered on the site in 2020 by Manchester Financial Group, but the new lab/office portions will be delivered by IQHQ in late 2023/early 2024 and will add 1.7 million sq. ft. across five buildings (with some ground floor retail).
• Life sciences/office is very active in the San Diego market. Another massive Downtown project will have a life science component mixed with creative office and retail. The Campus at Horton is a repositioning of a former mall in the heart of Downtown San Diego and will include 410,000 sq. ft. of lab/office mix, 205,000 sq. ft. of creative office and 108,000 sq. ft. of retail across three buildings. It is expected to deliver in Q4 2023. At the end of 2022, Longfellow Real Estate Partners broke ground on a 316,000 sq. ft. lab facility in Sorrento Mesa called BioTerra. The project is expected to deliver in late 2024.
• Though not a focus of this report, the largest construction project by far in San Diego is the $2.7 billion renovation of Terminal 1 at the San Diego International Airport, which will consume considerable builder resources through its completion in 2028.?

Historical Cap Pricing

The chart below illustrates how cap pricing has changed over the past 2 years.?

Podcast: "The Weekly Take"

Today's Rate Snapshot:

PER CHATHAM FINANCIAL

USD LIBOR and SOFR Forward Curves

Indicative Rate Cap Pricing for Agency ARMs

For More Information, Please Contact:

Bill Chiles | Vice Chairman | +1 858 646 4735 | [email protected]

Scott Peterson | Vice Chairman | +1 858 546 4607 | [email protected]

Mark McGovern | Institutional Group | +1 858 546 4662 | [email protected]

Brian Cruz | Vice President | +1 763 512 2923 | [email protected]

Morgon Fraser | Senior Analyst | +1 858 646 4713 | [email protected]

Colby Matzke | Senior Analyst | +1 858 646 4784 | [email protected]