Commercial/Multifamily Financing Update

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

• U.S. Real Estate Market Outlook 2024:?There is an increased chance that the U.S. will avoid a recession and achieve a soft economic landing in 2024, but economic growth will slow and downside risks are elevated.?Read More
• Land-Constrained Logistics Markets Remain Best-Positioned Amid Heightened Risks:?Land-constrained markets, such as Miami and Southern California, are best-positioned for a potential downturn in the U.S. economy.??Read More
• North American Cargo Volumes Continue to Normalize: Container volume is returning to pre-pandemic levels at most major ports, after last year’s record highs, as producers increased inventory to meet strong consumer demand.?Read More

• The Shifting Landscape of Headquarters Relocations: The past five years have been an active period for HQ relocations, with 465 such moves identified since 2018. However, relocations appear to have peaked at 137 announcements in 2021 and have trended down since then.?Read More

Debt Market Sentiment

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

The?10-year Treasury has broken 4% and currently sits at 3.92%!?This is down over 105bps since hitting 5% at the end of October. Less than two months later, expectations are now that the Fed will start cuts in March.

Fed Watch: As expected, the Fed held rates at 5.25-5.50% during yesterday's meeting. From the bond market, there is currently a 64% chance the Fed cuts in March. The market is pricing in six cuts next year. CBRE's house view is that the Fed will reduce rates by 100 bps to a range of 4.25% to 4.50%.?Odds off a rate cut from the FOMC can be tracked on the?CME Fedwatch Tool. Read More on the Federal Reserve policy makers stance?HERE.? We are utilizing buy-downs with lenders to reduce rates further than the below.?

Life Companies?have been quoting rates between?5.60% to 6.10%?for leverage 65% or less. Five year money is becoming harder to come by as LifeCos are getting full in this bucket. We?have also seen life companies increase their minimum loan amounts?as they have less capital to deploy.?Rates vary widely due to the large range in rate floors being applied. Life Company?spreads are around 175-225bps 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 continue to be more conservative when evaluating deals. Stress testing, Fed Audits and proactive asset management is taking up majority of their time. That said, we are seeing?quotes in the 6.00-6.50% 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 and existing relationships are meaningful to attract better interest.

Debt Funds?are looking to be more active. Leverage?is around 60-70% loan-to-cost with primary focus on stabilized debt yield and in-place cash flow or lease up deals for multifamily or industrial product types. You can expect to see spreads range between?295-425?bps?over?SOFR. On the multifamily side, many groups are actively pursuing preferred equity positions behind agency senior loans.?

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 6.50-7.50%?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. The FHFA announced the volume caps for the GSEs in 2024 will be $70M each. Although down from the $75M cap in 2023, this does not raise concerns due to 2023 GSE business volume falling short of the caps.?

Fannie Mae business volume through October is $45.7B compared to $57.4B last year.?Freddie Mac new business volume is at $55B YTD compared to $66B in?2022. Freddie 5-year loans are $15B of production this year vs. $2B normally. 35-year Amortization loans are still available up to 70% LTV with mission, no cash out and 65% with cash out. Deals with significant mission are warranting competitive pricing in the mid-100s spread.

Overall, Agency pricing is around?5.60-6.00%. Rate buydowns are becoming a more effective alternative for borrowers given the current environment driven by volatile benchmarks. With a buydown, rates can drop to as low as 5.10-5.85%.

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

2023–2024 CBRE Global Workplace & Occupancy Insights

The 2023-2024 Global Workplace & Occupancy Insights report summarizes three years of office benchmarking and client sentiment surveys to identify how CBRE clients are creating efficient portfolios and effective work experiences in the wake of the pandemic. The report examines global data from select CBRE clients representing 350 million sq. ft./32 million sq. m. and breaks down insights by portfolio size and geography. The report explores trends across major office occupiers and offers insights for any organization considering how the workplace can support the business’ needs and cultural objectives.

Key Takeaways

Over the last three years, hybrid work has driven portfolio optimization. The broad adoption of hybrid work has led to portfolio reductions and enabled planning efficiencies, including a?22%?decrease in the average square foot per person globally and a?28%?increase in?occupancy rates, which measure the allocation of people to seats. Organizations have increased space-sharing?30%?and adapted to support hybrid work styles by increasing collaboration spaces by?44%?globally since 2021. While?45%?of participants have policies requiring employees be in the office three or more days per week, less than?4%?consistently implement consequences for not following policy.

Today, despite these efficiencies, there is still an imbalance of space supply and demand. Despite these planning improvements and hybrid workplace policies, office space?utilization rates, which measure the actual use of space, remain under?40%, a?45%?decrease from the pre-pandemic global average of?64%. This suggests that office attendance has plateaued, exposing an imbalance of space supply and demand that will not simply resolve itself without purposeful action such as well-communicated changes to hybrid policy, workplace experience improvements that attract more employees to the office or further reductions in portfolio size.

Moving forward, portfolio optimization and new performance metrics will make the workplace more efficient and effective. To address the imbalance of space supply and demand, most organizations are increasing space-sharing and prioritizing portfolio optimization, with?43%?planning to decrease their portfolio size by more than?30%?in the next three years. Along the way, corporate real estate (CRE) leaders will be tasked with making the overall workplace experience more effective in supporting the organization’s business and cultural goals. This will require a new scorecard that partners CRE with HR, Finance and IT to track the workplace’s impact on employee performance, operational priorities, financial goals and ESG objectives. To prepare for this new level of data sharing and collaboration, CRE teams plan to increase the use of micro level utilization data gathered through sensors and Wi-Fi/network activity to measure employee workstyles, reduce occupancy costs per visit and enable dynamic building management.

Click HERE to Read the Viewpoint

Historical Cap Pricing

The chart below illustrates how cap pricing has changed over the past 2 years. Cap costs are dropping with the T2 decreasing ~26 basis points.?

Podcast:? "The Weekly Take"

Investment strategies for mixed-use environments

Spencer Levy's?podcast this week features Sondra Wenger?to discuss investing and developing mixed-use communities. Mixed-use real estate can be thought of as several discrete projects—executed in parallel—within a block-by-block area, to create a whole that’s greater than the sum of its parts.

LISTEN NOW

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]