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.

• Treasury Yields Hit Highest Since 2007 on Elevated Rate Fears:?The US bond-market selloff resumed Monday, driving 10-year yields to a 16-year high, as the persistently resilient economy has investors positioning for interest rates to remain elevated even after the?Federal Reserve?winds up its hikes.?Read More
• Investment Sales Expected to Improve in H1 2024:??Despite better-than-expected economic growth in the first half of the year, concerns over the U.S. economic outlook dampened investor sentiment, according to a new report from CBRE.?Read More
• Multifamily Market Continues to Stabilize in Q2: With a rebound in absorption and an uptick in vacancy, the multifamily market displayed signs of stabilization in the second quarter, according to new research from CBRE.?Read More
• Industrial Asking Rents Hit Record High Despite Rising Vacancy:?U.S. Industrial average asking rent rose by 1.3% quarter-over-quarter and 9.9% year-over-year to a record $10.06 per sq. ft. The average taking rent increased by 16.6% year-over-year.?Read More
• Optimism Is Returning To Battle-Tested Retail Sector — But More Importantly, So Are Investors: After years of trepidation, institutional money is flowing back into retail. Crow Holdings and Lincoln Property Co. are among the prominent firms that have launched new endeavors aimed at spending billions of dollars to acquire more retail real estate.?Read More
• The U.S. Economy Faces Continued Challenges:?Recession fears have been top of mind, but an upbeat labor market, the resilient consumer, stronger-than-expected corporate earnings and falling inflation have engendered hopes from some observers of a so-called “soft landing.”?Read More
• Prime Office Rents Continue to Rise in Most Global Markets:?As A flight-to-quality trend continued to boost prime rents in most markets in Q2 2023 as occupiers sought space in the best buildings. However, economic uncertainty and hybrid working arrangements led occupiers to curb leasing activity, downsize staffing and delay decision-making.?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.

Short term, fixed rate programs with prepayment flexibility are in high demand.?Many Portfolio Lenders are getting full on short-term paper, as well as becoming more reluctant to provide flexibility given the inverted yield curve. The treasury hit a peak this week at 4.35%, the highest level in 16 years.?

Click HERE?to view CBRE's Summary of Multifamily Debt Market landscape today.?

Fed Watch: The Fed's annual Jackson Hole?Symposium kicks off today with Jerome Powell schedule to speak on Friday morning. The symposium has added significance this year given the uncertainty that still surrounds the forward path for monetary policy. With the Fed claiming to be "data-driven", it will be interesting to see how they react to easing inflation, reduced hiring and concerns of a global economic slow-down. The expectation is that the Fed will pause in the September meeting. Odds of a rate hike are only at 11.5% as of August 23rd. Futures markets are pricing in a 88.5% chance the Fed pauses in the September meeting?and a 60.9% chance they continue to pause in November. Capital markets activity will remain depressed until there is clear evidence that we have passed through the peak of the interest rate cycle. Odds off a rate hike?from the FOMC can be tracked on the?CME Fedwatch Tool.

Life Companies?have been quoting rates between?5.80% to 6.25%?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 160-225bps 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?pricing has widened recently; most groups?are 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?300-425?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 6.85-8.75%?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. Deals with significant mission are warranting competitive pricing in the mid-100s spread. Fannie Mae business volume through July is $31.1B compared to $39.2B last year. Freddie Mac new business volume is at $24.4B YTD compared to $34.8B in the first half of 2022. Overall, Agency pricing is around?5.80-6.00%. Rate buydowns are becoming a more effective alternative for borrowers given the current environment driven by volatile benchmarks.?

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

U.S. Talent Migration: The Stories Behind the Story

An analysis by CBRE Americas Consulting shows the conventional narrative that knowledge workers are abandoning high-cost major U.S. markets is not the complete story:

Summary:

• High-cost major markets still have much larger talent pools than most Sun Belt cities.
• Out-migration from high-cost major markets during the pandemic was relatively minor and has been slowing, even reversing in metro New York.
• High-cost major markets are among the preferred destinations for young tech and finance talent.

Migration’s Relative Impact on Metro Talent Pools

High-cost major markets experienced an outflow of talent during the pandemic but still have larger talent pools than most Sun Belt markets. The workforce diminution in these cities was minimal over the three years ending February 2023.1?For example, metro New York had a net outflow of around 47,000 professionals, representing a -0.6% workforce decrease.?

Figure 1: Net Migration as % of Total Labor Force (February 2020 to February 2023)

Big Picture

Any talent location strategy requires understanding the impact of in-bound and out-bound migration on the talent pool. However, a number of factors must be analyzed over a long period to gain a full understanding of a market’s talent capacity. For example, the emerging talent pool of new local university graduates each year is often larger than the new talent pool relocating into a market. Companies should also focus on the migration patterns of their desired skill sets and experience levels, rather than just the aggregate population or total workforce.

Click HERE to Read the Viewpoint

Historical Cap Pricing

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

Podcast:?"The Weekly Take"

Shake It Up: The New Playbook for Office Occupancy

Spencer Levy's?podcast this week features CBRE's?Global Head of Occupier Thought Leadership Julie Whelan?to discuss the return to the office and the office’s long-term value.?

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]