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.
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 is down 30bps to 4.64%. Odds of a hike at any time is just 9.6%.?
Fed Watch: On Wednesday, the Fed held?the federal funds rate at a range of 5.25% to 5.50% for the second consecutive time. The central bank also affirmed that it will continue to reduce its balance sheet.?The Fed’s decision on Wednesday to hold rates steady was in-line with market expectations. Despite headline inflation remaining above the Fed’s 2% target, core inflation, which excludes food and energy prices, has steadily decreased over the past 12 months. The recent run-up in the 10-year Treasury yield has further tightened financial conditions, which will suppress economic growth and inflation. Odds of a December hike have dropped to 9.6% as signs?of a slowing economy are emerging. CBRE's house view?expects the Fed to hold rates steady for the rest of this year, as an economic slowdown takes hold and extends into early 2024. As growth slows, CBRE expects the Fed will cut rates for the first time in March 2024, with two additional cuts throughout next year. Odds off a rate hike?from the FOMC can be tracked on the?CME Fedwatch Tool.
Life Companies?have been quoting rates between?6.25% to 6.65%?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?6.20-6.90% 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?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 7.00-8.00%?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 September is $41.7B compared to $50.6B 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. Overall, Agency pricing is around?6.00-6.50%. 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 5.50-6.25%. Our team is here to help you navigate financing options and provide color on what we are seeing in today's market.
San Diego Office & Life Sciences Regional Overview
San Diego Office Market?at a Glance Closing the third quarter of 2023, the San Diego office market continued to face challenges in many forms. Economic conditions are forcing companies to make decisions not only about how much space they will occupy in a hybrid workplace, but also how many people they need to operate their business as they consider laying off employees to cut costs. While impacts to the San Diego office market have not been as severe as other major metro markets, reduced demand for space has increased vacancy rates, propelled sublease availability, and forced tenants to right-size their workforce and focus on shorter term deals and renewals.
San Diego Life Sciences Market at a Glance In Q3, the Central San Diego Laboratory market gave back 189,000 SF of space, bringing the YTD figure to over 712,000 SF of negative absorption. This makes four straight quarters of negative net absorption, which has never happened prior. Rental rates in Central San Diego have leveled off over the last few quarters, as demand has slowed significantly from the COVID-19 years. The downward pressure on effective rents is evident, as concessions have been increasing. The overall average asking rental rate is essentially flat from year-end 2022, standing at $6.59 NNN. This figure is a weighted average, and currently swayed by new construction that comes with high rates.
Venture Capital Activity San Diego companies raised nearly $1.05 billion of venture capital (VC) funding in Q3. That marked the second consecutive quarter of both increased volume, and total investment that touched at least $1 billion. Compared to Q2, funding increased by 3% and moreover, it surpassed Q3 2022 by 15.4%. Most notably, VC funding in 2023 has already exceeded all of 2019, the last year not to be affected by the COVID-19 pandemic. Still, only 29 deals were recorded in Q3, the first period less than 30 raises were completed since Q2 2020.
Figure 1: Venture Capital Investment in San Diego, Quarterly Dollar and Deal Volume, by Industry Group, Three Years, Q3 2020 to Q3 2023
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Historical Cap Pricing
The chart below illustrates how cap pricing has changed over the past 2 years.
Podcast:? "The Weekly Take"
Data centers and new power-intensive tech
Spencer Levy's?podcast this week features Pat Lynch, Global Head of CBRE Data Center Solutions to discuss how the rapid growth of digital infrastructure like AI, edge computing, virtual reality and private clouds is making data centers into an increasingly important CRE sector.
Today's Rate Snapshot
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