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.

• CBRE Chief Economist Richard Barkham On Rates, Distress And Recession Outlook:??CBRE Global Chief Economist and Global Head of Research Richard Barkham discusses the outlook for commercial real estate as 2024 rapidly approaches.?Read More

• Multifamily Rent Growth Will Return to Historical Norms: Kelli Carhart, Head of US Multifamily Capital, CBRE,?sees rent growth returning and staying at historical norms (about 2.5%) and typical 5% vacancy rates as well.?Read More

• Inland Empire Industrial Market Shifts to Flight-to-Value:?A slew of pre-leased deliveries pushed third quarter net absorption up to 2.19M SF in Inland Empire as large projects in the IE West submarket delivered more than 6M SF, according to CBRE’s Q3 2023 market report.?Read More

• Interest Rate Hikes Are Triggering a Rapid Increase in Distressed Sales: “We’re seeing a lot more distressed sales through receiverships and power of sales,” says Lauren White, who co-runs CBRE’s Land Services Group, which specializes in such situations.?Read More

• Retail Fundamentals Continue to Improve in Q3:?The overall retail availability rate fell to at least an 18-year low. The neighborhood, community & strip center segment had the biggest year-over-year decrease in availability of 50 basis points (bps).?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. Stocks fall, and the 10-year Treasury approached 5% Thursday after comments from Fed Chair Jerome Powell highlighted the uncertainty surrounding the central bank's next steps in its fight against inflation. The treasury hit a peak today at 4.99%, the highest level in 16 years. With only a 30bps gap between the 10-year and SOFR, borrowers are evaluating floating vs. fixed rate options if it makes sense.? Fed Watch: With the 10-year reaching 5%, a hike in November is unlikely. Odds of a December hike have dropped to 30% as signs?of a slowing economy are emerging. Annual wage growth slowed, and inflation continues to show improvement as another subdued reading for trimmed-mean?PCE inflation?in August brought the three-month annualized rate down to 2.6%. 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?6.55% to 7.00%?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?6.50-7.25% 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 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 7.75-8.75%?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?6.70-7.00%. 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.

Venture Capital Targets Early-Stage Life Sciences Companies; IPOs Increase for Late-Stage Enterprises

While annual venture capital (VC) funding for life sciences companies has tapered off since reaching a record high in 2021, early-stage enterprises are receiving their biggest share ever. Similarly, while the number of initial public offerings (IPOs) by life sciences companies has declined, the proportion by late-stage companies increased in 2022 and 2023. Life sciences building owners should take note of these trends since funding levels are an indicator of future demand for lab/R&D space.

Figure 1: Venture Capital Funding by Stage

Annual VC funding for the life sciences industry is returning to pre-pandemic levels since peaking at $33 billion in 2021. Twenty years ago, the biggest share of VC funding was distributed in Series B or mid-stage rounds. More recently, funding has been allocated primarily to early startups, while funding for later-stage companies has been decreasing. The share of Series A and earlier funding increased to 39.5% in 2022 and 41% so far this year—far above the 11% share in 2004.

Figure 2:?Average VC-Funding Deal Size

While 2023 is on track to have fewer VC funding rounds than in any of the past six years, the average size of all funding rounds increased by 110% between 2004 and 2023. (Figure 2). However, the average VC-funding deal size in Angel/Seed/Pre-Seed rounds had the biggest increase of more than 600% over the same period. Since the start of the pandemic in 2020, the average Angel/Seed/Pre-Seed VC funding deal size has increased by 70%, while more moderate increases have been seen in average deal size for every funding round except Series B, which decreased by 10%.

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Historical Cap Pricing

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

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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]