Commercial/Multifamily Financing Update

We have highlighted several resources and publications below, designed to offer insights into the constantly evolving market and their impact on the real estate sector.

• CRE Finance May Have Hit Bottom in 2023. What’s Next?:?A look at where debt and equity capital is going in 2024 due to recent rate moves.?Read More
• CBRE report highlights the ever-growing role of holiday season reverse logistics operations:?The report observed that with 2023 holiday season online sales pegged to increase 7%, to $237.2 billion.??Read More
• What to Expect for CRE in 2024: CBRE expects an economic slowdown in the U.S. next year that will impact commercial real estate with bank lending remaining tight throughout 2024, investment volume decreasing 5 percent, cap rates expanding and property values declining.?Read More

• San Diego Apartment Sale Ranks Among Region’s Priciest of Past Year: A San Diego apartment sale topping $200 million may be the region’s priciest multifamily deal of the past year and among the largest in California, as buyers find opportunities to acquire well located properties at prices below the cost of new construction.?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.

Fed Watch: The consumer price index released yesterday showed that core prices rose faster than expected in December.?The S&P 500 turned moderately lower following CPI inflation data, as investors weighed the impact on Federal Reserve policy. While the initial take was slightly negative, Friday's producer price index could alter the picture.?

Prior to the CPI report, markets were pricing in a 69% odds of a?quarter-point Fed rate cut by the March 20 meeting. After the CPI data, odds have slightly risen to 73%; however, odds of a full 1.5% in rate cuts this year slipped from 76% to 63%.??

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 of?a rate cut from the FOMC can be tracked on the?CME Fedwatch Tool.?

We are utilizing buy-downs with lenders to reduce rates further than the below.?

Life Companies?have been quoting rates between?5.50% 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 November is $48.1B compared to $63.9B last year.?Freddie Mac new business volume is at $55B YTD compared to $66B in?2022. 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?5.40-6.00%. 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.

The Math Behind the Hybrid Workplace

CBRE research indicates that 80% of current office occupiers have adopted and will sustain hybrid work policies. This systemic change in how, where and when employees work requires rebalancing existing workplaces to create an attractive in-office experience while optimizing real estate portfolios for cost savings. These ambitions are aligned under the same overarching principle: Reducing seats can create more vibrancy in the office and generate savings to reinvest in the space, technology and services to optimize the employee experience.

Key Challenges and Solutions:

1.) Hybrid work increases the variation of attendance and show-up rates. Prevailing methods for visualizing utilization often fail to capture the nuances of these patterns and can lead to over- or under-estimating the appropriate allocation of space.

Solution:?Visualizing utilization data through the lens of peak and non-peak demand increases the accuracy of future estimates for the quantity and mix of desks and supporting spaces.

2.) Hybrid workstyles require an expanded variety of space types to support focus and virtual and in-person collaboration in the office.

Solution:?Leverage micro-level utilization data to determine which types of spaces best support the desired workplace experience based on employee behaviors and preferences.

3.) Hybrid work has encouraged a rethinking of how we measure a real estate portfolio’s effectiveness.

Solution:?Revisit your occupancy metrics to understand how hybrid work patterns have changed employee behaviors.

Figure 1: Current Guidance on Employer Expectations for Office Attendance

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 continue their downward decline.?

Podcast:? "The Weekly Take"

A new framework for creating opportunity in a high-rate environment

Spencer Levy's?podcast this week features Rob Finlay, Founder & CEO, Thirty Capital,?to expounds on opportunities to create value using data analytics to optimize property performance.

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]