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.

• March jobs report expected to show slower pace of hiring, lower unemployment rate:?The report will serve as a test of the labor market as investors continue to watch for signs of cooling but hope for?overall strength to support Federal Reserve Chair Jerome Powell's?current base case for interest cuts later this year.??Read More
• Fed Officials Still Expects Rate Cuts This Year, But Not Anytime Soon:?San Francisco Fed President Mary Daly said that three reductions this year is a “very reasonable baseline” though she said nothing is guaranteed.?Read More
• Everyone 'Knows' Elections Impact CRE. But Does The Data Back It Up?:?Whether the results of an election have a material impact on portfolio performance is little understood and not backed up by the numbers, making any assumption about linkages precarious.?Read More
• Multifamily, Office Cap Rates Have More Room to Expand:?To the pleasure of buyers and distress of sellers, cap rates have moved steadily higher over the last couple of years as property values drop and forward rate growth is stifled.?That?may be coming to an end,?suggests CBRE.???Read More
• Industrial Leasing Likely Will Improve, Though All Markets Won’t Benefit Equally:?Leasing activity is expected to improve this year, especially if the Federal Reserve follows through on anticipated interest rate cuts.?Read More
• Approaching a New Normal for Office Sector:?Sublease vacancy has begun to decline and occupied space per employee appears to have stabilized at 148 sq. ft. or 9% below the pre-pandemic level.?Read More

Global Real Estate Capital Flows H2 2023

Global Real Estate Capital Flows analyzes cross-regional commercial real estate investment across North America, Europe and Asia-Pacific (APAC), breaking down capital inflows and outflows by region, country, top markets and property sectors.

Executive Summary

• Cross-regional capital flows between North America, Europe and Asia-Pacific totaled US$26.3 billion in H2 2023, down by 45% from the already subdued levels of investment in H2 2022 and the lowest half-year total since 2011.
• The high cost of capital, geopolitical concerns and uncertainty over monetary policy continued to hamper investment activity. North American capital, which historically makes up the bulk of cross-regional investment, was largely deployed domestically.
• The industrial & logistics sector had the biggest share of cross-regional investment in H2, followed by the multifamily sector.
• CBRE expects that many central banks will begin cutting interest rates later this year, which should lead to increased global investment activity. While cross-regional capital flows will likely remain below historical levels in H1 2024, they should begin to pick up in the second half of the year, especially for assets with attractive valuations in major markets.

Explore the Report

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:?After spending much of this year making bets that were much more dovish than those of Fed officials, investors have now flipped in the opposite direction. They are now forecasting ~65bps of rate reductions in 2024, compared to the 75bps signaled by the median estimate of projections released following the Fed’s March 19-20 meeting.? The shift is also casting doubt on bets that the first-rate cut will land in June. The probability of a quarter-point reduction in June briefly dropped below 50% on Monday but currently stands at ~62%. The reassessment is driving investors to demand higher rates of return on US government bonds.?Odds of a rate cut from the FOMC can be tracked on the?CME Fedwatch Tool.? Treasuries have jumped 20bps in the past month due to more strong economic data this week and the expectation that?the "Higher for Longer" period won't?be ending any time soon. All things considered, we are utilizing buy-downs with lenders to reduce rates further than the below.?

Life Companies?have been quoting rates between?5.90% to 6.40%?for 65% leverage or less. Five year money is becoming harder to come by as LifeCos are getting full in this bucket. 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 6.25-6.75% 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 Mae business volume through February is at $7.5B compared to $5.6B last 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?5.70-6.10%. 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 5.40-5.95%. Our team is here to help you navigate financing options and provide color on what we are seeing in today's market.

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 PENSFORD

USD LIBOR and SOFR Forward Curves

Indicative Rate Cap Pricing for Agency ARMs

View the Newsletter of J.P. Conklin, President? Founder of Pensford?

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 | DSF Director | +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]