Refinancing Opportunities for CRE Investors
- May 30, 2019
Refinancing opportunities for CRE investors across the property spectrum are abundant thanks to calmer financial markets, compressed spreads, steady interest rates and a capital-rich liquid lenders.
“All product types are attractive. All capital providers are in markets doing deals. It’s an exciting time,” said Elliot Eichner, co-founder & principal at Sonnenblick-Eichner Co., a real estate investment banking firm. “There’s a lot of competition. Deals are getting done at lower interest rates than before the recession.”
Borrowers are also finding flexibility and higher leverage in select cases. “It’s a more borrower friendly environment than it was several years ago,” said Cynthia Wilusz Lovell, executive vice president, Wells Fargo Commercial Real Estate Group, who works on balance sheet transactions.
While Wells Fargo tends to be a bit more conservative than some other lenders on structure, Lovell confirmed that pricing has been more aggressive than in the past.
Meanwhile, borrowers are benefitting from the increased competition among lenders trying to capitalize on the positive fundamentals. “We’ve done some deals where upwards of 25 or 30 lenders were interested. We’ve had transactions where those lenders had 100 different scenarios with loan terms, amortizations, etc.,” said Cushman & Wakefield Managing Director Chris Moyer.
All property types, particularly value-add deals, are also experiencing a record amount of liquidity.
“There is a huge lender composition for everything from vacant office buildings to core plus office buildings to hotel repositioning,” said Keith Largay, JLL managing director and head of Midwest Capital Markets.“Given thin core buying pools, many investors of high quality real estate are opting to refinance their assets and delay selling for three to five years when the core equity market becomes more aggressive.”
MBA Stats Offer Refi Clues
While the Mortgage Bankers Association doesn’t break out refinancing figures, refinancings were definitely a fair share of the record $573.9 billion in loans in 2018―up 8 percent over 2017 ―that has been attributed to low interest rates and strong appetites from borrowers and lenders.
The momentum continued in the first quarter with originations up 12 percent year over year. Volumes were higher for nearly every property type aided by continued low interest rates and strong property values, MBA noted. Fannie Mae and Freddie Mac led the increase among capital sources with a 14 percent increases in loan originations year over year.
“A lot of the things that might drive a refinance might also drive a sales transaction, especially with a prepayment restriction in place,” said Jamie Woodwell, MBA’s vice president of commercial real estate research.
Loan maturity volumes are also an indicator of potential refinancing activity. MBA expects $110 billion of the $1.9 trillion (6 percent) of outstanding commercial and multifamily mortgages held by non-bank lenders and investors to mature in 2019―up 8 percent from 2018 but down 37 percent from 2017 maturities. That’s because fewer 10-year deals were done in 2008 and 2009. But Woodwell said a number of shorter-term loans held by other investor group―including credit companies, pension funds, REITs and warehouse facilities―are coming due. Of the $174 billion of commercial and multifamily mortgages held by these groups, $37.3 billion (21 percent) will mature in 2019 and $49.3 billion (28 percent) will mature in 2020. The loans maturing this year are 3 percent higher than both 2018 and 2017 maturities.
Borrowers with an adjustable rate with a flat yield curve who plan to own their properties for a while, Woodwell said, would benefit from exploring the refinancing opportunities for CRE investors in order to lock in a longer fixed-rate.
“Some of the refinancing we are seeing today is owners whose loans might not be maturing for a year or two and are looking at where interest rates are and where their property values and income are right now,” Woodwell said.
With the Federal Reserve maintaining the dovish approach it began taking earlier this year, borrowers are less concerned with rising rates today than they were 12 months ago.
“I think we’ve seen more borrowers willing to take on floating-rate bridge financing and hold off on locking in fixed-rate permanent financing for a couple of reasons,” said Brendan Miller, principal & CIO at Thorofare Capital, a Los Angeles-based loan origination and servicing firm. “… The difference in the interest rate in a floating-rate bridge product and fixed-rate CMBS product is not as wide as it has been historically. It gives owners more flexibility if they want to sell their properties.”
Lovell said her side of the business typically does more three- to five-year-floating rate loans plus extensions with a lot of variation in terms depending on product type, occupancy levels and the credit profiles of the tenants.
“We are seeing from the bank market between 50 and 60 percent and up to 65 percent for apartments,” she said.
Among the most liquid of the refinancing opportunities for CRE investors is the 10-year fixed-rate, noted Jon Martin, managing director, Wells Fargo Real Estate Capital Markets. But those doing floating-rate CMBS are doing more five-year deals with three years on the loan with two one-year extensions and, only occasionally, going to seven years due to the limited investor demand for longer-term floaters, making that option more expensive for borrowers.
On the CMBS side, Martin said the leverage has a broader range and it’s case by case with the borrowers. He noted some borrowers will push the leverage to 70 even 75 percent as they determine what is the most efficient way to price and structure the transaction.
While 2019 total CMBS origination is expected to be flat to 2018, Martin said a drop is expected on the conduit side given limited refinancing activity. With less than $10 billion of previously securitized loans scheduled to mature in 2019, conduit issuance could total only $25 billion to $30 billion. The single asset-single borrower and agency CMBS market are expected to pick up some of the conduit shortfall with total market levels nearing 2018 levels.
“Right now, it’s a little more wait and see,” Martin said, noting borrowers are weighing whether to pay the prepayment penalties or wait for the right opportunity to refinance.
Meanwhile pricing has continued to tighten, particularly for multifamily. Miller said he has noticed multifamily in tier-one through tier-three markets getting lower pricing than office in tier-one markets.
“We are seeing quality multifamily that is pricing in the 30-day LIBOR plus anywhere from 260-295,” he said.
Thorofare recently provided a $53.5 million five-year, floating rate, interest-only loan to a joint venture to refinance a two-property, 198-unit multifamily portfolio in Norwalk, Conn., that also has more than 10,400 square feet of retail at one of the sites, Berkeley at Waypoint. The refinancing is being used to retire the original senior construction loan and pay lease-up costs for the retail space.
Miller noted Thorofare has several different lending vehicles. In the core plus fund, the firm is generally offering three to four years with one- to two-year extensions―often four plus one-year extension or three years plus 1 plus 1, with the two-year extensions tied to performance hurdles.
Late last year, Thorofare provided a $35.8 million loan to Brookwood Heritage Square LLC to refinance a 368,214-square-foot Class A office complex with two high-rise, multi-tenant office buildings near downtown Dallas. The borrower received a 36-month, interest only loan to repay an existing loan and pay for tenant improvements, leasing commissions and stabilizing the buildings. Thorofare closed the deal within 35 days to meet the existing loan maturity date.
Miller said the firm is selective with retail and hospitality deals noting they tend to price wider than most asset classes.
“We’re seeing lots of quality hospitality loans get done in the 65 to 70 LTV vs. 75 to 80 like we’re seeing in most multifamily and industrial deals,” Miller said.
Sonnenblick-Eichner Co. does a lot of hospitality refinancing deals and Sonnenblick said they are seeing 70 to 75 LTV for hotels as well as retail, industrial and office and rates in the low 4s. The firm has also arranged some hotel acquisition financing between 55 and 65 LTV.
Eichner said they do a lot of repeat business, often doing an acquisition loan and then multiple refinancings for a property. In October, the firm arranged $29.2 million of interim first mortgage financing for Provenance Hotel to refinance the Old No. 77 Hotel & Chandlery, a 167-key hotel in New Orleans. Proceeds of the loan, a five-year floating rate loan priced over LIBOR at a spread in the mid-300s, were used to refinance the acquisition loan and provide a return of equity.
Cushman & Wakefield, Moyer said, has been handling a lot of cash-out refinancing deals, particularly for multifamily and in office markets like Seattle and San Francisco, where there has been double-digit rent growth. “They’re refinancing the construction loan to take the cash, then hold onto it for a year or more to sell,” he said.
C&W has also been active in hospitality. The firm recently closed a $430 million, 10-year, fixed-rate loan from an insurance company for the owner of the Hyatt Regency Seattle, just two months after the 1,260-key hotel opened. Moyer said it was unusual for a borrower to get a 10-year loan based on no operating history, but it provides a way for the borrower to take the financing risk off the table in a market where a wave of hotels is coming online. Owners of three other Seattle-area Hyatt Regencies have also refinanced their hotels in the last 12 months, Moyer said.