INCOME PROPERTY FINANCING MARKET UPDATE
April 1, 2019
The general response we have been getting from our lenders across the board is
that 2019 is business as usual and it looks like we could have another two
years of runway before we see a correction, which would appear to be consistent
with the following: We are currently seeing an inverted yield curve, as short
term rate (the 3-month, 1 and 2-year Treasury yields) slightly above the 5-year
and 10-year Treasury yield. There has been concern due to the fact that a
recession is typically preceded by an inverted yield curve. However, the
narrative today is that yields are inverted because the FED, which controls the
short end of the yield curve, over reached last year, raising the FED rate too
fast. The long end of the curve reflects weakness in the economy, causing long
term yields to fall and bond prices to rise, which has been the case to the
tune of about 40 basis points the past month. In 2006 the yield curve began to
invert sensing weakness in the housing market, which had peaked in 2005, began
to roll in 2006, accelerated down in 2007 followed by financial crisis in 2008.
While the real estate market was weakening, the economy continued to grow until
late 2007 and the stock market remained strong through mid-2007, when the
inversion of the yield curve stopped. Therefore, the 2006 cycle took much
longer to predict stock market weakness and the recession. On average, it takes
21.3 months, according to LPL Research, for a bear market and recession to
follow yield curve inversion. When the yield curve then goes flat it is usually
a sign a recession or bear market are near. The real weakness in the economy in
both the 2000 and 2007 ensuing recessions came when the yield curve not only
inverted but steepened, because the FED cut short-term rates as the economy
weakened, causing short-term rates to go down faster than long-term
rates.
Presently the FED indicates comfort with the
inflation rate standing at 2.1%, the economy and consumer confidence which
remain strong, notwithstanding the hit the economy took as a result of the
government shutdown and severe winter weather, which slowed residential and
retail sales. In addition, investors paused to see how the November election
was going to shake out, and paused further due to the results of the November
election. The result was a slowing economy 4th Quarter and early
2019, which saw the FED continued to raise and indicate more raises to follow.
Now, the FED has softened their rhetoric on rate increases, and has now
indicated they will not increase rates the rest of this year. Some feel we
could even see a short tern rate cut if the economy sputters. For now, with the
end of winter and lower interest rates one would expect residential sales and
retail sales to improve, especially with the strong consumer confidence report
just released. The wild card continues to be negotiations with China and the
slowing global economy, including China. A new trade deal with China is
apparently already baked into the current interest rates. So, it is incumbent
upon Trump to finalize the new trade deal. If not, we would expect to see
long-term rates rise quickly. Interestingly, our trade deficit declined
dramatically last month due to a big reduction in Chinese imports.
RESIDENCE INN BY MARRIOTT / GOLTEA, CA
I AM PLEASED TO ANNOUNCE THE FUNDING OF MY 12TH LOAN FOR
RD OLSON DEVELOPMENT
Q10|WESTCAP / We represent 15 life
insurance companies for which we service over $2 billion of all property
type income property loans. These relationships that date back 30+ years.
We also work with the largest Fannie/Freddie/HUD underwriters in the
country in addition to some of the best banks, bridge and CMBS sources,
arranging permanent, construction, bridge and mezzanine financing
nationwide.
Hospitality Permanent Financing - I have recently seen hospitality quotes of 10-year fixed from a bank with flexible prepay at 1.70 over LIBOR with a hedge which resulted in a fixed rate at 4.12% with IO for 2 years, and a CMBS quote with 10 years IO. CMBS continues to be the source for maximum leverage underwriting senior debt to hi-8%'s to low 9% debt yield with spreads in the mid to low-to-mid 200's over the Swap. I have also received quotes from several that added mezz to get down to 8.5% debt yields using a combined 1.10 DCR. We have also seen spreads as low as 150 for lower leverage loans. 2) Life companies are underwriting hospitality to 12% debt yield with rates in the low to mid 200's over the 10-year Treasury for the right properties and borrowers.
Hospitality Construction Financing - Banks continue to be under pressure to dial back commercial construction lending, particularly on hospitality. That said, I still have several hospitality construction lenders quoting up to 65% LTC for a select service hotel. I also have a couple of banks that provide non-recourse hospitality construction loan up to 75% LTC with a combination 55%-60% senior and mezz for the balance. Finally, we have a great nationwide SBA source which can get to 85% LTC at Prime +2% up to $30 million.
Multifamily Our life companies have been getting creative, offering forward commitments at attractive rates up to 75% LTV, requiring some recourse which are released once DRC hurdles are achieved.
I have a 12 unit property under application which should close next week with Fannie at full leverage 10/30, PAR and low processing cost. The rate will set 2 days prior to closing.
We work with a few of the largest Fannie/Freddie underwriters in the country for small and large programs. Multifamily also continues to be a favorite and our life companies have been coming up with some amazing pricing. We continue to see spreads inside of 100 basis points over the 10-year Treasury on large lower leverage loans.
Agency Bridge Loans are available from $2 million unstabilized at a 1.0 DCR for 2-3 years up to 90% of current value and 80% of stabilized for 1 point in and 1 out (waived if you take their perm) at L+400.
Industrial financing continues to be a favorite as well of all lending sources. Life companies spreads ranged from sub-120-170 depending on leverage. Rates are slightly higher for office, retail, medical office and self-storage.
Office & Medical Office - There is plenty of capital for office and medical office. I have a soft quote on a large single tenant office building in San Francisco for a 15/20 at 65% LTV with no TILC reserves with a 10-year lease.
Unanchored and Strip Retail - Grocer anchored with solid sales figures are still a favorite. We continue to have life company sources for unanchored and strip retail.
Big Box Retail space continues to be difficult due to the difficulty re-leasing these spaces as the retail industry closes and downsizes their retail stores to showrooms while shipping inventory direct to customers from big industrial logistics distribution facilities.
Hospitality Permanent Financing - I have recently seen hospitality quotes of 10-year fixed from a bank with flexible prepay at 1.70 over LIBOR with a hedge which resulted in a fixed rate at 4.12% with IO for 2 years, and a CMBS quote with 10 years IO. CMBS continues to be the source for maximum leverage underwriting senior debt to hi-8%'s to low 9% debt yield with spreads in the mid to low-to-mid 200's over the Swap. I have also received quotes from several that added mezz to get down to 8.5% debt yields using a combined 1.10 DCR. We have also seen spreads as low as 150 for lower leverage loans. 2) Life companies are underwriting hospitality to 12% debt yield with rates in the low to mid 200's over the 10-year Treasury for the right properties and borrowers.
Hospitality Construction Financing - Banks continue to be under pressure to dial back commercial construction lending, particularly on hospitality. That said, I still have several hospitality construction lenders quoting up to 65% LTC for a select service hotel. I also have a couple of banks that provide non-recourse hospitality construction loan up to 75% LTC with a combination 55%-60% senior and mezz for the balance. Finally, we have a great nationwide SBA source which can get to 85% LTC at Prime +2% up to $30 million.
Multifamily Our life companies have been getting creative, offering forward commitments at attractive rates up to 75% LTV, requiring some recourse which are released once DRC hurdles are achieved.
I have a 12 unit property under application which should close next week with Fannie at full leverage 10/30, PAR and low processing cost. The rate will set 2 days prior to closing.
We work with a few of the largest Fannie/Freddie underwriters in the country for small and large programs. Multifamily also continues to be a favorite and our life companies have been coming up with some amazing pricing. We continue to see spreads inside of 100 basis points over the 10-year Treasury on large lower leverage loans.
Agency Bridge Loans are available from $2 million unstabilized at a 1.0 DCR for 2-3 years up to 90% of current value and 80% of stabilized for 1 point in and 1 out (waived if you take their perm) at L+400.
Industrial financing continues to be a favorite as well of all lending sources. Life companies spreads ranged from sub-120-170 depending on leverage. Rates are slightly higher for office, retail, medical office and self-storage.
Office & Medical Office - There is plenty of capital for office and medical office. I have a soft quote on a large single tenant office building in San Francisco for a 15/20 at 65% LTV with no TILC reserves with a 10-year lease.
Unanchored and Strip Retail - Grocer anchored with solid sales figures are still a favorite. We continue to have life company sources for unanchored and strip retail.
Big Box Retail space continues to be difficult due to the difficulty re-leasing these spaces as the retail industry closes and downsizes their retail stores to showrooms while shipping inventory direct to customers from big industrial logistics distribution facilities.
Bridge Lenders - With
pressure on the banks to be more conservative many have turned their focus to
bridge lending in addition to our traditional bridge lenders and we are
seeing several get more aggressive with less recourse and flexible prepayment
provisions. On large transactions we are seeing pricing as low as LIBOR plus
even sub-200, but again those are very large transactions. For deals under $25
million we are seeing pricing as low as L+300 for multifamily properties and
goes up from there.
12-month lock out with no make whole provision and full term I/O and typically
1 point in and 1 point or less out. With the CMBS sources they will usually
waive the exit fee if you roll into their permanent program. Some of the CMBS
have their own internal mezz which can get them up to 80% LTV.
LIFE COMPANY
RATES
5-Year 10-Year
Multifamily * 3.69%-4.55% 3.69%-4.15%
Office, Industrial, Shopping Center and Self-Storage
3.69%-4.50% 3.69%-4.40%
*We did see one very low-leverage multifamily quote at 95 bps over the 10-Year on a very large loan. Our life companies are PAR to us, and we have been beating the agencies on interest rates on slightly lower leverage. That situation will likely improve as it is likely that the agencies may be privatized under the new administration. *Amortizations are typically 30 years depending on the age and condition of the property with some interest only as a sweetener.
Multifamily * 3.69%-4.55% 3.69%-4.15%
Office, Industrial, Shopping Center and Self-Storage
3.69%-4.50% 3.69%-4.40%
*We did see one very low-leverage multifamily quote at 95 bps over the 10-Year on a very large loan. Our life companies are PAR to us, and we have been beating the agencies on interest rates on slightly lower leverage. That situation will likely improve as it is likely that the agencies may be privatized under the new administration. *Amortizations are typically 30 years depending on the age and condition of the property with some interest only as a sweetener.
WHY WESTCAP?
I have 40+ years experience arranging income property financing, ran 2 major construction lending operations, co-developed over 1 million SF of income property and have managed my own portfolio of retail, medical office and residential income properties since 1978, and have been president of 3 successful mortgage banking companies. I have arranged $600 million of hospitality construction and permanent financing the past 6 years, and I handle all income property types. My focus is solely on arranging the best possible loans for my clients.
WESTCAP was founded in 1988 and serves as a correspondent to 15 life insurance companies for which we service over $2.0 billion. Most of these correspondent relationships date back over 25 years, including Sun Life of Canada for which we have been the exclusive correspondent in Southern California for over 30 years. We also represent non-correspondent life companies, multifamily agency sources, banks, construction lenders, bridge, mezzanine and equity, in order to meet all of our client's financing needs. We handle assignments ranging from $1,000,000 to $400,000,000 nationwide, and represent all sizes of borrowers including many of the largest developers in Southern California.
WESTCAP is also a founding member of Q10, which is a network of 14 of the largest independent mortgage banking companies in the country with 22 offices throughout the United States, and a combined servicing portfolio in excess of $12 Billion. We arranged a combined $4.6 Billion last year, 46% life company, 18% CMBS and 36% agency. With a proprietary database sharing quotes, lender and equity intelligence we are constantly in a position to insure that we deliver the best sources at any given time for our clients.
I have 40+ years experience arranging income property financing, ran 2 major construction lending operations, co-developed over 1 million SF of income property and have managed my own portfolio of retail, medical office and residential income properties since 1978, and have been president of 3 successful mortgage banking companies. I have arranged $600 million of hospitality construction and permanent financing the past 6 years, and I handle all income property types. My focus is solely on arranging the best possible loans for my clients.
WESTCAP was founded in 1988 and serves as a correspondent to 15 life insurance companies for which we service over $2.0 billion. Most of these correspondent relationships date back over 25 years, including Sun Life of Canada for which we have been the exclusive correspondent in Southern California for over 30 years. We also represent non-correspondent life companies, multifamily agency sources, banks, construction lenders, bridge, mezzanine and equity, in order to meet all of our client's financing needs. We handle assignments ranging from $1,000,000 to $400,000,000 nationwide, and represent all sizes of borrowers including many of the largest developers in Southern California.
WESTCAP is also a founding member of Q10, which is a network of 14 of the largest independent mortgage banking companies in the country with 22 offices throughout the United States, and a combined servicing portfolio in excess of $12 Billion. We arranged a combined $4.6 Billion last year, 46% life company, 18% CMBS and 36% agency. With a proprietary database sharing quotes, lender and equity intelligence we are constantly in a position to insure that we deliver the best sources at any given time for our clients.
Call for rates on all income property types
including hospitality, multifamily, industrial, office, medical office,
self-storage, retail, student and senior housing. We even have a couple of
bank sources which offer no prepayment penalty and a few who
offer non-recourse. With a few exceptions our permanent lending sources
are PAR to us.
Steve Bridges
Executive Vice
President
Q10|WESTCAP
9960 Irvine Center
Drive
Irvine, CA 92618
