Two short months into 2018 we have seen a significant uptick in treasury yields along with positive economic data supporting continued Fed rate hikes for the remainder of the year. In the CRE lending universe however, the focus has been on has been on increased competition and decreasing credit spreads.
Here we will briefly touch on a couple of catalysts for this credit spread compression, as well, highlight a few lending programs that are relevant for our developer and value-add investor clients.
The peer group of bridge lenders focused on transitional projects continues to expand – by our count there are over 90 well-funded capital providers. This is a trend that we identified last year.
This opportunity for bridge lenders has been fueled by banks shifting their focus and capital to financing facilities for these real estate debt funds, as well as buying A-Notes on loans originated by these bridge funds.
Additionally, the muted CMBS origination volume has incentivized traditional CMBS shops to raise and deploy bridge capital as a tool to lead-sourcing tool for fixed rate lending.
Downward Pressure on Pricing – It’s a Borrower’s Market
Bridge lenders across the board have trimmed their spreads as much as a 100 basis points since Q4 – a clear reflection of the increased competition, lender financing options, as well as capital available at all leverage attaching points.
Further tailwinds for this lending has come from the CLO market re-activating in 2017. $109 billion of CLOs were issued in 2017 compared to $76 billion in 2016.
DEFINITION: A collateralized loan obligation is an asset-backed security which is backed by the receivables due on loans. Lenders package and sell their receivables on loans to investors in order to reduce the risk coming from potential loan defaults. Returns on CLOs are paid in tranches; that is, the individual loans backing a CLO have different maturities, and investors are paid out as each matures. Lenders offer higher interest rates to investors willing to buy CLOs backed by higher-risk loans (Farlex Financial Dictionary).
As well, the private REIT market has further buoyed the space, with a number of lenders forming private REITS to source cheap capital.
Behind the Curtain
While Libor and Treasury rates have gone up, lenders have compressed their spreads – keeping investors and borrowers focused on the all-in coupon. Lender return expectations have not gone up in conjunction with the rise in the indices (which is typical in a rising interest rate environment). We would attribute this to overall stability in the economy and the lack of higher yielding savings and or investment opportunities.
Lender Program Highlights
Multifamily Bridge Program
A leading credit-focused alternative asset management firm is offering up to 80% LTC bridge- financing on multifamily value-add projects, pricing starting at L+325. They can layer on additional mezzanine financing up to 90% LTC, priced at 12% with some upside participation. Nationwide.
One established fund manager has received a new allocation to deploy low-priced floating rate debt priced at L + 2.75% and up, at 70% to LTV. Up to 7-years of term, with a focus on taking out construction loans on new multifamily developments, or lease roll plays on office properties. Loan sizing at $20M+.
Life Company Execution
Life Co will take on “hairier” deals. They are comfortable going to 65% LTV and can offer shorter term 5-year fixed bridge money, $10M minimum check size. Open to look at properties with less than break-even cash flows. Pricing is typically at applicable Treasury + spread of 160 to 180.