As everyone is busy working on their year-end closings, we will keep this one shorter than usual.
The capital markets continue to push forward with a full head of steam through year-end. There is reliable competition among lenders throughout the capital stack as the national economic drivers appear to have shed any geo-political factors that could dampen general optimism. Lenders are entering new markets for the right story.
On the equity side, the early cycle deals in primary and gateway markets have generally been picked over. Investors are open to new markets or product types as they chase yields and downside protection related to timing – avoiding business plans that require more than 24 months to execute.
Lenders and investors are open to exploring ‘story deals’ or ‘story locations’ in order to capture yields that are wholly priced out in any coastal or primary market.
Multifamily loans continue to be sized and priced to perfection in coastal locations. Borrowers are enabled as underwriting standards reflect valuations in the foreseeable future, despite the sentiment toward interest rate direction. Additionally, mobile home communities seem to be in favor with lenders today.
Agencies and banks offer increasingly attractive terms whereas conduit lenders are still restrained due to risk retention and discipline in CMBS B-piece buyers.
Industrial properties and creative office continue to feed off tail winds of fundamental change in consumer habits and desire to attract millennial tenants.
For industrial properties, institutional equity funds continue to express that they are underweight, which translates into strong appetite for both value-add and ground-up development opportunities. In general, industrial is wholly accepted and recognized as a critical component of a commercial real estate portfolio allocation.
For creative office, we have seen that the equity appetite for value-add projects leans heavily toward business plans that can be executed in 24 months. Longer business plans are being hyper-analyzed due to equity groups’ projections of macroeconomic risk and general slowdown in the economy.
Today, retail is all about buzzwords – with “right sizing the retail experience,” “experiential,” and “omni-channel” concepts popping up in our conversations with sponsors. The retail space is evolving, sparking curiosity in equity investors and caution from lenders. We are seeing valuations shift to indicate that equity can mitigate the sector risk in retail with smaller bets in this space.
Meanwhile, the commoditized grocery or big box anchored business plans based on population density and demographics are considered non-starters for most equity investors unless there is a compelling story (or basis).
Generally, everyone seems to have a full plate going into year-end. We continue to be cautiously optimistic for 2018.