News

September 13, 2024 Risk On!

After 24 hours of meetings at the Western States CREFC Conference with 20+ lenders ranging from a mid-western private debt fund to the likes of global investment banks such as JPM Investment Management, one major theme rang consistent — CRE lending is doing Risk On!

After nearly two years of defensive retrenching initiated by the Fed’s historically swift increase of the Fed funds rate, the CRE lending sector has become leaner and better capitalized as more capital was raised to take advantage of the risk adjusted returns that floating rate CRE lending is offering today; 8-10% yields at 55%-65% leverage.

“Risk On” has a wide range of connotations depending on the lender. We spoke to bridge lenders that have either entered or intend to enter the construction lending space, providing higher leverage, 65-70% LTC loans, while targeting spreads in the low to mid 4% range over SOFR. Others already providing construction loans are now willing to finance land A&D loans.

The insurance companies, either directly or through other lending firms, are allocating capital to fund 3-7 year, fixed rate bridge that prices in the low 2% range over treasuries and allows for prepayment flexibility after years two or three of the loan term. CMBS lenders are on pace this year to securitize $90-100 billion of loans, just as they have done in the past leading the CRE market out of troubled times when primarily banks have restricted/constrained their lending.

“Risk On” in a liquid lending market is also expressing itself in tightening credit spreads. Spreads on bridge debt since the middle of summer have compressed 50-100 basis points with some lenders offering loans at SOFR + 2.5%, and other bridge lenders (taking a cue from CMBS) allowing for spread buydowns.

The Agencies are realizing that asset quality and tenant quality of mission-driven loans that they have been pushing (and discounting spreads for) in the past 24 months have resulted in an inferior quality loan portfolio that is likely subject to higher levels of defaults. They are now providing pricing discounts for newer vintage multifamily properties and have seen a significant increase of loan requests that have pushed out review/quotes to 30 days, with pricing starting in the low 1% range over treasuries. It also helps that the treasury yield has continued to decline and is now approaching the mid-3% range as economic data continues to point towards a slowing economy in the US and a possible recession should the Fed not act aggressively enough in reducing the Fed Funds rate.