Overview of Capital Markets

Robust debt markets will create an advantageous year for borrowers

Real estate investors can remain confident in their acquisitions and refinancing due to the attractive options in the debt markets. 2015 is predicted to be a healthy market given strong domestic and international investor demand for commercial real estate, a wave a loan maturities, low interest rates and continued improvement of property fundamentals. Lenders expect a robust debt market in 2015 with ample credit and aggressive underwriting to meet the large amount of borrower demand. Interest rates continue to remain at historic lows. While there is chatter of rising interest rates, economists predict that there will be minimal uptick during 2015.

Capital Market Trends:

• According to Trepp, more than $300 billion in CMBS loans will mature in 2015, 2016 and 2017. Trepp estimates that almost 20% of the commercial mortgages maturing over the next three years will require additional capital when the loan is refinanced or the property is sold. As these loans were underwritten at peak valuations with aggressive underwriting and full term interest only there will be an increased need for mezzanine debt and CMBS financing at take-out.
• $100 to $125 million in CMBS debt is expected to be closed in 2015, up 25% from 2014.
• CMBS lenders will continue become more aggressive by loosening underwriting standards, increasing leverage, lowering debt yields, and offering full term interest only.
• The combination of low to negative global interest rates and international investors looking for yield and stability will continue to drive higher acquisition prices for trophy assets. Consequently, lenders will continue to be aggressive to lend on these trophy assets, especially multi-family and office in top MSA’s such as Seattle and San Francisco.
• There is continued gap in interest rate pricing which is risk adjusted based on both loan size and loan quality. Investment-grade assets, large loan sizes and major markets will be priced more competitively than small loan sizes, non-investment grade and in tertiary markets.
• There is a growing need for mezzanine and bridge loans that are fueled by redevelopment and refinancing activity. Mezzanine and bridge lending fills the gap for conservative lending standards allowing borrowers in secondary markets, seeking non-recourse and untraditional assets to obtain financing up to 80% of LTC.

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Life insurance companies will continue to offer historically low interest rates with five-year fixed rate terms in the low- to mid-3% range and mid- to high-3% range for 10 year terms allowing up to 65% LTV. Free rate locks are available for up to 4 months and minimal charges for rate locks up to 12 months. Fixed rate terms of 5, 10, 12, 15, 20 and 30 year terms are available. With the increase of the number of CMBS lenders and small loan programs the CMBS market will become more aggressive during 2015. Currently, CMBS allows for up non-recourse financing up to 75% LTV and debt yields as low as 7.5%. Full term interest only is available for loans with 65% LTV or less. Current 10 year fixed term interest rates are 185 bps to 200 bps over the 10 year swap rate. Will remain active with interest rates of L + 170 bps to 300 bps heavily relying on sponsor, asset and market. For Class A properties in top tier MSAs, banks are extraordinarily competitive on variable and short-term fixed rate albeit personal recourse. Banks are continuing to provide financing on value-add deals and with recourse are priced in the sub-4%. Due to regulation, Banks will continue to rely on sponsorship. Most bank terms will be 3 to 7 years. “Bridge Lenders” There are a growing number of bridge lenders in the market with terms of 3 years plus extension options. There is much diversity among bridge lenders depending on product types ranging from a vacant building, to development and value-add. The bridge lenders offer very flexible terms, allow for non-recourse financing, up to 80% LTC, and a varied pricing. For large loans that have break-even debt service coverage interest rates are sub-4.5%. Loan sizes sub-$10MM without breakeven DSC are priced for risk with interest rates between 5.5% to 10%.