Commercial Investment Real Estate

JUL-AUG 2017

Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.

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Page 40 of 54

COMMERCIAL INVESTMENT REAL ESTATE 36 July | August 2017 As a result, we are paying particular attention to small balance product in secondary markets. We are still bullish on assets bought right where the local economy shows population and job growth, as well as other demand drivers. Heather Olson: Multifamily lending is still strong in 2017 and is expected to continue to grow. The Federal Housing Finance Agency kept the gov- ernment-sponsored enterprises capped lending amounts at $35 billion each for 2017. Both Fannie Mae and Freddie Mac are staying aggressive in pur- suing fi nancing for low-income and affordable mul- tifamily units. These units are considered uncapped business and do not fall under the $35 billion limit. Capital markets remain selective in certain geo- graphic regions and products, particularly market- rate, such as new construction products. Daniel Matz: The bridge lending market in New York City is very competitive. During the past few years, more investors have turned to the commer- cial debt space in search of more stable, predictable returns. As banks and other regulated lenders have taken a step back from lending due to regulatory restrictions, borrowers have been driven toward debt funds and other nontraditional, private lenders. This increased competition in bridge lending has made vying for deals challenging, as it is diffi cult to compete on pricing for high-quality deals with in-place cash fl ow in strong markets. As a result, lenders are turning to secondary markets and alter- native property types, in search of more yield and less competition. Darin Davis: The market is still very strong. Like many midsize markets, multiple large and small banks will consider lending, depending on the proj- ect size. The challenge in markets such as Albu- querque is if a project is between $15 million and $50 million, fi nding a lender could be a challenge. A limited number of lenders is available for bigger transactions. CIRE : What types of CRE loans are most prevalent today for deal structure, size, property type, and loan terms? Braman: Despite seeing the beginning of a cool- ing off in the multifamily sector, agency lending can be an attractive product right now. In recent years, the Freddie Mac small balance program has been particularly popular and just increased the loan maximum from $5 million to $6 million and even as much as $7.5 million in primary markets. Rates are still low compared to historic averages, so borrowers can max out on leverage. We have done many projects where we offer pre- ferred equity to enhance leverage. Another alterna- tive is to provide common equity, alongside attrac- tive multifamily debt. Davis: It still seems that 75 percent leverage is the key, with amortizations from 20 to 25 years. Terms are from 5 to 10 years, depending on the nature of the project. I haven't seen much bias against any one property type, but I can say the retail sector is starting to make a few people nervous. I look for retail proper- ties whose tenants are more service- or value-based businesses because it is easier to gain fi nancing. This compares to properties whose tenants tend to be more big boxes, which compete with Amazon or do not have a strong internet-based business model. Olson: Most common for all multifamily are the seven- and 10-year fi xed-rate loans from GSEs. Both offer 30-year amortization and interest-only terms, dependent on deal structure. The Federal Housing Authority and the U.S. Department of Housing and Urban Development offer a 35-year fully amortizing loan for acquisitions and refi nances, and a 40-year fully amortizing loan for substantial rehabs and new construction. Average loan size is $5 million to $30 million, but loans can go up to $100 million or higher. We also offer credit facility structures for large portfolio acquisitions. Green fi nancing has become popu- lar with Fannie Mae and Freddie Mac borrowers, which offers reduced pricing if a property under- goes a green rehabilitation as a condition for the transaction. Matz: Multifamily is still the favored asset class among lenders, which makes these deals very diffi - cult to win. Industrial is becoming increasingly com- petitive, as e-commerce has signifi cantly increased demand for distribution and fulfi llment centers. Traditional lenders are being more conservative and typically not lending greater than 65 percent loan-to-value. Retail loans are very challenging, as each new day brings news of more store closures and bankruptcies. However, well-located centers that have strong anchors, such as a grocer or credit tenant, on long-term leases with strong sales, are able to obtain fi nancing at favorable terms. "Equity is still a hot button. With new high-volatility commercial real estate rules, it's important that hard equity is put into a project, especially if it involves ground up construction." — Darin Davis, CCIM

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