Equity, Debt & Structured Finance Capital Markets Update

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On July 11th, 2019

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Equity, Debt & Structured Finance Capital Markets Update

Market Commentary

Banks, debt funds and mortgage REITs are competing aggressively for construction loans nationally. Generally, non-recourse LTCs have been increasing on most product types with traditional banks considering requests up to 60-70% LTC and debt funds going as high as 80-90% for the right borrowers, markets, and business plan. While on the surface this may sound concerning, attention to underwriting, market fundamentals, and borrower/guarantor qualifications remains sensible. Also, the lenders that are taking the last dollar risk of the loan are predominantly groups with direct development experience that are knowledgeable and equipped to resolve risks associated with completion.

Contrary to the construction lending market, CMBS LTVs have been trending down. Average LTV reached a high of 70% in 2007 and has trended down to 65% and 55% in 2014 and 2018, respectively. The average percent of the pool with an LTV greater than 70% has decreased from 60% in 2007 to 37% in 2014 to just 10% in 2018. With lower LTVs, full-term IO has become more prevalent. 2019 is on track to exceed the 50% of loans that had full-term IO in 2007, which has increased each year since reaching a low of 7.2% in 2011.

With all-in fixed interest rates starting in the low 3%s for the lowest LTVs on the highest quality assets to low 4%s for high LTVs or tertiary assets, positive leverage is available for virtually all acquisitions. Debt markets should help maintain or increase investment sales volume and pricing. Cushman & Wakefield Research just released an update on opportunity zones titled "In The Opportunity Zone: Location. Timing. Capital." Opportunity zone prices are already rising 14% (redevelopment) and 20% (land sites). Cushman & Wakefield is tracking 138 large CRE funds targeting more than $44B in equity, most with national mandates. These funds intend to invest in multiple product types: 82% will consider multifamily, 60% office, and 49% retail. The full report is available here

After modestly trailing Y-o-Y volume for most of the first half of 2019, several single borrower deals in May and June reduced the underperformance of CMBS issuance to just 4% for the first half of the year; Commercial Mortgage Alert reported first half CMBS volume of $39.1B, down from $40.5B during the first half of 2018. CLO issuance is up 32%, from $6.9B to $9.1B. Agency volumes are basically unchanged at down 1% Y-o-Y which could closely be tied to the FHFA caps discussed in the May EDSF Update. REIT bond issuance is up nearly 36% Y-o-Y as many REITs look to lock in long term corporate debt in the 3%s.

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