In 2013, NorthMarq Capital arranged $10.1B in loans. In 2014, that number rose 20 percent to $12.6B, reports Managing Director James Dumars.
That doesn’t mean the market isn’t competitive, notes DuMars, who locked in a low-leverage $25M loan at 3.64 percent for 10 years. He is also financing a $56M class-A shopping center purchase at a rate around 4 percent with full-term interest only and 75 percent loan-to-purchase price.
“Lenders are seeking good, quality real estate with quality sponsors,” says DuMars. “They will get aggressive on rate and terms to win the business. I doubt any lender would say 2015 will be any less competitive than 2014 has been.”
A good buy exists, but is hard to find, says BH Properties Chief of Acquisitions.
“I’m very curious to see the business plan that buyers have when buying some of these apartment deals at record numbers and incorporating gimmicks into their debt like high leverage and long-term interest only,” he says. BH Properties pays cash for its assets, which he calls an advantage as it is not reliant on debt markets and timing, and wants to leverage more than $100M in acquisitions in 2015.
CMBS lenders are on track to originate $100B, notes DuMars.
“My banker friends tell me that they are losing many loans in their portfolios to CMBS,” he says. “I expect this to continue in 2015. There is high demand for the paper and delinquency rates are low.”
More banks are re-entering the real estate sector, says Alliance Bank of Arizona Executive Vice President Don Garner.
“The liquid lending market benefits borrowers and brings about short-term memories as to the last real estate cycle,” adds Garner. “Banks tend to be like lemmings and follow one another, to the extent that often times structure and margins are the No. 1 things that suffer.”
The 10-year treasury yield dropped, despite an overwhelming sentiment of rates reaching 4 percent in 2014. Instead, they’re hovering around 2 percent as of press time. NorthMarq’s DuMars is reluctant to offer a forecast on treasury rate, but suggests the risk-adverse investor refinance.
“Spread movements typically adversely correspond to the change in the UST,” says DuMars. “Historically, I’ve seen spreads compress due to competition between lenders. There is room for spreads to compress and there is a lot of competition to get money out. My guess is that spreads may narrow.”
Van Tuyle says lenders are not pricing the appropriate risk into today’s deals.
“I believe there is a real refinance risk for many of the loans that are being made because we could see a real rise in interest rates without a correlative inflationary pressure on rents,” he says. “Without amortization or a long-term fixed rate, many of those deals could be difficult to refinance.”
In October, DuMars observes, when the 10-year note’s yield plummeted by 1.8 percent (180 basis points), “many lenders retreated to the sidelines.”
“Lenders like stable and calm,” says DuMars. “Volatility shakes them up. During these few days, some life companies instituted rate floors and many CMBS lenders refused to quote spreads. As soon as the 10-year stabilized, everything went back to normal.”
Alliance’s Garner predicts the Federal Reserve’s tapering of its quantitative easing process (which was announced in late 2013) will lead to an increase in rates. BH Properties’ Van Tuyle agrees.
“My instincts say [rates] have to rise, to the point where I think we will see a 3+ percent 10-year Treasury in 2015. This has to be quantified to say that if there is a major market correction in the Dow Jones, there likely will be a flight to bonds, which actually could bring the yield lower in the short term and delay the inevitable, which I believe is an increase in 10-year treasuries to 3.25 percent.”
The Phoenix Metro market’s hot spots are predictable with class-A and -B multifamily properties topping Van Tuyle’s list. Industrial is stable, he adds, noting that Phoenix’s retail situation has a unique challenge to overcome.
“Retail is still tricky because Phoenix was so overbuilt,” says Van Tuyle. “Often, there are two shopping centers at the same intersection and it is a case of the haves and have nots. Once center will be stabilized at 95 percent occupancy, and the other will have under 30 percent occupancy. Location, access and parking are keys to making a retail deal work, and making sure you’re properly represented in the brokerage community is also critical.”
“Everyone is gearing up,” says DuMars. “All sectors look good for Phoenix. We have lenders seeking all of the major property types.”