10 Insights from the IMN Borrower and Investor Forum on Mezzanine Debt

Financiers, developers and investors gathered at IMN’s Borrower and Investor Forum in New York City on November 1 to talk about the real estate lending environment for 2017. Here is what they are seeing in the financing market today:

1. The debt market is generally open and available for stable, cash-flowing assets, with alternative lenders competing aggressively for mezzanine deals on these types of assets. Debt lenders are also willing to extend a bit more credit on transitional projects, according to Ravi Anand, first vice president of investments with the CIM Group, a full-service real estate investment firm.
2. Debt funds will be targeting transitional assets in 2017 and have also been very active in providing senior stretch loans, helping refinance 10-year maturities.
3. Traditional lenders are bullish, but not overly so, and are still following strict underwriting standards. They are most comfortable with sponsors who are willing to put 15 to 20 percent equity in the deal—then, banks are beating on your door to give you money, noted George Hasenecz, senior vice president of investments with the REIT Brandywine Realty Trust.
4. The industry is experiencing a lull in activity now, coming off a fairly heavy investment period over the past 12 months, said Michael Maturo, president of New York-based RXR Realty, a real estate management and development firm. Maturo predicts “a couple of more years” of strong capital flows into “major 24/7 cities” such as New York, saying that Chinese insurance companies in particular want to diversify their holdings. “They have 1 percent of their balance sheets invested in the U.S.; they want 7 to 10 percent of their balance sheets invested.”
5. There continues to be a lot of interest from foreign investors, on both debt and equity side. Foreign investors still see the U.S. as a very safe economy, according to Hasenecz. This year foreign investors have also started looking into secondary cities, he added, giving the example of Cira Square, the old post office building in Philadelphia that sold for over $340 million to Korean investors.
6. Debt providers are becoming more active in lending on multifamily assets, panelists said. There is a strong market for mezzanine financing on multifamily construction loans. Borrowers will end up paying up to 50 basis points more on construction financing for multifamily, as lending for this asset type has tightened, predicted Anand. There is not much financing available for ultra luxury multifamily assets.
7. In some cases, primary lenders are willing to step up to bridge the gap in financing for borrowers in order to retain control on speculative development, Hasenecz said.
8. “Nobody has completely figured out risk retention in regard to CMBS coming through, but it should open up once lawyers figure out how to make deals work,” said Jake Bisenius, chief investment officer at property management firm AMCAP Inc. “What seems to work,” he added, “is holding a vertical stack.” Panelists agreed that CMBS borrowers are trying to secure financing before December, with analysts predicting a 50-basis-point spread between deals closed this year and the next.
9. “We are in a wacky environment,” with massive funds expansion with no alternatives and little growth, said Sean Egan, president of Egan-Jones Ratings Company. Globally, elevated ratios of sovereign debt to GDP mean many countries can’t afford to answer to raised interest rates. Compounding the picture is that Central Banks own $25 trillion in financial assets, which is more than the GDP of the U.S. and Japan combined, Egan added.
10. The low yield environment is unprecedented and could extend the recovery, speakers at the Macro-Economic Viewpoint 2017 panel said. “We have to recognize that we have historical low interest rates, and negative interest rates in many countries,” said Jeff Carswell, partner in capital markets group at The Shidler Group, a private equity investment firm. “The global hunt for yield can lead to strange behavior.” He noted that corporate balance sheets are leveraged on the backs of low interest rates, asking, “So when rates rise, how does debt get repaid?”