By Jillian Mariutti, Director at Mission Capital
As we pass the year’s halfway mark, it’s an excellent time for real estate professionals across the industry to take stock of where we stand. I recently attended Bisnow’s National Finance Summit, where a host of industry experts — including developers and lenders — discussed some of the most important trends in today’s CRE capital markets.
One movement that’s hard to miss is that investment sales have slowed down significantly in New York City, and as James Nelson of Cushman and Wakefield noted, there have now been significant year-over-year declines in both 2016 and 2017. That said, as other panelists pointed out, the tremendous transactional volume of 2015 was an outlier. While there have been notable declines in successive years, we are still trending toward historical norms, and the market is fairly healthy overall.
In a panel on “Alternative Sources of Capital,” much of the discussion focused on debt funds. While borrowers once looked at borrowing from debt funds as a last resort, Jeff DiModica of Starwood pointed out that these funds have really established themselves as mainstream sources of capital. Debt funds are particularly attractive for borrowers seeking higher leverage than banks are willing to offer.
While debt funds are in ascendance, CMBS’ market share is in sharp decline, as the portion of commercial loans that will get securitized has dropped markedly in the last decade. While CMBS comprised 50 percent of debt volume in 2007, it’s just 10 percent of the market today.
Not surprisingly, most lenders are bullish on gateway cities, as compared with secondary and tertiary markets. But Raphael Fishbach of Mesa West noted that developments in non-primary markets are not doomed to fail in their quest for capital. Specifically, Mesa West is comfortable lending on deals with experienced sponsors who really know the local market — whatever its location.
One of the most important things to be aware of when considering real estate financing is how quickly the industry changes. As Drew Fletcher of Greystone Bassuk pointed out, today’s hot discussion topics within real estate are retail, co-working and transaction volume, none of which was considered a particularly important issue a year ago.
In discussing the current state of the market, David Brickman (the head of Multifamily at Freddie Mac) noted how healthy the multifamily sector is doing and how strong lending conditions are in that space. Michael May of CCRE mentioned how strong mezzanine financing is, referencing one recent 10-year mezz deal he structured at sub-5-percent rates.
Of course, despite the market strength, the panel agreed about the importance of having a strong intermediary to gather the information about the deal and help usher it to closing — and this is especially true for asset classes that have had struggles (such as retail). Similarly, Warren de Haan of ACORE Capital talked about the strength of transitional assets with a good business plan. With an able broker serving as an intermediary, these sorts of properties are increasingly able to secure capital at very strong rates.
The real estate world and capital markets both move very rapidly, and the space would be nearly unrecognizable from a vantage point just five or ten years in the past. From the challenges of the retail sector to the emergence of debt funds to the rise of a host of strong secondary and tertiary markets, CRE is evolving, and lenders are monitoring these changes as closely as anyone. Across the board, the most important thing for any borrower is a strong business plan and a forward-thinking approach that will enable them to adapt to changes in the market. With those prerequisites — and an experienced broker — any strong deal across the country should be able to get financing.