18C — January 27 - February 9, 2017 — 2017 Forecast — M id A tlantic
Real Estate Journal
www.marejournal.com
F inance
By Israel Schubert, Meridian Capital Group Commercial finance’s strength continues into 2017
D
uring the final months of 2016, commercial real estate witnessed
ished 2016 on a high note clos- ing $35 billion in volume and entered the New Year with a
there’s enough investor and tenant demand for all asset classes.
institutional borrowers at extremely low cap rates—and these properties are being snapped up quickly. Subur- ban luxury projects aren’t necessarily achieving the same cap rates, but deals are closing and the landscape is competitive. Overall, the lending com- munity is experiencing a lot of regulatory oversight, and as a result, is slightly more cautious in its underwrit- ing. This is a fact of life, and nothing for borrowers to worry about. While we’ve seen typical real estate lenders pull back somewhat in proceeds and interest rates, we’ve yet to see the anticipated pull- back from CMBS lenders due to increasing regulations. In fact, they seem to be just as ambitious as the agencies these days. For the most part, all lender categories have got- ten aggressive in chasing and closing deals. On the construction side, lenders who might have tra- ditionally taken the entire who might ultimately end up in a second bankruptcy, in which the unprofitable lease could be sold to a third party over the landlord’s objection. An “early out” provision can also give the landlord a chance to participate in the upside if the debtor success- fully reorganizes: the debtor could be given the right to avoid early termination by paying some portion of the forgiven rent, by paying a higher rent going forward, or both. The renegotiation sword can indeed cut both ways. On the other hand, if the landlord knows (or strongly believes) that its location is solidly profitable, it can go “all in”. In this scenario, the landlord tells the debtor that it will not even consider a demand for concessions unless the debtor provides profitability information for the location in question. In most cases, the debtor will refuse; at that point, the landlord should simply go on “radio silence”. If the location is indeed as profitable as the landlord believes, then the chances are good that the debtor will ultimately swal- low its pride and assume the lease unmodified.
capital stack are pulling back, but this has opened oppor- tunities for other lenders to come in and fill the gap with preferred equity. There are many opportunistic lenders out there who will make sure the market still functions in a highly-efficient manner. Meridian Capital Group remains bullish about com- mercial real estate financing as the market continues into 2017. While interest rates have risen, they’re still low from a historic perspective; fundamentals will continue to remain strong across all asset classes, and lenders are ready to close deals. These trends position us well to service ex- isting and new clients in the months ahead. Israel Schubert is a se- nior managing director of Meridian Capital Group’s New Jersey and Florida offices. The strategic focus of the offices extend into New Jersey, Pennsylvania, New England, Maryland, DC, Virginia and Florida. n Even in the case of a prof- itable location, a debtor’s demand for concessions can sometimes be turned to the landlord’s advantage. “Early outs”, recaptures, and other landlord-friendly modifica- tions can often be obtained in exchange for relatively modest concessions if the lo- cation is solidly profitable for the debtor. Generally, a landlord can force a debtor to decide wheth- er to assume or reject a lease, but can’t force the debtor to pick one over the other. Still, applying the psychology of a poker player to the demand for concessions can often lead the debtor in the landlord’s preferred direction. Don’t assume that you’ve lost until all the cards have been revealed. William J. Levant is a principal in Kaplin Stew- art’s Blue Bell office, and a member of its commercial litigation department. His practice focuses on representing creditors, particularly small- and medium-sized financial in- stitutions, in foreclosure, collection and workout matters, and as creditors in both consumer and commercial bankruptcy cases. n
a dramatic rise from all- time-low in- terest rates. Unlike pre- vious spikes, which were temporary , the e f f ec ts of these in-
“While interest rates have risen, they’re still low from a historic perspective; fundamentals will continue to remain strong across all asset classes; and lenders are ready to close deals.”
robust pipeline of activity. Aside from interest rates, fundamentals remain solid throughout the areas Merid- ian Capital Group covers in New Jersey, Pennsylvania, Maryland, Delaware, and Virginia. The demand for multifamily product, in par- ticular, hasn’t slowed down, and industrial is riding on the positive sentiment being felt throughout the business world. Office space is experi- encing occupancy increases, while retail ownership is tak- ing a hard look at tenancy and repositioning assets to attract more shoppers. We haven’t seen any slowdown in leasing or rental rates across any of these sectors, and despite an increase in new development, 10% of these 2017 maturities. Agency borrowing will con- tinue to remain supreme and act as the lender of last resort. Fixed-rate agency borrowing is based off a Treasury index plus a spread. The 10-Year Treasury, often regarded as the benchmark for economic activity, is expected to stay in the mid to high 2% range through 2017. While total agency borrowing costs are currently above other lending options, spreads have room to tighten from current levels to maintain competiveness in the marketplace. Their position in the market as virtually omnipresent lend- er, especially as traditional lenders move to the side- lines for the aforementioned reasons, will increase their volume, offsetting tighter spreads. Additionally, while Federal Housing and Finance Agency (FHFA) imposed caps on volume remain at the same levels as 2016, both Fannie Mae and Freddie Mac con- tinue to add to cap exclusions, driving additional volume. Agency securitizations will continue to remain in demand as a desirable risk-adjusted return alternative for insti- tutional investors. In our opinion, financing options in the multifamily market will
The multifamily sector has been a particular standout. To demonstrate its strength, Meridian Capital Group re- cently arranged $116 million in permanent financing for Rittenhouse Hill Apartments, a 626-unit luxury multifamily property located in Philadel- phia. Lender interest was both strong and competitive for the property, andMeridian was able to secure a five-year loan at a fixed rate of 3.13% with one-year of interest-only payments. While Mid-Atlantic multi- family properties might not sell as fast as properties in New York City, the market is experiencing plenty of high- end rental development that developers intend to sell to remain favorable to owners and purchasers this upcoming year, albeit it at higher rates than seen in 2016. IN CLOSING In closing, we hope this outlook has shed some light on some of what our team is focusing on, and what moves the markets that have an ef- fect on our business. While there are always opportunities abound for savvy investors, we continue to believe that real estate is the best way to achieve above average risk-ad- justed returns while hedging against inflation and short- term uncertainty. For those reading this that are new to our team, our door is always open. We encourage industry professionals and investors alike to connect with us in 2017, and discuss how we can work together to achieve posi- tive results. Happy New Year from Lucern Capital Partners! David Hansel is a man- aging member of Lucern Capital Partners, a fully integrated real estate in- vestment firmfocusedonac- quiring core-plus andvalue- add real estate investments in markets throughout the Mid-Atlantic andNortheast. David also is a principal and the president of Alpha Funding Solutions. n
Israel Schubert
creases will hang around for a while and impact both purchases and proceeds bor- rowers are able to receive from refinancing. Despite this change, the forecast for commercial real estate financing remains posi- tive. Interest rates are still near historical lows, with five-year money in the 3.50% range and seven-year money in the 4.00% to 4.25% range. And plenty of lenders have strong appetites to finance both new investments and refinance mortgages coming due over the next 18 months. Meridian Capital Group fin- prior to the financial crisis. The culmination of regula- tory pressure to de-lever CRE concentrations, and the pre- ponderance of a higher rate climate, will see banks widen- ing their lending on personal and commercial banking to increase their net-interest spreads, and choosing to al- locate capital to US Treasury securities and government backed Fannie Mae and Fred- die Mac products which offer higher risk-adjusted returns and are backed implicitly and explicitly by the United States government. In the vacuum of traditional relationship and construction lenders pulling out of this sec- tor, bridge funds and private lenders will continue to fill a much needed gap for over-le- vered and transitional product left over from the 2006-2007 lending climate (10 year prod- uct coming to maturity). There is approximately $100 billion of product across all asset classes that is expected to mature in 2017. More re- cently, approximately 30% of this product has failed to pay off on time triggering maturity defaults. The highest concen- trations of this are office and retail assets. Multifamily as- sets represent approximately
continued from page 4C 2017 Economic Outlook... By David Hansel
continued from page 3C Anyone for poker?... By William Levant
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