It is difficult to outrun the business cycle. The best developers and their financing partners work hard to anticipate the end of cycles and plan accordingly. At least half the time, however, changes in the business cycle cannot be anticipated and the best professionals adapt.
below 2.70, the deal is back in front of the lender.
market. There have also been deals that were ready to go to market and sellers decided not to proceed. Based upon our national calls, it seems that pricing is anywhere from 10 to 15 percent below what it was in late 2021. That’s a blanket statement but if you work out the rates and the required returns that’s about where you would be.” Unlike in 2009, investor capital has not been decimated, but the desire to deploy it has cooled. Lenders are taking advantage of the way the market has
“There’s such volatility that it’s almost impossible to transact,” he remarks.
The outlook for commercial real estate financing is for a quiet fall and winter. There is still liquidity in the market that could be deployed if conditions improved unexpectedly, but there is no urgency to put it to work right now. Most commercial properties are performing in line with financing that was put in place before rates and inflation jumped. Delinquency rates remain low. The leading indicators of deal volume suggest that owners will play the hands they have been dealt for a while. “Our volume of assignments has dropped a lot and, with the rate hike in July, I expect this quarter will see a real decline. After we get through what’s in the pipeline for the next month, I think the third and fourth quarter will see a significant slowdown,” predicts Griffith. “People will begin to sit on the sidelines, expecting that this time next year the Fed may be cutting rates. If you’re not forced to refinance and you don’t have to buy something it will be easier to sit on the sidelines. That shouldn’t affect new construction as much as acquisitions.” It is difficult to outrun the business cycle. The best developers and their financing partners work hard to anticipate the end of cycles and plan accordingly. At least half the time, however, changes in the business cycle cannot be anticipated and the best professionals adapt. For capital markets that means changing lending standards and pricing to recognize the increased risk. That usually means that fewer projects are financed. While that is not ideal for development, it is the way capital markets work when they are at their most efficient. It is clear that in 2022 lenders are anticipating that the risk of development will be higher and are responding as would be expected. Prudent developers are behaving similarly. When you consider the alternative - as occurred in 1986, 1999, and 2007 - tightening lending conditions ahead of a slowing market is short-term medicine the market needs to avoid longer and deeper pain. DP
“Our characterization of the market would be disjointed, as we are still experiencing a wide variety of spread quotes on any given day deal. Our appetite for industrial and multifamily remain strong along with grocery-anchored retail,” Puntil laughs as he reads the report, noting that every lender’s appetite seems to be the same. Puntil notes that the increase in spreads on corporate bonds influenced the life companies significantly. “Spreads on corporate bonds widened to 200 basis points. For life companies that meant that the spread on mortgages had to widen by 25 to 50 basis points,” he explains. “The sticker shock from the widening of the spreads and the run up in the Treasuries also contributed to the slowdown. Mortgages have had to compete with bonds to get deals done.”
slowed to tighten lending standards and increase the compensation they want for the increased risk. “I had a hotel deal placed with a local bank that is being acquired. That deal should have closed two months ago but it had to go through the committee of the acquiring bank and the acquiring bank decided they weren’t doing any hotels. We lost the deal and had to put it back together,” says Autumn Harris, principal at Rose Finance LLC. “We are definitely seeing things like that happen in the market. We’re seeing term sheets fall through and lenders reversing commitments.” Large publicly traded banks have begun to feel pressure from the Federal Reserve Bank about the level of real estate exposure for Tier 1 capital. The larger banks have tightened underwriting and the smaller regional banks have begun to follow. Construction loan allocations have begun to shrink. Construction loans that have been done are significantly more expensive than a year ago and the permanent financing may be 200 basis points higher than in 2021. One Pittsburgh banker noted that debt service coverage, which has not been a constraint on deals during the past decade, is now a constraint on almost every deal. Matt spoke of a refinancing deal that the owner pulled from Fannie Mae after the 10-year Treasury hit 3.49 percent in mid- June. Just 45 days later, with the 10-year
A reversal of the decade-long compression of cap rates has been
expected, especially since base interest rates have been pushed higher quickly. Rising cap rates will dampen the proceeds for sale or refinancing, which will put downward pressure on property values. Thus far, cap rates have not lifted at the same pace as short-term interest rates, but investors seem to be expecting that to follow. “The flow of deals is definitely lighter. I don’t think cap rates have moved that much; it’s more the result of the bid/ask spread between buyers and sellers,” says Matt. “Deals have been pulled from the
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