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Highlights from the Western States Commercial Real Estate Finance Conference
September 2024
Key Highlights
In recent weeks, the Talonvest team attended the Western States Commercial Real Estate Finance Conference to network with lenders and participate in discussions about prevailing and upcoming market dynamics.
Many of the lenders our team met with agreed that lending activity has increased in recent weeks, and many are taking this as a signal that transaction levels will continue to increase in the coming months.
Several life company representatives made it clear that capital is available to lend when the right opportunity presents.
Banks remain conservative, but several large banks implied that the industry may be on the cusp of increasing lending activity, especially if interest rates ease heading into 2025.
Lenders Signaled Optimism on the Heels of Increased Activity Over the Summer
Several of the lenders our team met with earlier this month at the Western States Commercial Real Estate Finance (CREF) Conference noted that transaction volume had ticked up noticeably over the last six to eight weeks. A wide variety of lenders expressed optimism about market conditions heading into the fourth quarter, and many were quick to point out that they have ample capital and welcome the possibility of financing a higher level of transaction volume moving forward.
Lenders expressed cautious optimism that the trend toward higher transaction volume could continue and cited several factors to back up the possibility of a further increase in volume into 2025. One lender called for a “wave of transaction volume in the near future,” while another cited the looming "refinance wall" that could materialize as loans originated during the pandemic near maturity. While the precise timing of this activity remains uncertain, it was apparent through our discussions that many in the industry are gearing up for increased activity.
Lenders expressed cautious optimism that the trend toward higher transaction volume could continue and cited several factors to back up the possibility of a further increase in volume into 2025. One lender called for a “wave of transaction volume in the near future,” while another cited the looming "refinance wall" that could materialize as loans originated during the pandemic near maturity. While the precise timing of this activity remains uncertain, it was apparent through our discussions that many in the industry are gearing up for increased activity.
Life Companies Have Ample Liquidity and are Actively Seeking out Deals that Meet Underwriting Criteria
Over the last eighteen months, life insurance companies have played a role in filling the gap left by the broad pullback among traditional bank lenders. Life companies are known to offer advantageous terms and pricing, but they often take a conservative underwriting approach and favor certain asset types as well as owners with requisite levels of experience.
We heard from several life company representatives that funds are still available to lend through the remainder of the year, and they are offering a variety of programs and terms to align with internal capital allocation strategies. For example, one life company lender commented that longer-term debt is pricing more economically for borrowers, while another discussed their decision to maintain liquidity for short-term lending. Notably, another lender mentioned they have a pre-stabilized perm program available, but that it is being extended to borrowers only on a specialized basis.
We heard from several life company representatives that funds are still available to lend through the remainder of the year, and they are offering a variety of programs and terms to align with internal capital allocation strategies. For example, one life company lender commented that longer-term debt is pricing more economically for borrowers, while another discussed their decision to maintain liquidity for short-term lending. Notably, another lender mentioned they have a pre-stabilized perm program available, but that it is being extended to borrowers only on a specialized basis.
Lower Interest Rates Could Unlock Sidelined Bank Capital
It’s no secret that traditional bank lenders pulled back in early 2023 due to industry-wide turmoil and have remained quiet since then. We heard from several bankers that risk tolerances and leverage levels remain conservative compared to the pandemic era. Among banks that are extending credit, most are still requiring borrowers to make deposits, albeit not to the same degree they were earlier in the year.
Interestingly, several larger banks mentioned that, internally, they are considering the need to pivot toward a more aggressive lending strategy. Banks are grappling with the impact that a decline in interest rates could have on their balance sheets. Many banks have favored loan payoffs in recent months, which has reduced asset levels and left banks with extra cash on hand. When cash produces satisfactory yields, this is not seen as an issue. However, if rates decrease as many expect, then banks will be forced to think about alternative strategies to generate interest income. Putting capital to work by ramping up lending activity is one potential side effect.
Interestingly, several larger banks mentioned that, internally, they are considering the need to pivot toward a more aggressive lending strategy. Banks are grappling with the impact that a decline in interest rates could have on their balance sheets. Many banks have favored loan payoffs in recent months, which has reduced asset levels and left banks with extra cash on hand. When cash produces satisfactory yields, this is not seen as an issue. However, if rates decrease as many expect, then banks will be forced to think about alternative strategies to generate interest income. Putting capital to work by ramping up lending activity is one potential side effect.
A Look at the Most Interesting Loan Programs from the Western CREF Conference
Our team spoke with numerous lenders, and we took note of several new and innovative loan programs.
A large bank is beginning to test a non-traded REIT targeting CMBS clients in a bid to compete with debt funds. Discussions with the bank revealed that pricing begins at spreads in the high 200s, and their goal is to keep spreads below that prevailing among debt funds. Few debt funds are able to price at spreads in the 200s in today’s market, so this is a notable development that our team will be monitoring. Additionally, the bank indicated a willingness to lend up to a 75% loan-to-value, with a 1% origination fee and no exit fee. They expressed a willingness to extend credit to smaller deals where preexisting banking relationships are not required.
A life company described a non-recourse ground up construction loan product for multifamily assets with project costs between $20 million and $60 million. These non-recourse loans are being extended up to 65% of project cost with pricing at 400-450 basis points over Treasuries. The same life company is offering perm loans between $15 million and $80 million with LTVs up to 60%, 3-15 year terms, and rates in the 170-200 basis points over Treasuries. Finally, the lender offers a bridge product in the $15 million to $80 million range with spreads in the mid-to-high 300 basis point range.
A large bank is beginning to test a non-traded REIT targeting CMBS clients in a bid to compete with debt funds. Discussions with the bank revealed that pricing begins at spreads in the high 200s, and their goal is to keep spreads below that prevailing among debt funds. Few debt funds are able to price at spreads in the 200s in today’s market, so this is a notable development that our team will be monitoring. Additionally, the bank indicated a willingness to lend up to a 75% loan-to-value, with a 1% origination fee and no exit fee. They expressed a willingness to extend credit to smaller deals where preexisting banking relationships are not required.
A life company described a non-recourse ground up construction loan product for multifamily assets with project costs between $20 million and $60 million. These non-recourse loans are being extended up to 65% of project cost with pricing at 400-450 basis points over Treasuries. The same life company is offering perm loans between $15 million and $80 million with LTVs up to 60%, 3-15 year terms, and rates in the 170-200 basis points over Treasuries. Finally, the lender offers a bridge product in the $15 million to $80 million range with spreads in the mid-to-high 300 basis point range.
Final Thoughts
Lenders at the recent Western States CREF Conference expressed cautious optimism for increased transaction volume as we head into the fourth quarter of 2024. Over the past two months, deal activity has picked up, with lenders citing ample capital and the looming "refinance wall" as factors that could drive further increases. Life insurance companies continue to lend, while banks remain conservative due to ongoing sector challenges. However, some banks are considering a pivot to more aggressive lending given expectations for impending interest rate declines. In discussions with lenders, we learned about several innovative programs that are being rolled out, and this speaks to the emerging optimism taking hold across the industry.
Talonvest Capital specializes in structuring and negotiating comprehensive capital solutions for owners of industrial, self-storage, multifamily, office, and retail assets. We create tailored capital solutions for our clients by sourcing cutting-edge lending programs and advising on capital markets trends.
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