A Bird’s Eye View
Monthly Newsletter
Evolving Perm Loan Market Unlocks Opportunities for Borrowers
July 2024
Key Highlights
Acquisition volume has been slow over the last 18 months due in part to challenges that buyers have faced in obtaining permanent financing for new purchases.
As we progress through 2024, the perm loan market has shown encouraging signs for buyers as evidenced by multiple life companies quoting refinance loans at spreads as low as Treasury plus 140-150 basis points.
Important developments in the commercial mortgage-backed securities market have provided a tailwind to the perm loan market that could continue into the second half of the year.
Recent Perm Loan Market Dynamics are Encouraging Borrowers to Revisit Stalled Deals
Over the last eighteen months, plenty of deals across the commercial real estate landscape have been put on hold due to challenges that buyers faced in obtaining financing on satisfactory terms. Higher rates and tighter underwriting standards have prevailed, and collectively, these factors have contributed to trepidation among buyers working on new deals and owners exploring refinancings.
More recently, market conditions surrounding permanent financing have eased, and the supply of capital has grown. Prospective borrowers who were unable to complete deals in 2023 or early-2024 are beginning to revisit these deals. They are increasingly finding that acquisitions or refinances that could not be completed earlier in the cycle due to stricter underwriting standards or onerous terms are more likely to be viable in today’s environment.
Two loan products – life insurance company financing and commercial mortgage-backed securities (CMBS) – have contributed to the recent, favorable market conditions for perm financing. It is possible that deal volumes through the remainder of the year will receive a boost if financing from these product groups continues to be available on satisfactory terms.
More recently, market conditions surrounding permanent financing have eased, and the supply of capital has grown. Prospective borrowers who were unable to complete deals in 2023 or early-2024 are beginning to revisit these deals. They are increasingly finding that acquisitions or refinances that could not be completed earlier in the cycle due to stricter underwriting standards or onerous terms are more likely to be viable in today’s environment.
Two loan products – life insurance company financing and commercial mortgage-backed securities (CMBS) – have contributed to the recent, favorable market conditions for perm financing. It is possible that deal volumes through the remainder of the year will receive a boost if financing from these product groups continues to be available on satisfactory terms.
Life Companies are Coming to the Table in Support of Permanent Financing
Many owners are aware of the benefits typically associated with life company financing, including the advantageous terms and pricing. It is also widely known that life companies typically take a conservative underwriting approach and favor certain asset types as well as owners with requisite levels of experience.
Through 2024, the life insurance industry has produced solid operating performance, and insurance liabilities have continued to grow. Collectively, these factors have encouraged life companies to place capital into productive assets, and they have indicated a willingness to gain exposure to commercial real estate credit. As a result, life companies have remained a steady, albeit selective, source of capital for borrowers and assets that fit the lending requirements.
Recently, several Talonvest clients have sought life company financing on multi-family, self-storage, and industrial assets. The responses have been strong with a diverse set of life company lenders expressing interest in extending financing to our clients. Through interactions with these lenders, we have gained clarity and confidence in the appetite among life companies to extend credit.
The loan packages that have come out of these conversations have been compelling. Quotes on sub-50% leverage opportunities have been priced in the range of 140-150 bps above the 10-year Treasury yield. When viewed through a historical context, fixed pricing in the mid-5% range provides favorable leverage to support new acquisitions as well refinances for long-term asset ownership. Pricing like this could continue to boost the demand for life company financing through the second half of the year.
Through 2024, the life insurance industry has produced solid operating performance, and insurance liabilities have continued to grow. Collectively, these factors have encouraged life companies to place capital into productive assets, and they have indicated a willingness to gain exposure to commercial real estate credit. As a result, life companies have remained a steady, albeit selective, source of capital for borrowers and assets that fit the lending requirements.
Recently, several Talonvest clients have sought life company financing on multi-family, self-storage, and industrial assets. The responses have been strong with a diverse set of life company lenders expressing interest in extending financing to our clients. Through interactions with these lenders, we have gained clarity and confidence in the appetite among life companies to extend credit.
The loan packages that have come out of these conversations have been compelling. Quotes on sub-50% leverage opportunities have been priced in the range of 140-150 bps above the 10-year Treasury yield. When viewed through a historical context, fixed pricing in the mid-5% range provides favorable leverage to support new acquisitions as well refinances for long-term asset ownership. Pricing like this could continue to boost the demand for life company financing through the second half of the year.
The Reactivation of the CMBS Market is Creating Positive Ripple Effects
During the post-pandemic interest rate escalation, CMBS production decreased significantly as borrowers found more compelling options through other borrowing channels. However, over the last twelve months, the CMBS market has seen a resurgence as investor interest in securitized assets has pushed spreads down. Green Street’s Commercial Mortgage Alert reported that AAA spreads on newly issued conduit CMBS averaged 94 bps in June 2024 compared to 151 bps when Treasury Yields peaked in late 2023 and 175 bps when the regional bank failures occurred in March 2023.
In addition to spread compression, pricing has been aided by the recent decrease in Treasury rates, and issuance volumes have grown in lockstep. According to the Wells Fargo & Company June CMBS Market Update, May 2024 was the most active month for non-Agency CMBS issuance since February 2022.
Recent firsthand experience in the CMBS market supports the notion that CMBS financing is available on suitable terms. In July 2024, Talonvest closed a 65% LTV, mid 8% debt yield refinance loan at a 228 bps spread with 10 years of IO payments. We also have an application in progress for a higher leverage, lower debt yield assignment that was quoted at a 240 bps spread for 10 years of IO payments. In both cases, a very high number of lenders submitted bids to win the loan business.
Borrower interest in CMBS financing has increased as pricing has compressed. As CMBS terms have become more compelling, lenders across other product groups have taken note, and we are beginning to see a heightened awareness among non-CMBS lenders of the possibility that narrower CMBS spreads could spur broader pricing competition.
In addition to spread compression, pricing has been aided by the recent decrease in Treasury rates, and issuance volumes have grown in lockstep. According to the Wells Fargo & Company June CMBS Market Update, May 2024 was the most active month for non-Agency CMBS issuance since February 2022.
Recent firsthand experience in the CMBS market supports the notion that CMBS financing is available on suitable terms. In July 2024, Talonvest closed a 65% LTV, mid 8% debt yield refinance loan at a 228 bps spread with 10 years of IO payments. We also have an application in progress for a higher leverage, lower debt yield assignment that was quoted at a 240 bps spread for 10 years of IO payments. In both cases, a very high number of lenders submitted bids to win the loan business.
Borrower interest in CMBS financing has increased as pricing has compressed. As CMBS terms have become more compelling, lenders across other product groups have taken note, and we are beginning to see a heightened awareness among non-CMBS lenders of the possibility that narrower CMBS spreads could spur broader pricing competition.
Final Thoughts
As we move further into 2024, the dynamics of the permanent loan market are encouraging buyers to reconsider previously stalled deals. With higher rates and tighter underwriting standards posing significant challenges over the past year, many transactions were put on hold. However, recent improvements in market conditions, particularly in life insurance company financing and CMBS, are reviving interest and feasibility in these deals. These developments represent a chance for borrowers to reconsider deals that were discussed in 2023 and early 2024 to determine if there is an opportunity to capitalize on the improved availability of financing on satisfactory terms.
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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