In a Liquid Market, Lender Difference Matters

If there has been one consistent theme in the commercial real estate market in recent years, it’s been volatility. Geopolitical conflict, economic disruptions, and persistent inflation have created an environment few expected to normalize. This year began with the welcome return of an improving rate climate and transaction activity that was picking back up. That momentum is now being tested again with renewed conflict in the Middle East as we are reminded how quickly things can shift.  The economy and commercial real estate industry has remained resilient to date with transaction flow for maturities and investments sales continuing  in what continues to be a volatile cycle.

For investors thinking across multi-year and multi-asset investment business plans, this climate puts new tension on two critical elements of a real estate transaction: the cost of debt and certainty of execution. Rapid changes to market conditions can interrupt transactions in process, proceeds can shift and lender appetite can change. Being prepared for disruptions in this climate is both paramount and a part of the job.

Timing is everything

In a market like this, timing matters but not in the way you might expect. Yes, everyone wants to catch the right moment on rates. But more often than not, the differentiator is whether you’re prepared to go to market when that window opens.

The borrowers who execute well are the ones who start early. For sponsors with an upcoming maturity, the process should begin six months in advance if feasible. That gives time to explore potential options, engage existing relationships and bring more of the market into the conversation. At the same time, make sure you are focused on maximizing performance, organizing due diligence and preparing a solid package to submit when timing aligns.  When things align, you don’t want to be scrambling. In volatile markets, the window doesn’t stay open long. Preparation means actually being able to take advantage of it.

Debt availability

For the time being, the debt markets remain active and well-funded to meet the needs of assets in various phases of a life cycle, from permanent and bridge solutions to construction and value add programs. You might say there is more money in the market than transactions to fill the necessary pipeline. Almost all the insurance company lenders have increased their commercial mortgage allocations this year. Fannie and Freddie have substantially increased their caps. Banks have shored up their balance sheets and have returned in a meaningful way. Debt fund liquidity has never been higher. And Wall Street continues to show an appetite for CMBS and other debt related securitizations, such as CLOs. However, any of that can change and it is important to identify and engage with your preferred lender to get your loan on their radar and on their books before a shift in sentiment happens.

Certainty of close

The key to real estate financing for successful investments is certainty of execution. Once you begin down the road for a refinance or acquisition, a countdown starts for closing. A large part of managing risk comes down to who you choose to work with. Lenders that control their own capital and have a track record of closing through different cycles tend to be the most reliable. The lenders who have the most control and demonstrate follow-through once an application is locked include insurance companies, the agencies, banks and balance sheet debt funds. Life insurance companies are at the top for their proven track record in tough cycles for closing loans. For existing borrowers with stabilized multifamily properties, the agencies are also essentially turnkey once under contract with strong follow-through. Banks have returned with tighter spreads and deals they haven’t done in the recent past. Balance sheet debt funds continue to grow in numbers and allocations— from family office to institutional players. All these sources are competing for quality loans and have the greatest likelihood for closing on their commitments when market conditions get tough.

Wall Street stressors

CMBS has come back into favor, especially for borrowers looking for higher leverage and non-recourse structures. It can be a great execution but comes with more exposure to market swings. Wall Street is going to react quickly to any disruption. Spreads briefly widened with recent geopolitical tension, and ongoing rate movement can make it difficult to pin down final pricing as you move through the closing process.

There is still substantial market demand for CMBS bonds, so liquidity for these loans remains high. But in a more stressed scenario, that can change. Execution can slow down, proceeds can be reduced and certain parts of the capital stack, like the B-piece, can result in more scrutiny.

With the number of debt funds entering the CRE lending space and the massive wave of subsequent allocations, it’s important to understand where the capital is coming from. Balance sheet funds will be preferred (insurance companies, committed capital) while warehouse and repo lines or collateralized loan obligation funded platforms will be subject to swift movements in market volatility. Groups relying on warehouse lines, repo facilities or CLO execution can be more exposed if markets tighten.  When something unexpected happens, those differences matter.

The end game

We should expect to see volatility throughout the year. One impact we’re already seeing is timing.  Lenders are taking longer to respond and initial feedback might take a couple of weeks, with full clarity closer to a month as they watch the market and adjust.

At the same time, borrowers want to wait to take advantage of a dip or drop in treasuries. That’s understandable, but it can be risky. The market doesn’t always give you a clear entry point, and conditions can move the other direction just as fast. It’s more important to have enough time to choose the right lender, lock rate and go forward. In this kind of volatile environment, you don’t need to predict the market to win.  You need to be early, prepared and you need to align with lenders who can deliver when things get uncertain. The groups that understand the importance of certainty of execution are getting deals done. The ones waiting for perfect conditions will continue to wait.

Andy Bratt is a principal for Gantry.