Following through with pre-pandemic expansion plans, Black Bear Capital Partners has recently boosted its national platform structured debt and equity advisory by opening new offices in Chicago and New Jersey. The Black Bear Asset Management affiliate is adjusting to shifting demand for capital in the wake of the COVID-19 crisis.
Commercial Property Executive spoke to Senior Managing Director Matthew Stearns and Managing Director Scott Modelski, both based out of the company’s Chicago office. Stearns and Modelski gave their insights on increasing borrowing costs, longer due diligence periods and other changes we may see in coming months.
BBCP recently closed on several loans for multifamily properties. What can you tell us about securing financing for retail and office properties during COVID-19?
Stearns: Both asset classes are being viewed through a microscope by lenders. Again, the focus is on the credit quality of the tenants as well as the collections history and trendline over the last several months. Office is still viewed more favorably than retail at this point, and interestingly, there seems to be more interest in suburban office than urban core. This is a paradigm shift that pre-dates the pandemic and is a result of market participants believing tenants will be seeking space closer to home in a less dense environment.
Retail has been a challenging sector for years. The pandemic has expedited the situation, with numerous retailers filing for bankruptcy, adding to a multitude of difficulties facing retail landlords. Capital is available for these assets. However, borrowing costs are increasing and it is taking much longer for deals to close. As lenders are thoroughly underwriting the asset, they are, for the most part, digging much deeper into the health of each individual tenant, necessitating longer due diligence periods, and thus taking longer to close.
The crisis has sparked a refinancing wave in the multifamily sector, but what about other asset classes?
Modelski: The refinancing wave is currently limited to the multifamily property sector, specifically via agency lenders. Additionally, in order to take advantage of the current rate environment, the property needs to have performed well through the pandemic—high occupancy and strong collections. From our vantage point, we have seen that lenders are adequately staffed and prepared to handle the current volume.
Stearns: I would agree that refinancing is somewhat limited right now to the multifamily sector, but it is happening in other asset classes, although at much lower loan-to-value ratios than in the past two to five years. Pre-pandemic, permanent debt was in the 70 percent to 75 percent loan-to-value range. This has since dropped to the 60 percent to 70 percent range, but we expect that to creep back up in the second quarter of 2021. Moreover, many lenders are collecting more reserves for risk mitigation, which is part of the reason the leverage is much lower. We expect rates to stay at this level for the next couple of years, so risk mitigation will further escalate as the capital markets start to thaw.
What are some of the most popular debt/equity structures you’ve worked with amid the pandemic? What about the most commonly used sources?
Modelski: Given the compression in rates, we have seen a significant amount of volume in agency financing. The commercial mortgage-backed securities market was on the sidelines from March until about the end of July. Since then, we have seen CMBS lenders become more aggressive for assets that fit their program. True joint venture equity 90/10 structures are available, primarily for industrial developments and certain multifamily deals. However, the risk appetite for joint venture investors has tightened, and most are looking to put together a deal with a preferred equity structure as it provides a lower risk.
Stearns: Joint venture equity was, and still is, almost entirely limited to industrial and multifamily. We expect this to change substantially coming at the end of the first quarter in 2021, once we get past the election and hopefully past the pandemic as well. Banks, agencies and some debt funds were the most active lenders during the height of the pandemic.
How does the scale of a lender (regional/national) influence the terms of a financing deal?
Stearns: National banks are not as aggressive in leverage and overall terms as regional and community banks.
Modelski: Typically, the size of the deal will dictate the size of the bank that is the best fit. For the largest institutional level deals, the largest four-five banks will provide the best terms. Regional banks are servicing mid-market-sized deals, and for smaller deals, community banks and credit unions are typically the best fit. This situation is a product of matching the size of the bank’s balance sheet and their appetite for risk to the individual deal.
What are some of the trends you see in construction financing?
Modelski: On a national basis, we have seen steady demand for industrial assets—tapering off in multifamily—and essentially no demand in other asset classes. There is construction capital available, however, from fewer sources providing less leverage and higher pricing compared to pre-pandemic levels.
Stearns: Self storage, medical office and other obscure asset classes with compelling stories are also getting attention. Student housing is getting solid construction financing looks in the right markets.
What should project sponsors expect in terms of underwriting standards and the cost of capital?
Modelski: Expect a higher level of scrutiny on the property fundamentals, particularly on the rent roll. For multifamily assets, there is a strong focus on collection history and the trendline of collections through the pandemic. On other asset classes, the focus is also on collections as well as the underlying credit of the tenants. Lenders are focused on the credit profile of tenants more than ever.
Regarding the cost of capital, it depends on the stage the asset is in. For stabilized, well-located assets, capital has never been less expensive. On value-add and construction loans, the cost of capital has increased from pre-pandemic levels. Although base rates, such as LIBOR, have hit historic lows, lenders are implementing LIBOR floors—typically 1 percent—and have increased spreads. For rescue or “hard money” capital, pricing has increased to reflect the risk these deals bring given the numerous unknowns caused by the pandemic and its impact on the economy.