Refi Replay: A Buyer’s Market Looms for 2018

By Jeffrey Steele

Image by leszekglasner/iStockphoto.com

If you liked refinancing in 2017, you’ll probably love 2018. A liquid market is breeding robust lender competition, and next year is likely to feature low interest rates, generous interest-only periods and compressed spreads.

“We’re still seeing all commercial assets being very attractive, (including) hotels, office and retail,” said David Sonnenblick, co-founder & principal of Sonnenblick-Eichner Co.

In September, the Beverly Hills-based firm arranged $165 million of non-recourse, first-mortgage financing, including 15 years interest-only, to refinance a 1.3 million-square-foot mixed-use property on Oahu owned by AIPA Properties LLC. AIPA chose a life company execution for the deal, which also attracted conduits.

Lenders are refinancing assets in a climate marked by stability. The Mortgage Bankers Association estimates that commercial and multifamily originations in 2018 will be comparable to this year’s projected $515 billion volume.

Nor do veteran investment bankers expect a big leap in refinancing costs, despite two 25 basis-point hikes in the Federal Reserve’s benchmark rate this year and wide expectations for a third increase by Dec. 31. If rates rise, borrowers may switch from floating to fixed terms because the difference between the two will narrow, suggested Gerard Sansosti, a Pittsburgh-based executive managing director for HFF. That said, he added, “I don’t see any real pressure on rates to rise until we see significant growth in the economy.”

Boldness and discipline

Life companies have demonstrated characteristically disciplined underwriting, while commercial banks continue to show caution, particularly in originating permanent loans. One major change: the rising profile of debt funds. “They’ve become much more aggressive … in terms of loan-to-value ratios, pricing and structure,” Sansosti observed.

More welcome news: less volatility in the CMBS market, thanks to lender discipline, improved execution and well-timed securitizations. Moreover, Sansosti said, “the maturity wave everyone has been concerned about for years has proven anticlimactic because the amount of liquidity in the market has allowed the majority of maturities to be refinanced.”

As in 2017, sponsors seeking to refinance will find variable underwriting. Lenders are “a little more skittish” about refinancing retail, reported Jason Bressler, vice president for originations with Mesa West Capital. The firm is “looking to home in on (somewhat) more resilient deals with high-quality tenants, like grocery or drug anchors,” he added.

Hotels, too, are often refinanced conservatively, yet lenders are receptive to high-quality new product, like the 330-room Aloft and 180-room Element in Boston’s Seaport District. On behalf of the assets’ co-owners, Ares Management LP and CV Properties LLC, HFF recently arranged $140 million from Starwood Property Trust. 

In short, terms will depend on asset quality, but as Sonnenblick emphasized, “there’s plenty of capital for all product types.”

Originally appearing in the December 2017 issue of CPE.