{"id":1004637154,"date":"2023-01-04T22:18:07","date_gmt":"2023-01-05T06:18:07","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004637154"},"modified":"2023-01-18T11:37:56","modified_gmt":"2023-01-18T19:37:56","slug":"sluggish-sales-and-refinancings-cast-doubt-over-property-values","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/sluggish-sales-and-refinancings-cast-doubt-over-property-values\/","title":{"rendered":"Sluggish Sales and Refinancings Cast Doubt Over Property Values"},"content":{"rendered":"
\"\"<\/a>

Image by erhui1979\/iStockphoto.com<\/p><\/div>\n

By all accounts, commercial real estate lending activity has largely come to a standstill despite an abundance of liquidity in the market. A roughly doubling of interest rates to around 6 percent in a matter of months this year has fueled a bid-ask spread that has sent buyers and sellers to the sidelines amid property value uncertainty and recession fears.<\/p>\n\n\n

\n
READ THE DIGEST<\/a><\/div>\n<\/div>\n\n\n
\"\"<\/a>

Scott Modelski<\/p><\/div>\n

Without deals to fund, lenders, too, are on the sidelines. Or at least they have become much more conservative. Like buyers and sellers \u2013 and borrowers who need to refinance \u2013 they are waiting for a clear and confident sign that commercial real estate values have reset.<\/p>\n

\u201cA lot of lenders have stepped back for the remainder of the year after doing a lot of volume and hitting their target in the first half or three quarters of the year,\u201d said Scott Modelski, a managing director with Black Bear Capital Partners in Chicago. \u201cBut there\u2019s a lot of uncertainty out there, and people are trying to figure out the landscape.\u201d<\/p>\n

Patience Required<\/h2>\n
\"Joseph<\/a>

Joseph Iacono<\/p><\/div>\n

Exactly when the reset happens is the great unknown. But mortgage banking specialists anticipate that lending activity will begin to pick up midyear in 2023. Around that time, observers expect borrowers who have delayed refinancing or selling to face potential distress and forced into action. That time period is also expected to follow the end of Federal Reserve rate hikes, which should bring some stability to mortgage rates.<\/p>\n

What\u2019s more, publicly listed REITs were trading at a median 22 percent discount to their net asset value estimates in early November, according to S&P Capital IQ. Among conventional property categories, the discounts ranged from 16.4 percent for industrial REITs to 47.8 percent for office REITs. Typically, changes to REIT valuations are a leading commercial real estate indicator, but it takes time for the broader market to adjust. \u201cThis is not brain surgery,\u201d said Mitch Sinberg, senior managing director for Berkadia\u2019s Florida mortgage banking team in Boca Raton. \u201cIt\u2019s commercial real estate, and we\u2019re in price discovery mode. Until we get to a point where people really understand what pricing levels should be, we\u2019re just not going to see a tremendous volume of transactions.\u201d<\/p>\n

\"\"<\/a>

In November, JLL facilitated a $39.7 million loan to refinance Bridgeport I and II, a 178,061-square-foot office building complex in Austin, Texas. The complex was 78 percent leased, and the borrower paid the loan down by $8 million and committed $4 million to tenant improvements and lease commissions.<\/p><\/div>\n

In November, Sinberg and other Berkadia team members arranged a nearly $81 million bank construction loan to build a 448-unit, high-rise luxury condominium in Miami.<\/p>\n

The lack of trades is only clouding the value picture because the market cannot develop an opinion as to where cap rates are today. As a result, CMBS investors are demanding more compensation for greater risk: Spreads on AAA-rated bonds widened 85 basis points in November 2022 from the beginning of the year, and spreads on BBB-rated bonds more than doubled to 820 basis points, according to Trepp.<\/p>\n

\u201cWe\u2019ll see cap rates rise 15 basis points in some products, 50 basis points in another, and 100 basis points in still another,\u201d said Joe Iacono, CEO of Crescit Capital Strategies, an alternative commercial real estate lender based in New York. \u201cThe public markets are telling us their perception of cap rates relative to NAV. Multifamily cap rates are going to widen with higher interest rates \u2013 it\u2019s just mathematics \u2013 but it may be not as much as in office.\u201d<\/p>\n

It’s the Cost of Capital, Stupid<\/h2>\n
\"\"<\/a>

Source: MSCI<\/p><\/div>\n

Investment sales volume plunged 43 percent in October from a year earlier, to $42.8 billion, marking the third straight month of year-over-year declines, according to MSCI Real Assets, a New York-based commercial real estate research firm that tracks deals of $2.5 million or more. Year-to-date volume of $622.3 billion continued to outpace the same 2021 period by 10 percent, largely due to brisk transaction activity in the first half of 2022, MSCI Real Assets reported.<\/p>\n

Meanwhile, the 10-Year Treasury yield, which in October hit 4.2 percent for the first time in more than a decade, had receded about 70 basis points by late November. While that could translate into lower mortgage rates, the continued volatility in the credit markets and short-term yields trading some 70 basis points higher than long-term yields continue to signal recession<\/a>.<\/p>\n

\"\"<\/a>

Wally Reid<\/p><\/div>\n

Still, a roughly 32-basis point drop in the 10-Year bond yield over a few days sparked a flurry of activity at Fannie Mae and Freddie Mac recently, as borrowers who had been waiting on the sidelines locked in interest rates, said Wally Reid, senior managing director with JLL Capital Markets and co-leader of the firm\u2019s debt business.<\/p>\n

\u201cNothing is broken in the lending markets,\u201d declared Reid, who is based in Houston. \u201cLenders want to transact, and they\u2019re liquid. But the cost of capital has just made everyone stop.\u201d<\/p>\n

Pain Ahead<\/h2>\n

Big money center banks were among the first lenders to pull back in the summer after Federal Reserve stress tests<\/a> determined they needed to increase their stress capital buffers to balance heightened loan risks, Reid said. That largely made other large banks follow suit. For a time, regional and community banks filled the gap, he added, but by October, most banks had tightened commercial real estate lending<\/a> as demand for loans fell and uncertainty about values climbed.<\/p>\n

\"\"<\/a>

In September, Black Bear Capital Partners arranged an $18.6 million community bank loan to refinance two suburban Chicago office buildings totaling 400,000 square feet. The five-year fixed-rate loan featured a loan-to-value ratio of 70 percent.<\/p><\/div>\n

Nowhere is that truer than in the office category<\/a>. About nine months ago, an investor was seeking financing for an older but modern, glass-curtain-wall corner office building in New York that was selling for $600 per square foot. The fact that the price was at least half of its pre-COVID value made it an attractive deal at the time, said Iacono, who ultimately didn\u2019t do business with the borrower. More recently, the borrower told him that prices for similar offices had dropped to $400 per square foot.<\/p>\n

\u201cWe are opportunistic, and we have historically gone where no man has gone before if we can develop a thesis on the dynamics of a deal,\u201d he said. \u201cBut it\u2019s a little too early right now, and, unfortunately, there\u2019s going to be more pain before we hit a bottom.\u201d<\/p>\n

Some deals are still happening, but lenders must have confidence that sponsors who possess specific product type expertise, have a firm grasp on the deal\u2019s fundamentals, and can identify demand and project leasing activity for the next few years, Modelski said. In September, Modelski arranged an $18.6 million community bank loan to refinance two suburban Chicago office buildings totaling 400,000 square feet. The five-year fixed-rate loan featured a loan-to-value ratio of 70 percent.<\/p>\n

\"\"<\/a>

Mitch Sinberg<\/p><\/div>\n

\u201cThe owner was able to point to an operating and collections history over the last four or five years and into the pandemic, and, even in the case of deteriorating cash flow, it was going to be able to pay the loan\u2019s debt service,\u201d he said. \u201cNot every deal looks like that.\u201d<\/p>\n

Similarly, in November, Reid and another JLL mortgage banker facilitated $39.7 million in private lender debt to refinance a 178,061-square-foot two-office building complex in Austin, Texas. The complex was 78 percent leased, and the borrower did a \u201ccash-in\u201d refinancing by paying the loan down by $8 million and committing $4 million to tenant improvements and leasing commissions, he said.<\/p>\n

\u201cIf the borrower has cash or the borrower has leases, everything is financeable,\u201d Reid explained. \u201cBut if you have an office building that\u2019s 60 percent leased and lease prospects aren\u2019t looking good, it\u2019s tough to get that deal done.\u201d<\/p>\n

Read the January 2023 issue of CPE.<\/em><\/a><\/p>","protected":false},"excerpt":{"rendered":"

Mortgage bankers await rate stability so deals can start flowing again.<\/p>\n","protected":false},"author":890,"featured_media":1004637158,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1521,21825],"tags":[],"class_list":["post-1004637154","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-digital","category-finance"],"acf":[],"yoast_head":"\nSluggish Sales and Refinancings Cast Doubt Over Property Values - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/sluggish-sales-and-refinancings-cast-doubt-over-property-values\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Sluggish Sales and Refinancings Cast Doubt Over Property Values\" \/>\n<meta property=\"og:description\" content=\"Mortgage bankers await rate stability so deals can start flowing again.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/sluggish-sales-and-refinancings-cast-doubt-over-property-values\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2023-01-05T06:18:07+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-01-18T19:37:56+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2022\/12\/Finance-January-iStock-532008903.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"900\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Joe Gose\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/sluggish-sales-and-refinancings-cast-doubt-over-property-values\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/sluggish-sales-and-refinancings-cast-doubt-over-property-values\/\",\"name\":\"Sluggish Sales and Refinancings Cast Doubt Over Property Values - 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