Q4 Market Update: Lender Insights

We believe it is vital to keep our clients informed concerning the major lending sources in the market. We asked producers in our office to call our lenders and provide insight into their performance in the market. Keep reading below to find out more:

Life Insurance Companies

We are now in Year 2 of “The Year of the Life Co.” While the market was reeling from the banking world fallout, including the loss of one of the most trusted and respected banks – First Republic – Life Cos vacuumed up a lot of that bank business. Some of our Life Cos are in consecutive record-setting years because of that. The Life Cos that are not necessarily breaking records year-over-year continue to capitalize on the right opportunities, providing a trusted and reliable lending source through all forms of market turmoil. It is generally very difficult to keep up with the pace of market fluctuation and volatility, but our Life Cos have been an exemplar of consistency through drops in the Treasury, hikes in the Treasury, and the much-talked-about lowering of the Prime rate that happened earlier this month.

One of those changes they are keeping up with is the un-inverting of the Yield Curve. For the past 2+ years, 3-year Treasuries were ~.20 bps higher than their 5-, 7- or 10-year counterparts. Part of that had to do with the demand for shorter-term money as borrowers hoped/prayed/expected rates would fall. They are still hoping for that, but for the time being, 3-year money has become cheaper than 5-, 7- or 10-year. Another thing Life Cos have done to hedge against rapid and unexpected Treasury drops is introduce “floor rates.” Some were already doing this.

Best pricing these days remains in the Treasuries +140 bps range for moderately levered, high quality, well-located industrial, retail, or multifamily assets. Multi-tenant grocer-anchored retail and multi-tenant industrial with credit tenants on long-term leases generally get this “best treatment.” Spreads over the Treasury were even lower than ~140 bps before the most recent rate hike. To keep rates stable after the recent drop, lenders widened spreads by a little bit. Now that Treasuries are up another ~.50 bps since then, we might see a little downward pressure on spreads. For lower-quality assets in secondary or tertiary locations with fewer credit tenants and shorter lease terms, pricing can get up to ~235-250 bps above the corresponding Treasury. For our Life Cos that do bridge financing, we usually see spreads starting in the 300+ range. In addition to the asset classes listed above, some of our Life Cos are doing single-tenant net lease, office, self-storage, and hospitality.

Life Companies continue to remain the most formidable capital source in the market. They are often able to customize their loan structures to borrowers’ needs, whether it be prepayment flexibility, earnouts/holdbacks, non-recourse, etc. Their certainty of execution has many times been more important for our borrowers than any of the formerly mentioned terms and we’re looking forward to continuing to do business with them.

-Jonny Soleimani, Vice President

Debt Funds

Debt Funds and other bridge lenders have experienced a significant increase in activity since the Fed cut in September. While activity doesn’t directly correlate with production, Debt Funds provide necessary liquidity to the market at a time when short-term financing is in high demand. The increase in activity has translated to an increase in higher quality deals for many; as many Debt Funds are seeing deals that are considered stabilized with strong debt yields going in and the borrower simply wants a short-term loan to reengage the market at a later date or exit to a sale. Borrowers are willing to tolerate a premium in their rate for a 12- to 24-month period to avoid a cumbersome prepayment penalty that they may experience with a 5-year or 10-year loan.

Over the past 45 days the SOFR index has come down approximately 50bps and to remain competitive, Debt Funds have had to keep spreads down as well. Today, cash-flowing bridge deals near stabilization or light value-add opportunities are pricing in the low 300s over SOFR. Alternatively, more transitional non-cash flowing deals are priced at S+500 and up. Debt funds are winning on certainty of execution and are seeing many repeat customers as the space continues to be competitive and growing.

-Jacob Lee, Vice President

Banks

Bank financing challenges have persisted into late 2024. Most banks now require deposits of 5% to 20% of the loan amount, held for the loan’s duration—a slight decrease from last year. This deposit requirement can make many banks less competitive in terms of leverage and transaction costs. Typical offerings include 3- to 7-year terms, amortized over 25 to 30 years, with interest rates ranging from the high 5% to low 7%.

Even with the 50-basis-point rate cut back in September and the reduction in banks’ cost of funds, treasury markets have risen. This indicates that the rate cuts were already priced into the market, and interest rates have remained unchanged since the Federal Reserve’s action.

Recourse is usually required, though non-recourse and interest-only options may be available for lower-leverage loans. There is minimal interest in office lending, and banks remain selective about retail properties and tenant types. However, banks can be a good option for borrowers seeking higher leverage on multifamily properties.

-Tony Messiah, Vice President

Credit Unions

Credit Unions seem to be underwriting to a 1.25 debt service coverage ratio on 25-year amortizations. In the last quarter, we’ve seen a difference in the loan-to-value that they are willing to provide reducing from 70% closer to 60-65% on a loan-to-value basis.

Interest rates range anywhere between the high 6’s to low 7’s. They’re willing to provide interest-only terms and lending on all property types. Most lenders are very selective on office and in order to get that done, leverage has to be reduced significantly to sub-50% LTV.

-William DeFanti, Vice President

CMBS

The CMBS market had a strong Q3 2024, with momentum continuing into Q4. The trend toward 5-year loan terms persists in both originations and securitized pool sales to B-buyers. Of the 12 pools securitized in Q3, 9 were 5-year maturities, reversing the historical preference for 10-year terms. Borrowers are willing to pay a slight premium for 5-year loans, with weighted average coupons of 6.38% for 5-year loans and 6.16% for 10-year loans.

The overall increase in CMBS activity in 2024 is driven by U.S. Treasury compression and tightening lender spreads. Anchored retail, industrial, multifamily, and self-storage assets remain preferred, with rates in the 5.90% to 6.40% range depending on factors such as location, leverage, and credit. These assets also offer higher leverage, capped at approximately 8% NCF DY, 70% LTV, or a 1.25-1.30x DSCR. Office and hospitality assets are approached more cautiously, with pricing in the 6.10% to 6.65% range and stricter underwriting, limiting proceeds to 11-12% NCF DY, 60% LTV, or a minimum 1.50x DSCR.

Looking ahead to Q4, 5-year deals are expected to continue at a slight premium, with increased reliance on data sources (e.g., recent pool comps, Placer data, credit ratings) to guide investment decisions for new loan requests.

-Grady Seldin, Vice President

Agencies

Agency lending is in an interesting place as we enter the 4th quarter and move to year-end. Freddie Mac announced this week that based on closings and loans under application, they are projected to hit their $70B cap for 2024. That means new submissions are taking 3-4 weeks to quote with closings scheduled for January of 2025.

Fannie Mae is running significantly behind that pace and is only projected to hit maybe $50-$60B in production this year. In response, we have started to see them stretch a bit more over the past few weeks for the business they want to capture this year. We are seeing more IO, some 35-year amortization schedules, and pricing that is typically in the +140-160 bps for higher leverage requests with very little mission-driven affordable component.

Execution for mobile home parks remains attractive with PSRS locking rate this week on a 10-year fixed rate full-term interest-only offer at a +125 basis point spread over the 10-year treasury.

-David Sarnoff, Vice President