What does it take to secure debt in today’s challenging commercial real estate environment? It all boils down to experience, relationships, and a lot of creativity. That’s according to an expert panel speaking this morning at ULI’s spring meeting at the New York Hilton Midtown. The panel is the first in a series of three, which will include Raising Equity (10 a.m. Wednesday) and Borrowers’ Experiences—Recent Success Stories (10 a.m. Thursday).
Moderated by Kyle Bolden, senior audit partner in the Real Estate Hospitality & Construction practice of Ernst & Young LLP (EY), the debt panel featured Michael Amoia, head of Asset Strategy for MetLife Investment Management’s Real Estate; Tiara Henderson, managing director in Corporate & Investment Banking’s Diverse Segments Group, Wells Fargo; Tammy K. Jones, CEO and founder of Basis Investment group; and Sadhvi Subramanian, market manager for the Commercial Real Estate East region for US Bank.
“I think the spike in [the] interest rate—that was really very disrupting to commercial real estate and really limited the amount of capital that is available. Working from home … people thought that people would come back in 2023. And that’s proving to be a struggle, and really [affecting] the office needs, and leading to a paradigm change in the way people view office,” said Subramanian of US Bank. In contrast, there is capital available for all segments of multifamily.
Amoia of MetLife agreed that adding the 11 rate hikes in 2023 made a significant impact on commercial real estate lending by “bringing to a head the impact of COVID,” including more regulation and inflation, which together affected rent growth rates, operating expenses, capital expenditures, and cap rates. He also pointed to office as the “biggest elephant in the room,” with a nod to the availability of capital for multifamily, excepting certain oversupplied markets; neighborhood retail; and industrial.
Among the biggest line items affected by high interest rates have been insurance, real estate taxes, and capital expenses, according to Amoia, who said that when MetLife looks at a budget, the company wants “to lend against that entire future funding obligation,” including deferred maintenance, which is broadly on the rise.
“I’ve never seen insurance be the reason deals didn’t pencil out,” said Henderson of Wells Fargo. “Staying alive until 25,” for Wells Fargo, has meant looking beyond the main food groups. “We dug our heels into the data center space,” she said, “which was kind of like a bright spot” during the past 18 months.
All of these factors have resulted in caution around underwriting, which translates to borrowers being great sponsors with great assets in great locations. Today’s lenders walk a property before the deal is closed; given the dearth of deals, bridge lending is all but dead, as is construction lending.
In addition to traditional multifamily and data centers, bright spots for lenders include medical office, self-storage, and student housing. Cell towers are also an emerging asset class with promise, according to Jones of Basis Investment Group, a multistrategy commercial real estate investment platform and lender that acquires and originates a variety of senior mortgage loans, preferred equity, and joint venture equity positions on behalf of its investors. Jones called the property type “real estate without walls and [with] antennas for tenants.”
Jones said that Basis, as an alternative lender, was able to step in and take advantage of a lot of opportunities, including situational distress and recapitalization by providing preferred equity behind agency lending for large sponsors. For example, Basis was able to provide common equity and preferred equity for the Philadelphia Navy Yard, a 600-unit project on the waterfront with 15–20 percent of those units being affordable. Jones called the deal, which was backed by institutional public pension plan investors, “creative” and a “niche opportunity” that entailed having a deed restriction lifted on residential.
In terms of loan-to-value (LTV), panelists pointed to the “sweet spot” 55 percent to 65 percent range on all property types with limitations on office. On the technology front, panelists noted the shift from paper to digital during and post-COVID and the concept of digital twins—popularized in office—migrating to other sectors.
Borrowers who want to connect with these lenders will find them responsive on LinkedIn, but all of them say to connect early, and that relationships matter.
