September 24, 2018
Connect Media headed to CMBA’s 21st annual Western States CREF conference in Las Vegas to find out what’s on the minds of mortgage pros these days. We asked Colliers International’s Jeremy Thornton, EVP Debt & Equity Finance, to share a few insights. Check out his responses to questions on the biggest challenges, how the post-recession lending environment has changed and how the rising Fed funds rate is playing out in our latest 3 CRE Q&A.
Q: What’s the biggest challenge to closing a deal in 2018?
A: We are currently in an extremely competitive environment in commercial real estate lending. It’s the classic scenario of too many dollars chasing too few deals. As an advisor representing both large institutions and private real estate investors, we are tasked with sourcing and structuring the most creative and accretive capital for both existing product and new development. With the wide array of competitive lenders in the market, identifying the “perfect fit” generally tends to be biggest challenge. However, a challenge that we very much welcome.
We address the challenge by first clearly identifying our clients’ investment objectives prior to any discussion on potential debt strategies. We very much consider ourselves in “partnership” with our clients, acting in a capital advisory capacity, and therefore take a very thoughtful approach to structuring the capital stack to optimize investment returns. Once we have a clear understanding of investment strategy, we target lenders in our extensive network of capital providers and leverage key relationships to produce “outlier” capital solutions.
Q: This fall marks the 10-year anniversary of the start of the great recession. What is the greatest change you’ve seen in the lending environment in the last 10 years? Are there any similarities between today’s market and the market in 2008?
A: The early years of the great recession there was a very obvious significant lack of supply of competitive debt capital for real estate investors looking to acquire, build or refinance. Traditional lending sources (i.e. banks, life insurance companies, CMBS, etc.) pulled back sharply on new originations and turned towards internal portfolio management. That opened the door for more opportunistic capital sources (private equity funds, etc.) to enter the market on the lending side of the business, to take of advantage of the existing market conditions and achieve fairly attractive risk adjusted returns.
That trend has continued into 2018, where we see these more opportunistic funds (or debt funds) playing a more integral role in financing commercial real estate investments for both existing product and new development. Due to the tremendous success that a lot of the debt fund players have had in raising capital over the course of the past few years, more players continue to enter the market – making this segment of the market more crowded and therefore much more competitive. Debt fund financing has now become much more “mainstream,” and is giving more “traditional” capital sources a run for their money. All of this increases competition in the market. The ultimate winner…borrowers.
Q: What has been the impact of rising Fed funds rate? How has it changed deals?
A: The impact of the rising Fed funds rate has most significantly affected shorter term floating rate loans. We’ve seen corresponding significant increases in the 30-Day LIBOR index (which is the primary index for floating rate loans). However, inflation still remains relatively low and therefore we’ve seen a relatively small impact on long term fixed rate lending. The significant increase in yields on the shorter end of the yield curve, compared to the relatively small increase in yields on the longer end of the yield curve, has resulted in an extremely flat yield curve. Therefore, this creates an opportunity for fixed-rate borrowers to get additional term with very little impact on pricing.
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