Financing Development Deals in Today’s Volatile Market
With the wave of loan maturities from last cycle coming to a head, now is the time to examine how investors can make sure they are able to finance their deals and take advantage of acquisition and investment opportunities. Gregg Applefield, managing director at Mission Capital Advisors, will moderate a discussion at Commercial Real Estate Conference 2016 (CRE.CON) that explores how development deals are being financed, who is financing them, and which markets – including secondary and tertiary markets – are attracting capital. NAIOP spoke with Applefield for an early look at what he’ll cover at CRE.CON.
NAIOP: How can investors make sure they are able to finance their deals and take advantage of acquisition and investment opportunities?
Applefield: While there has been significant volatility in the markets year-to-date, lenders still have an appetite for finance commercial real estate deals. Domestic and foreign banks, life companies, agencies, commercial mortgage-based securities (CMBS) lenders, mortgage REITs and debt funds are actively offering a variety of loans ranging from permanent financing to bridge loans with attractive terms. Investors can make sure they are able to finance their deals by being reasonable in the amount of leverage they are requesting and moving quickly to close their deals. The capital markets continue to fluctuate and when they do, they do so very quickly. This can create some real challenges for closing deals – investors often say “time kills deals.”
NAIOP: Who is financing today’s development deals and which countries are those investors coming from?
Applefield: There are a very limited number of domestic and foreign lenders for borrowers from those respective countries which have pre-existing banking relationships that are financing today’s deals. Domestic banks will provide low (around 50 percent) leverage primarily for their existing customers. There is a lot of mezzanine capital for well-conceived apartment and office projects (with significant pre-leasing).
Overall, financing development deals is increasingly challenging at this point in the cycle. Due to regulatory requirements, many commercial banks are significantly less incentivized to originate construction loans. Additionally, while there has been a large number of new specialty finance and debt fund lenders coming to the capital markets, the majority of them are unable to finance ground-up construction per their fund documents. As such, developers should be very careful about taking on new ground-up development projects as there is a chance they may not be able to capitalize them unless there is recourse, higher than historical rates and additional structure.
NAIOP: Which markets – including secondary and tertiary markets – are attracting the most capital?
Applefield: Gateway markets are attracting the most development and bridge financing, while all markets are attracting CMBS loans. The yield which investors can obtain on their real estate investments in coastal and primary markets has compressed significantly due to the abundance of capital flocking to real estate. The secondary and tertiary markets that are attracting the most capital currently are markets which continue to have strong economic fundamentals, population growth and are proximate to major markets.
Join Applefield and 1,200+ commercial real estate leaders across North America for the best in education and networking at CRE.CON, September 26-28, in Scottsdale, Arizona. View the full agenda, attendee list, pre-conference tours and register on the event website.
