Commercial/Multifamily Financing Update

We have highlighted several resources and publications below, designed to offer insights into the constantly evolving market and their impact on the real estate sector.

• Retail Availability Rate Hits Record Low | Q4 2023 U.S. Retail Figures: The overall retail availability rate hit a record-low 4.7% at year-end, with the neighborhood, community & strip center segment tightening the most. Read More
• The Gap Between the Top and Bottom Multifamily Markets Will Be Narrower Than Usual in 2024: The gap between the top markets (generally Midwest cities with little supply growth) and bottom markets (generally Southern cities with aggressive supply growth) is narrower than usual. Read More
• The Top 100 Industrial Leases of 2023? Tenants Didn’t Go As Big Last Year: The number of 1-million-square-foot industrial lease signings dropped to 43 in 2023 from a record 63 in 2022. Read More
• New Multifamily Supply Exceeds Strong Demand: Construction completions of 140,900 units in Q4 brought the annual total to 416,500—the highest amount since CBRE began tracking the market in 1996. Read More

• Renewals Dominate Top 100 Office Leases of 2023: Renewals accounted for 58% of the top 100 office leases in 2023, a reversal from 2022 when new leases dominated. Read More

Multifamily Debt Market Updatefrom NMHC Conference

CBRE had over 100 meetings with lenders and owners across the multifamily space at the NMHC Conference last week. Overall, the expectation is that we have weathered the storm, there may still be some cloudy days ahead, but we are starting to see the sun coming out and deals are getting done. 

Availability of capital remains robust. Debt liquidity is concentrated with the agencies, life companies, and debt funds. Banks are selectively active. Expenses such as insurance and payroll continue to be an issue and have been a huge focus when underwriting acquisition opportunities. 

Multifamily Debt Capital Markets Landscape

Agencies: 

• Fannie and Freddie ended 2023 with loan production of $52.3B and $48.3B, respectively, 67% below the total cap allowance
• FHFA reduced the combined agency cap to $140M for 2024, a 7% reduction from 2023
• Low leverage, high mission deals warrant the most competitive pricing (low- to mid-100s)
• Rate buydowns continue to be offered by both agencies and are utilized often
• Given the lack of origination volume, we are seeing little to no adders for forward settlement costs – Borrowers can lock now and not deliver the MBS to investors until May/June with minimal impact to spread

Life Companies: 

• Biggest LifeCos need to put out $4-6Bn each to keep up with liabilities
• Borrower demand for 5-year structures remains elevated while supply is highly dependent on the individual lending source
• Some life companies are marketing limited offerings of 2- and 3-YR fixed-rate products
• Lender dependent, construction financing is available

Banks: 

• Liquidity is selectively available on a client-by-client basis
• Regulatory pressures continue to limit liquidity, which is not expected to change in the near-term
• US Banks appear to be more constrained than Canadian, European and Asian Banks
• Limited construction capacity unless significant deposits are provided – Construction spreads are 2.75%-4.00%

CMBS: 

• Volume is expected to accelerate as high-leverage maturities come due with the inability to refinance into permanent agency loans
• AAA’s have compressed 40-50bps from the last issuance in December 2023
• Competitive quotes require strong sponsor, conservative underwriting, and compelling stories
• CMBS loan maturity wall in 2024 looks similar to 2023

Debt Funds: 

• Many traditional equity players continue to focus on deploying capital through opportunistic debt fund vehicles
• Current inability to obtain leverage limits liquidity to take down larger deals
• LifeCo Debt funds remain liquid
• Robust offerings for preferred equity positions behind agency senior mortgages – actual origination volume has been limited but is expected to increase

HUD/FHA: 

• Investor demand for construction loans is strong with spread premiums to borrowers compressing from the norm of ~60bps to ~35bps
• Flexible prepayment schedule available 35- to 40-year, fully amortized
• 6–9-month timeline for refinances & acquisitions and 10-14 month for new construction/rehabs

Debt Market Sentiment

With CBRE's nationwide proprietary data sharing system we are able to keep a pulse on the everchanging debt market. Fed Watch: Following last Friday’s strong payrolls numbers and Powell’s hawkish segment on 60 Minutes from this weekend, other Fed members are speaking out against a March rate cut. Currently, the market is pricing in only a 18% chance of a cut in March, with a 70% chance of a cut in May. CBRE's house view is that the Fed will reduce rates by 100 bps to a range of 4.25% to 4.50%. Odds off a rate cut from the FOMC can be tracked on the CME Fedwatch Tool.  We are utilizing buy-downs with lenders to reduce rates further than the below. 

Life Companies have been quoting rates between 5.50% to 6.20% for leverage 65% or less. Five year money is becoming harder to come by as LifeCos are getting full in this bucket. We have also seen life companies increase their minimum loan amounts as they have less capital to deploy. Rates vary widely due to the large range in rate floors being applied. Life Company spreads are around 175-225bps for most deals. Most are still 60% or less for best pricing. Some Life companies are still pushing debt yields and in-place coverages below 1.20x for value-add deals toward a higher stabilized DSCR, however most are sizing to an actual 1.25x DSCR in-place for core and core-plus deals. 

Banks continue to be more conservative when evaluating deals. Stress testing, Fed Audits and proactive asset management is taking up majority of their time. That said, we are seeing quotes in the 5.95-6.60% range for deals with steady collections and a strong tenant mix. Banks on their fixed rate programs for core deals are 3, 5, and 7-year fixed rates with a step-down prepay. Floating rate options are around 275-350bps + SOFR. There continues to be a flight to quality and most lenders have reduced their target LTV’s by 5% to 10%. Deposits and existing relationships are meaningful to attract better interest.

Debt Funds are looking to be more active. Leverage is around 60-70% loan-to-cost with primary focus on stabilized debt yield and in-place cash flow or lease up deals for multifamily or industrial product types. You can expect to see spreads range between 295-425 bps over SOFR. On the multifamily side, many groups are actively pursuing preferred equity positions behind agency senior loans. 

CMBS prefer 10-year terms as 7- and 5-year terms are more difficult to price. CMBS spreads have come in over the last few weeks. We have seen rates around 6.50-7.50% depending on lean size, quality, property type and debt yield. Loan terms are anywhere from 5- to 10-years, fixed rate, up to 75% LTV and often full term IO. 

Agencies: Fannie and Freddie continue to compete strongly on heavy mission business. Fannie Mae business volume ended 2023 at $52.9B compared to $69.2B last year. Freddie Mac new business volume in 2023 was $53.1B YTD compared to $72.8B in 2022. 35-year Amortization loans are still available up to 70% LTV with mission, no cash out and 65% with cash out. Deals with significant mission are warranting competitive pricing in the mid-100s spread.

Overall, Agency pricing is around 5.50-6.00%. Rate buydowns are becoming a more effective alternative for borrowers given the current environment driven by volatile benchmarks. With a buydown, rates can drop to as low as 5.20-5.85%.

Our team is here to help you navigate financing options and provide color on what we are seeing in today's market.

Historical Cap Pricing

The chart below illustrates how cap pricing has changed over the past 2 years. Cap costs continue their downward decline. 

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Today's Rate Snapshot

PER CHATHAM FINANCIAL

USD LIBOR and SOFR Forward Curves

Indicative Rate Cap Pricing for Agency ARMs

For More Information, Please Contact:

Bill Chiles | Vice Chairman | +1 858 646 4735 | bill.chiles@cbre.com

Scott Peterson | Vice Chairman | +1 858 546 4607 | scott.peterson@cbre.com

Mark McGovern | Institutional Group | +1 858 546 4662 | mark.mcgovern@cbre.com

Brian Cruz | Vice President | +1 763 512 2923 | brian.cruz@cbre.com

Morgon Fraser | Senior Analyst | +1 858 646 4713 | morgon.fraser@cbre.com

Colby Matzke | Senior Analyst | +1 858 646 4784 | colby.matzke@cbre.com