An Update on the Debt and Equity Markets

This is a guest post from Joe Stampone, author of the popular blog A Student of the Real Estate Game.

Increased transparency and more sophisticated data analysis allow us to clearly quantify key performance trends across the real estate sector. On the lending side we can analyze changes in balances, delinquency rates, and default rates for commercial, multi-family, and construction loans. Meanwhile, on the equity side we can view risk premiums, investor appetite, and returns.

Here is the latest data of the debt and equity markets compiled from various reports including Cushman & Wakefield’s Capital Market Update, Colony Capital’s Quarterly Letter, and Ackman-Ziff’s Quarterly Survey:

Lender Appetite

• Banks are beginning to be more aggressive. Improving balance sheets due to increased earnings and reduced loan delinquencies are putting pressure on banks to increase their loan origination efforts.
• There’s an appetite for cash-flowing assets. Expect more bridge-lending, 3-5 year permanent loans, and construction financing (mostly multi-family) over the coming months.

Lender Underwriting Approach

• Fundamental real estate analysis is important with lenders focusing on “basis”.
• DSCR, LTV, and debt yield have reverted back to historic mean.

Availability of Debt Capital

• There is a significant amount of capital to support debt financing.
• There has been an uptick in CMBS lending. The $1.5B Wells Fargo/RBS pool priced a few weeks ago saw its 5 and 10-year AAA bonds priced at 145 to 170 bps over swaps despite strong metrics (1.77x DSCR/61.6%LTV).
• Life Company lending remains strong with a focus on high-quality assets in prime markets.
• Foreign banks focus on cash-flowing, stable assets in prime markets for top sponsors.
• Money Center Banks (Nation’s largest banks) are active on cash-flowing assets, value-add, and development deals for strong sponsors.

Equity Markets

• Risk premiums on most real estate investments are too low and complexity too high.
• There is too much money chasing too few good deals.
• Investors seek safety, quality, and liquidity in real estate.
• Real estate is returning to ‘ordinary’ returns with competitive advantages to the lowest cost of capital.

What are you seeing in the market?