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Commercial real estate owners are benefitting from the supply/demand imbalance
WASHINGTON, DC, June 30, 2014 – After preserving capital during and immediately after the most recent recession, the appetite for deals has heightened in the nation’s capital. Sales volumes for all asset classes reached nearly $18 billion in 2013 and preliminary estimations have volumes potentially reaching $22.3 billion in 2014, according to JLL Capital Markets research.
“Washington, D.C. is a top-tier, gateway market and continues to attract significant interest from both investors and lenders. Core stabilized office buildings in D.C. are often trading at higher prices than they did in the peak in 2006 and 2007. Generally speaking the pricing for DC assets is typically more attractive compared to the next closest gateway market, New York City,” said Jon Goldstein, Executive Vice President, JLL’s Capital Markets. “Lenders still view Washington, DC as one of the safest markets in which to transact and therefore are aggressively pursuing deals here. With spreads having contracted fairly significantly this year, it’s a great time to lock in a low coupon for the long term.”
Lots of Capital, One Front-Running ChoiceAfter a busy 2013 with many lenders achieving record production levels, 2014 has proven more challenging in meeting lending targets. Despite the amount of capital available for investment being the same if not greater this year, from a production standpoint, so far 2014 has not seen a repeat of 2013. Whether it’s the fact that many 2014 maturing loans were refinanced in 2013 ahead of a perceived rise in interest rates, or a lack of quality investment levels, production levels have been anaemic to date.
“It seems that many investors are grappling with which asset class and which submarket is the best to focus on due to budget cuts, the realized impact of sequestration and the uncertainty of how the Affordable Care Act will affect hiring and space absorption,” said Wes Boatwright, Managing Director, JLL’s Capital Markets. “The clear choice seems to be transit-oriented mixed-use locations and when those opportunities present themselves, investors are doing whatever it takes to win.”
What Lenders WantMultifamily properties in the D.C. region sit atop lenders’ lists as the asset of choice. Government-sponsored entities, Fannie Mae and Freddie Mac, continue to dominate the multifamily sector especially for sponsors seeking higher leverage often beating out CMBS lenders in spread and rate lock mechanics.
“Fannie Mae and Freddie Mac may be the area’s top multifamily lenders, but, banks and life insurance companies are after a bigger piece of the pie, especially for lower leveraged deals and Class A assets,” said Shawn McDonald, Executive Vice President, JLL’s Capital Markets. “Debt Yields and credit spreads continue to compress and investors are taking advantage of longer term, variable floating-rate loans with maximum exit flexibility. Banks are now regularly providing ten-year loan terms and we have recently even seen fifteen years offered.”
According to the Urban Land Institute’s “Emerging Trends in Real Estate 2014,” D.C.’s multifamily market ranks fourth across the country for units under construction. Washington D.C.’s ongoing transformation into a 24/7 city fuels demand for mixed-use properties located near transit and an uptick in acquisitions for the multifamily sector is anticipated as new supply continues to be absorbed.
Industrial properties are also a top financing priority for lenders due to these properties trading less frequently, being smaller per transaction causing difficulty in aggregation, lack of development sites, and the market’s close proximity to major interstate highway systems. Grocery-anchored retail, well-leased Class A office, and hotels round out the top five financing opportunities.
Thresholds and Finer Points of DC LendingLenders typically check three boxes when underwriting a DC asset: sponsorship, asset quality and location. However, in 2014, they are willing to step further out on the risk continuum due to two factors: the search for greater yields and a desire to place pent-up capital in a more diversified portfolio.
Risk in the District can be seen in the form of vacancy, moving slightly down the asset quality curve and ventures into more secondary locations. For example, lenders may approach suburban D.C. office product more conservatively, but will still pursue them due to the amount of capital available and the higher yield potential relative to a downtown DC asset.
Loan-to-value (LTV) ratios for multifamily properties are up to 75 to 80 percent, with all other property types hitting 65 to 75 percent LTV, on average. Lenders are getting even more aggressive with their terms as evidenced by the recent availability of longer interest only periods.
Foreign Capital Flocks to the DistrictInternational capital inflows to the United States reached nearly $40 billion in 2013 and Washington, D.C.’s market is a particular bright spot for foreign investment, particularly from Chinese and Canadian investors.
“There is a large presence of international capital in Washington, D.C., and this trend shows no signs of slowing,” said Boatwright. “Typically, foreign investors like to bid for top office assets in the downtown submarket but as they develop strong joint venture partnerships and become more familiar with the market, development opportunities and secondary locations will start to crop up. Not only have we had more meetings this year with foreign capital interested in entering the United States, many are finally taking the steps to set up the operations required to actually make investments here.”
Refinance Early and OftenInvestors’ desire to take advantage of historically low interest rates hasn’t dimmed despite prepayment penalties. Amounts vary and depend upon interest rates and time remaining to maturity, but there are sponsors willing to refinance early and therefore pay prepayment penalties in order to secure loans at a low coupon for the next 10 years and longer.
The number of CMBS loans coming due between 2015 and 2017 has led to a sharp increase in bridge loans, allowing borrowers to capitalize on today’s attractive interest rates while securing longer-term financing.
About Capital MarketsJLL Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. The firm’s in-depth local market and global investor knowledge delivers the best-in-class solutions for clients — whether a sale, financing, repositioning, advisory or recapitalization execution. In 2013 alone, JLL Capital Markets completed $99 billion in investment sale and debt and equity transactions globally. The firm’s Capital Markets team comprises more than 1,300 specialists, operating all over the globe.
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About JLLJLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual fee revenue of $4 billion, JLL has more than 200 corporate offices and operates in 75 countries worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3 billion square feet and completed $99 billion in sales, acquisitions and finance transactions in 2013. Its investment management business, LaSalle Investment Management, has $48.0 billion of real estate assets under management. JLL is the brand name of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.
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