A Q&A with Executive Managing Director for JLL, Kevin MacKenzie
He discusses year-end results in commercial real estate lending and what’s in store for the future
We talked to Executive Managing Director Kevin MacKenzie in JLL’s Orange County office to get a year-end analysis on commercial real estate lending.
Q: Has financing volume met, exceeded or fallen short of expectations so far this year across the various property types?
A: Volumes are up year over year, with most lenders we are speaking to indicating this has been the busiest year they can recall, and in some cases that is leading to increased selectivity or raising minimum loan sizes. That said, there is an abundance of capital available across the spectrum from short-term floating rate to permanent long-term loan opportunities. Recent trends include an increase to the number of capital sources offering fixed rate bridge loans, early construction take-out, construction/permanent, and an increasing number of options on fully vacant bridge deals. Debt for assets with transitional business plans continues to be the most liquid part of the market with capital available through numerous sources including traditional debt funds, banks, life insurance companies, advisors and others.
Q: What is the current range of leverage and pricing you are seeing in the market?
A: Depending on the asset profile and sponsor the bridge debt market I referenced earlier can range from the mid-100s to mid-300s over LIBOR. This leverage can range from sub 60% to north of 75%, but the majority of deals with moderate all in loan to cost in the 60% to 70% range are pricing in the low to high 200s over. On fixed-rate debt, floors have come back into play due to the lower treasury rates. At certain points in time over the past several months, as the treasury/swap fluctuated downward, we did see some interest rates locked sub 3.0% on 7- to 10-year term for select deals and sponsors. However, for moderate leverage all in rates are generally 3.25% to 3.50%. In identifying the best pricing, life insurance companies continue to compete most effectively at sub 60% LTV, but will push higher for industrial and multi-family, or select retail and office, while CMBS is generally most attractive at north of 60% and with longer interest only requests. Banks have also competed heavily in the 5- to 7-year term market when a borrower considers fixing over swaps. Lastly, agencies pulled back during Q3, but are right back in the competition after receiving new allocations of $100 billion for the next five quarters; however, it’s worth noting on agency, the Green Program no longer exists with the same pricing benefits, and the majority of business will be focused on mission centric affordability goals going forward.
Q: How efficient is the market?
A: Given the range of options, our ability to work across platforms and communicate real-time across geographies while pricing more than $50 billion of debt at any given time, has become critical to properly identifying the range of optimal outcomes, often resulting in selecting an outlier. One recent example on a construction loan take-out is a loan over $150 million we closed on a Southern California asset in lease-up, as a bridge to sale, that returned over 100% of the sponsors basis and priced in the low 200s over LIBOR with open prepayment at par after 6 months. On the fixed-rate side, one good example of the demand and supply dynamics, is a large loan request (approximately $1 billion) we took to market on a portfolio of diversified assets that we should end up rate locking with a single life insurance company lender in the very low 3% range on 10-year term, full-interest only.
Q: Have underwriting terms or other loan metrics changed over the past year?
A: Lenders have continued to become more selective on retail and office this year, but, for the right assets, there is still plenty of interest. In addition, due to the influx of volume, some lenders have increased the minimum loan size, but we still have a range of great options for loans sub $25 million. Several lenders also are still pushing for longer terms, with capital options going out to 20 to 30 years plus, including one lender in particular that recently closed a 50-year fixed rate loan. Outside of that, the competitive environment I mentioned has created some push on the fringes to higher leverage and/or lower coverage, with some also providing more flexibility in structure to win deals, especially in the bridge space. However, lenders are very focused on the last dollar basis in the loan, the tenant credit and utilization of space and the underwriting metrics, which generally still feel prudent for the point of the cycle we are in.
Q: What's the outlook for deal volume both at JLL and out west as a whole for all of 2020?
A: We continue to see opportunities for financing on acquisitions as more trades occur, along with the refinance activity which has picked up significantly due to the lower rates I mentioned earlier. This is driven by a variety of factors from where we are in the cycle, the outlook on rates, the pending elections, the abundance of debt capital available and risk mitigation strategies to lock in returns while mitigating downside risk. We expect to see the same abundance of debt available in 2020 as lenders continue to grow available buckets of capital, and investors have an increasing demand for debt. Within this context, we feel positive about the major markets on the West Coast, as the fundamentals are generally strong. Furthermore, with the market leading amount of pricing metrics available to JLL and the highly communicative environment of our firm, our teams are well positioned to assist clients in any needs they have across the capital spectrum. This is a highly critical element to driving deal volume and successfully executing in this environment.
Q: Are there any particular areas out West where you think lending will be more (or less) active than others?
A: The core markets out west will continue to attract the most aggressive balance sheet capital, but there are plenty of options in the secondary or suburban markets as well. In terms of specific product types, apartments and industrial continue to generally be the most highly sought after, achieving the best terms. However, we are seeing some interesting suburban office strategies unfold and think we will continue to witness more capital attracted to specific retail strategies as that space continues to evolve with more clarity.