When it comes to private real estate borrowers, one experience does not fit all. What borrowers are seeing is significantly different according to sector, market and geography, with pricing and access to capital varying widely.
Accessing financing “is generally challenging across the board mainly due to the uncertainty in the global markets and real estate markets,” says Alek Misev, senior portfolio manager of property for Australian superannuation fund Aware Super, which typically works with four to five domestic and global lenders for financing real estate deals. “However, there is some degree of the bank margin differential between assets, sectors, and markets.”
Michael Levy, chief executive at Dallas-based manager Crow Holdings, agrees. “That bifurcation between attractive and less attractive [to lenders] has never been as extreme as it has been today,” he says. “I think that, as a borrower specifically – or even as an operator/developer seeking equity – those bifurcations are more pronounced. The sectors with the strongest fundamentals continue to include industrial and multifamily. All things being equal, they have been more attractive, with more available capital and easier to finance relative to office in particular, or hotels or retail properties.”
He adds: “If you were an owner of office buildings or you were an office developer in core urban markets, times are very difficult. I think if you’re an owner or developer of industrial properties in Southern California and New Jersey, you’re still able to obtain relatively attractive capital, which can allow you to continue to finance your ambitions.”
“That bifurcation between attractive and less attractive has never been as extreme as it has been today”
Misev believes the pricing expansion is more significant for office and retail assets because banks have become cautious about the two sectors. In contrast, “there is greater financing appetite in more resilient sectors, including multifamily/build-to-rent, given the non-discretionary nature of [the landlord’s] earnings, which is particularly valued by financiers during difficult economic times and uncertainty,” he says.
Additionally, banks have historically been underweight to industrial in their portfolios, compared to office and retail, Misev adds. Given the sector’s more defensive characteristics, including strong demand fundamentals with limited supply, most banks are increasing their allocations to industrial, he notes.
For Aware Super, margin levels based on the investor’s recent refinancing and acquisition financing experience have ranged from around 170-175 basis points for industrial assets, 190-200 basis points for office assets and 200-220 basis points for retail assets and entertainment leisure assets.
Focusing on sectors with defensive traits, such as senior housing and student housing, has allowed Harrison Street to find financing for the lion’s share of the more than 120 transactions that the Chicago-based manager closed on globally last year. In the cases where the firm acquired smaller assets without debt, or delayed or passed on transactions because of debt considerations, the reasons included punitive covenants inconsistent with Harrison Street’s business plan; reserve requirements that significantly impacted cash flow or returns; challenges arising from newer lender relationships; underwriting or appraisal issues that impacted proceeds; and during the extreme volatility in the financial markets, the movement in spreads.
What also helped with securing debt for its acquisitions was Harrison Street’s focus on cash flow. “We strive to identify assets and markets that should deliver what we consider a predictable, dependable cash flow,” says Mike Gordon, partner and global chief investment officer. “Strong cash flow really helps when sourcing debt in times like these.”
While borrowers’ ability to secure financing has varied by sector, there is further variation by market.
“There’s still today a meaningful separation between the US lending environment, especially as it relates to office, and the European one,” says Alex Knapp, chief investment officer for Europe at Hines. “Many more US lenders are either closed or are saying they’re very, very cautious. And that’s our experience as well, that there’s very few people in the market for office in the US. In Europe, I think it’s less clear cut.”
He gives the example of a German lender who told him during a meeting late last year: “It’s not that we’re closed for business, it’s just that you won’t want the debt at the price I can quote.” The lender had just done a two-year loan extension for a London office building at an all-in rate north of 6 percent.
In Europe, lending capacity has been constrained partly due to lower-than-expected levels of loan repayments, but financing demand for new loans has also been lower. “There isn’t a big disconnect between the amount of demand there is for loans and the amount of supply in Europe,” Knapp explains. “The demand for new loans is quite low – given pricing – and the supply is also relatively low.”
The US, likewise, has not seen high demand for new loans due to very low transaction volumes resulting from high interest rates, wide bid-ask spreads as well as asset re-pricing which moves more quickly in the country than in Europe, he adds. “Drilling down further, there is no interest in office loans in the US currently, industrial remains muted but there is more activity in multifamily,” Knapp says. “As in Europe, in the US we’re seeing more demand for refinancing in place of new loans.”
Meanwhile, Misev points out that Aware Super has also observed some challenges attaining competitive financing for smaller portfolio companies with a large development exposure and less liquid markets such as Southern Europe. “As such, there may be a requirement to equity fund particular opportunities until they achieve sufficient scale or maturity,” he says.