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These are challenging times for investment real estate financing:
- the Fed has pushed interest rates up over the last year, which has significantly reduced available loan dollars by way of the debt service coverage calculation
- Valuations of all property types have been pressured – some, like Office, more than others – as buyers pursue cap rates higher than loan interest rates
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The failure of Silicon Valley Bank and others in the last two weeks has immediately led some banks to stop or sharply curtail their lending, this shrinking the universe of potential lenders even further than it already was
- The remaining lenders may choose to focus on lower-risk opportunities or increase the interest rates on standard deals
- Reduced loan amounts result in additional equity required for many refinancing scenarios, creating yet another obstacle.
On a more positive note, the continuing risk of further bank failures has resulted in sharply lower treasury yields (presumably a reflection of the market assuming the Fed will soon stop raising rates and then start cutting), so loan interest rates are now down to the mid/high 5% range (or even lower in some cases) depending on leverage, market, and other factors.
For those facing necessary refinancing, due to a loan maturity or an obscenely high floating interest rate, preferred equity is available to provide the additional equity that is often required. The preferred equity typically targets a fixed return (much like junior debt) of around 11-18% with a portion of that paid currently and a portion accrued to be paid off upon exit. Often the challenge with preferred equity is getting the senior lender to allow it; there are some preferred equity providers that offer a very flexible structure that can sit behind agency or bank loans.
Despite the market turmoil, there are still construction loans available. Construction loans from banks will typically offer fixed interest rates with leverage in the 50-60% LTC range. Private construction loans are available and provide higher leverage, typically up to 65-80% LTC with floating interest rates ranging from roughly SOFR + 4.5% to SOFR + 7.5%. For multifamily properties, HUD construction loans are an option with all-in rates in the high 5% range, with the caveat that they will take 9-12 months to close.
For expert guidance concerning your commercial property investments, including multi-family, office, industrial, senior housing, and much more, the Soundview Commercial Capital team is always ready to help. Connect with us at this link!
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