Just got a newsletter I subscribe to saying the CRE lending environment is changing rapidly. Anyone try to finance a deal lately and found it more difficult than in the past?
Forgot to link to the piece: Dwindling Transactions, Lender Clampdown Make CRE Environment ‘A Massive Slap In The Face’ (bisnow.com)
" Wagner recounted an investment committee call the morning of the event discussing a potential deal on the Westside of LA.
“That appraisal is 2 months old,” Wagner said. “Well, it’s useless.”
“There are no comps taking place,” he said, which made it more difficult to figure out how much they should be paying.
Additionally, several panelists said banks are largely at a standstill, having paused their commercial real estate lending.
“It’s a massive slap in the face for everybody to get comfortable with that new environment,” Wagner said.
On a national level, big banks have taken a step back from lending to commercial real estate, Bisnow previously reported, with one expert estimating as much as a 50% drop-off in the second half of 2022.
“I would say now is the time to lean on those banking relationships you’ve built up over the years,” Wagner said. “If you have deposits with a bank, that’s the group that’s going to get your deal done.”
Not supprising in light of the fact that net new commercial loans are up over 150% from 2021 in the first 6 months of 2022. 50% drop off from a steep rise of over 150% is not too supprising with todays higher rates. Although the fed is increasing interest rates rapidly it will not prevent the recession that is on the door step.
One of the lenders I’ve worked with a lot these last few years increased their lending spreads. 300bps over the 5 year treasury vs. 250bps before. I think a lot of lenders are going to start doing similar things or bowing out all together. Especially a lot of the newer ones who’ve come into our space these last few years. Hopefully that motivates more sellers to do seller financing next year. I’m sure it will.
Market has been changing as investors and lenders are more cautious with current state of economy. We still fund deals that are strong but it takes more work than before.
I’m with RJ Capital. I have a view of the loan pipeline of one of the largest U S banks. It’s virtually empty.
Money is available but, of course, it’s expensive. And banks are scrutinizing loan applications more thoroughly — in my never-humble opinion, as they should always do. Yes, comps are pretty stale even in traditionally very active markets.
Bottom line: if you have good qualifications and a very good project, you should be able to get a loan — if you’re willing to pay for it.
Money is drying up. Rates are going up.
Banks are looking harder at everything.
The FED has stopped buying mortgage-backed securities which reduced demand for that asset class. When a bank makes a loan they are having a harder time selling it on the secondary market. So they have to increase the return (higher interest rate) on the product to get it sold. If they can’t sell the loan then it’s on their balance sheet and they have less money to lend. As this happens the banks are less likely to take on risky loans as they will be on the hook if it defaults.
Fed raises possibility of future mortgage-backed securities sales in FOMC minutes - MarketWatch
As interest rates rise and Cap rates stay low, there is a battle between DSCR and Loan amounts. Making it harder for buyers/properties to qualify for a loan. Deals will still get done, but down payments will be higher. Debt is already more expensive. In theory, this will lower demand for parks as fewer investors will be able to buy a big park.
In 2021, If you had $1.0MM down you could get a $4.0MM park and pay a 4% interest rate (or lower). If the park had a 6% Cap then you could put down 25% and still make the deal cashflow and meet the DSCR. Now with interest rates at 6-7% and Cap rates still at 6%, the same deal doesn’t work. You are looking at putting $2.0MM down. Therefore fewer buyers will be willing or able to make that deal happen. In theory, this will affect Cap rates making them go up, but who knows?
I think the Cat is out of the bag on these MHP deals. I get calls daily from new buyers trying to get into the game. They all say the same thing.
“I want a goldilocks park”
- No POHs
- All City Services
- Near a large MSA
- No Defer Maintenace
- 50-100 spaces.
- 8% Cap
Everyone wants the prettiest girl on the block, but only one person can have her. If you want to buy something then you will have to be more flexible/creative with your deals.
It’s only when the tide goes out that you see who forgot their swimsuit. There are a lot of balloon loans that are going to have to refinance on the same park at a much higher interest rate.