Chicago, Il, February 6, 2016 – Challenging capital markets face the real estate industry as the winter reaches midpoint. While finding the right debt or equity for a CRE project has never been easy, the current market is more inefficient than in recent years. The search process for finding the “right” loan requires better understanding of the various funding sources as highlighted below:

Permanent Debt: Today, allocations are steadily increasing in real estate mortgage production levels for life insurance companies. The Agencies have shown a commitment to providing liquidity in the market as well as for improvement in their processes to reduce approval, rate lock and closing timelines.

Conduit Debt: The biggest challenge today is managing expectations in the tumultuous CMBS market. Spreads have widened and exceeded the expectations of most experts. Deal terms can change without material reason due to the increased influence from “B-piece” buyers on credit decisions. Borrowers using conduit debt must manage their expectations, until more underwriting clarity returns to this sector.

Construction Loans: Multifamily projects lead the vast majority of construction loans, but well-located commercial projects with pre-leasing are also highly demanded. New regulations (e.g., Basel III) make it harder to obtain non-recourse construction loans at higher leverage and creating additional requirements for more equity in transactions. Select developers have been able to negotiate the equity partners take on some of the repayment guaranty to satisfy lender requirements in return for more yield, as construction lenders tighten sponsorship requirements. Lastly, numerous construction lenders have expressed a desire to see how some of their existing projects work out before making additional loans and this has become a general sentiment among some lenders.

The Real Estate Capital Institute’s director, Jeanne Peck, advises, “Stay alert for more volatility in the real estate finance markets this year as the Fed monitors the strengthening economy, and various banking and CMBS regulations come to fruition.”