Chicago, Illinois, April 3, 2017- Most of March, benchmark rates “marched” upward in step with the second Fed rate hike prompted by continued economic growth.  Due to hawkish Fed statements, pundits expect rates to reach a 3%-handle for longer term debt based upon the current trajectory.

In the face of rising rates, and correspondingly lower financing demand, how are various funding sources re-tooling to remain active?  The following summary tackles key players active in the permanent financing arena:

CMBS:  Numerous borrowers with maturing conduit debt are unable to effectively restructure their loans per currently stringent underwriting requirements.  Major financial institutions and banks issue bonds, keeping the vertical strip and maintaining strong relationships with horizontal strip investors per risk retention guidelines.  Pricing is tighter, resulting from higher quality loan offerings.  Leverage up to 75% is available for premium deals, but 70% is more common.

Agencies: “Workforce” and “affordable” are the two most important words when discussing best pricing and terms for multifamily housing with the agencies.  The GSEs are very focused on meeting their housing goals, as well as energy efficiency to various “green” program discounts.  Discussions surface about more creative options including construction loan and pre-stabilization funding.

FHA/HUD:  HUD continues to offer the most attractive leverage and pricing.  However, the longer closing timeline is the major factor influencing borrowers seek traditional financing alternatives.  Some of the more competitive seller/servicers now offer Bridge-to-HUD funding options to allow more borrowers to use interim debt while the HUD funding process is in play, expanding the possibilities for using this financing vehicle for property acquisitions.

Life Companies:  Armed with ample allocations of mortgage funds, LifeCos offer the best rates, in return for providing lower leverage.  Lower-100-basis-point spreads are surfacing, as spreads tighten between competing LifeCos.  Longer term dollars are plentiful.  Multiple players supplement are highlighting their transitional bridge product.

Banks:  The most traditional construction and short-term lenders, banks, stay focused on compliance within a more restrictive regulatory environment. Cautiously active on new construction with lower loan-to-cost fundings generally reserved for the “best” customers.  Pricing is still very favorable starting spreads of 300 basis points over Libor.  Term loans up to seven years are available for balance sheet lending, although interest rates swaps will be required to protect fixed-rate risk.  Small regional and community banks may be more aggressive on term and leverage, but generally limited to loans of $15 million or less.

Debt Funds:  Helping borrowers with loans that the aforementioned funding sources find challenging, debt funds provide higher leverage needs and more structured fundings such as preferred equity, mezzanine, and bridge loans.  Pricing is 100 to 300 basis points or more versus regular sources.

Ms. Jeanne Peck, director of the Real Estate Capital Institute®, states “Debt funds and smaller community banks are the sources to watch for more flexibility, leverage as more creative underwriting solutions are needed, instead of tighter pricing restricted by lower leverage.”