Andy Bratt of Gantry on how forces are colliding to create unique opportunities for financing commercial real estate.
The current market cycle has been one of the most massively disrupted economic periods on record. Yet somehow, it has also resulted in compelling upside for commercial real estate investors through attractive financing rates and terms.
With that in mind, access to commercial mortgages and financing options in today’s low-rate environment is the key to not only meeting the moment, but also capitalizing on it, literally and figuratively. At this point in the cycle, the market has a generational opportunity to secure long-term value by addressing current capital structures and locking in low interest rates in anticipation of a looming upward rate shift as the market faces inflationary pressure.
Banks, life companies, and CMBS lenders are actively competing with each other in pursuit of quality assets and sponsors in equal measure. When these qualities are in alignment, best-in-class lenders rise to the occasion to compete on rate, terms, and leverage requirements. Commercial real estate has become a preferred yield allocation and a diversification imperative for these commercial mortgage providers, while commercial real estate debt investments are seen as a strategic hedge against inflation by many institutional capital sources. These lenders want you to take advantage of their financing programs and will work diligently to secure your business. Now is the time, like no other before, to be a qualified borrower.
So, let’s get more specific for a moment: The industrial asset class has been one of the greatest beneficiaries from the current financing climate. Fundamentals are strong and demand for space is at all-time highs. The modern economic adoption of a logistics-reliant operating model, with both global and last-mile imperatives alike, has amplified the demands for onshore warehousing and manufacturing space following pandemic related supply chain disruptions.
Commercial lenders are responding with funding for a broad spectrum of property types in this increasingly prioritized asset class, in single-tenant and multi-tenant formats alike. At the same time, this trend is encouraging investment in new development, redevelopment, revitalization, and customization. This clear relevancy has lenders across the board actively seeking industrial property as a preferred allocation for their financing programs and capital deployment.
It now makes sense for sponsors and investors alike, to review their entire loan portfolios against current commercial mortgage and finance options to ensure that all opportunities have been identified that maximize potential value from optimizing existing debt and capital structures. This exercise requires that deep dive into the maturity horizons of existing loans, pre-payment penalties, investment goals, and associated market fundamentals. That invested time and effort paired with a clear understanding of available mortgage options, will result in actionable strategies for the borrower moving forward.
The rates we are seeing today will not last forever, and the market is already preparing to see rate increases by 2022, as the Federal Reserve moves to shore up their post-COVID liquidity strategies. Knowing this, Gantry recommends that at this opportunistic time, we all take that deep dive together with strategic foresight. Here is an overview of some compelling Second Half 2021 considerations for investors and owners in the industrial property space, although many of these principles can also be applied to office, retail, self-storage, and multifamily financings as well.
Loan Portfolio Analysis
If it hasn’t already been done, now is the time for a comprehensive review of loan terms, rates, and covenants to determine if the current rate environment presents opportunities for replacing maturing or dated loan structures with new debt tailored at superior rates for enhanced returns. Almost inevitably, this review turns up compelling, actionable strategies after a baseline is established on the opportunity costs. The marketplace is ripe with options, especially for those seeking low leverage, long-term debt vehicles.
Refinance or Sell
During this review, it is important to recognize that it may be more financially viable to refinance than sell an asset in reflection of a valuation climate providing ample room to leverage existing, pent-up value. As you consider refinancing, remember, rising asset values can offset the need for equity commitments while ultimately increasing cash flows through a lower rate. Many times it can feature interest-only terms throughout the life of the loan, while still providing for cash out to deploy or distribute to satisfy investor goals or future capital demands targeting growth, acquisitions, or new development.
Life Companies Look to Long Term
Life company lenders are especially active in the long-term hold debt space, offering some of the best 10- and 15-year loan products Gantry has seen in its three decades of operations sourcing, securing, and servicing commercial mortgages. The willingness of life company lenders to lock rates is the “why” a copious review of an asset’s current loan should not be put off for fear of significant penalties during the early retirement of an existing mortgage. Life company lenders see this as a completive benefit for their funding instruments and will lock up a rate for up to as long as six months in advance with interest rates in the low- to high-2-percent range. A thoughtful analysis of the savings from a potential shift to a lower rate becomes viable for maturing loans with pre-payment covenants when closing can be extended to mitigate the concerns of penalties from early retirement of the existing loan.