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Freddie Mac’s David Brickman on GSEs’ Special Role and the Outlook for Multifamily

A financier with a public-service outlook. It almost sounds like a contradiction in terms. Nevertheless, that’s the tightrope that David Brickman, the executive vice president who leads Freddie Mac’s multifamily business, must walk every day. The University of Pennsylvania and Harvard University graduate, a year shy of his 20th anniversary with the agency lender, answers to an intricate pair of overlapping mandates: earn a sensible economic return from loan activities while assertively promoting liquidity and affordable housing even during economic crises.

If those responsibilities wear on Brickman, it doesn’t show. At the Commercial Finance Real Estate Council’s annual conference in Miami last week, the energetic mortgage executive walked Commercial Observer through his thoughts on the business with enthusiasm borne from a flourishing multifamily sector in the United States.

Commercial Observer: How does Freddie Mac understand its mission?
David Brickman: We have liquidity, stability and affordability tattooed on our forehead. Those are our three mandates. But our business model resembles that of a direct lender. We make all economic decisions relating to loans and all credit decisions. We think that that model makes us that much more “real estate people.”

How is your group organized?
We have a regional model, different than people’s typical view of government-sponsored entities. In New York, our staff is very much made up of New Yorkers, real estate people. When it comes to providing liquidity, we compete like a lender. The other lenders perhaps wish we would compete a little less. But we take very seriously the view that we’re supposed to act like a private lender.

To what extent does the affordability mandate limit what kinds of deals you’ll get involved in?
We will do deals that aren’t, per se, affordable. But we will proportionately lean in and be more aggressive and do more, if it’s got higher affordability. It’s a more nuanced model than just yes or no, but it’s absolutely there in the sense that the more affordable a project is, the more important it is to get involved.

So is that the primary driver of your decision-making?
As a business matter, I want to earn a reasonable rate of return on what we do. We view ourselves as a fiduciary, and I think we’ve been a good fiduciary for our shareholders—mainly the U.S. taxpayer.

What level of risk can you tolerate on your balance sheet?
We want to distribute the significant majority of risk, given that we are owned by the taxpayer. We look to support affordability. For any business activity we do, I like to ring all three bells to some extent: If there’s no affordability, I should earn a little bit more money on it. If it’s affordable, maybe I can earn a little bit less return. When it comes to liquidity, the good news is that we were able to do that while achieving the other objectives [during the financial crisis]. We were able to earn a reasonable return during that period of time. Our market share grew during the crisis, and then it shrank again after.

How would the market be different if the government-sponsored entities disappeared?
We actually did an extensive analysis of this in 2012 or 2013. We concluded that if you were to get rid of Fannie Mae and Freddie Mac, mortgage rates would go up by about 50 to 100 basis points, cap rates would go up by a similar amount, construction activity would decrease significantly in the short term, and there would be a diminishing supply of multifamily for some time. As a result, multifamily rents would be higher, all else being equal.

So the data vindicates your job.
It’s certainly a reasonable thing to ask: Do we need Fannie or Freddie? Some have suggested that there’s no economic consequence to [our presence], and I think we’d probably say, no, that’s not accurate. If you get rid of us, that would hurt the multifamily market.

With such high student-debt levels and stagnant wages, are young Americans less interested in homeownership than their parents were?
Those factors certainly contribute, as does the shift to information-based employment, which lends itself to a little bit more urbanization. I think there is a trend toward delayed marriage and delayed childbirth, which aligns with renting longer. I’m not sure that any fewer Americans will own a home today than in the past, but maybe they will own a home for a lower percentage of their lives. The idea of millennials renting more, I think that’s true, but what’s really happening is that people are just a little older when they transition into owned housing.

What’s Freddie Mac’s role in the commercial mortgage-backed securities realm?
We have our own type of securitization called K-deals. Those are exclusively multifamily. Other than that, we don’t participate in regular conventional CMBS. Over 90 percent of what we’re doing these days will turn up in some type of securitization. And we will never commingle our collateral with anyone else’s.

Why the 90 percent level?
We aspire for it to be 100 percent. I’d like to distribute risk on everything we do. In the past, we used our balance sheet, our retained portfolio, to buy and hold loans. Our retained portfolio has been shrinking because it’s been mandated to shrink by the Treasury Department and the Federal Housing Finance Agency. We haven’t had the ability to hold much on the balance sheet. What we don’t securitize tends to be loans that are difficult to securitize.

Source: commercial

George Smith Chips in $122M for LA Office Developments

The ownership team of Urban Offerings and ESI Ventures has secured $122 million in financing on a pair of adjacent Los Angeles buildings it will convert to office space, according to an announcement from Dekel Capital, which arranged the financing for the owners.

The financing, a mixture of $80 million in short-term bridge debt and $42 million in junior equity, comes courtesy of George Smith Partners, an LA-based real estate investments firm. ESI and Urban Offerings will put the capital influx to two purposes, Dekel said.

First, the group will refinance its stake in the Norton Building at 755 South Los Angeles Street, a site that the team acquired in September 2016 for $17.6 million. The five-story warehouse building, built in 1906, had most recently served as home to a variety of garment and manufacturing firms. Renovations are already underway to create about 60,000 square feet of office space at the site, following a design by Los Angeles-based architects Omgivning.

Second, the ownership group will use the proceeds to acquire and renovate another building at 700 South Main Street on the same block as the Norton. The building, which also dates to the first decade of the 20th century, has hosted a Dearden’s department store since it was built.

When Ronny Bensimon—the owner of Dearden’s—and his family decided to sell the site last summer, ESI and Urban Offerings jumped at the chance to consolidate their office investment on the block, according to Shlomi Ronen, the managing principal at Dekel.

The team “didn’t want to have a competitor property a block away,” Ronen said.

That arrangement made it easy to secure additional financing from George Smith.

“The ownership team was the same, so [the lender] was open to including the Norton building as part of the overall capitalization,” Ronen said.

Neither ESI nor Urban Offerings responded to inquiries about the purchase price, but brokers who spoke to the Los Angeles Business Journal, when the Dearden’s property went on the market last year, estimated its value at around $50 million.

Describing the sites’ appeal, Ronen pointed to the traffic-beating accessibility to public transportation that Los Angeles’ Fashion District enjoys.

“It’s very much transit oriented,” Ronen said. The building are “two blocks away from the Seventh Street metro station, which is one of the hubs of the whole system. There’s also a small bus system that travels within downtown [with a] stop right in front of the buildings.”

The leader of George Smith’s lending team for the deal, Malcolm Davies, emphasized the importance to the city of the neighborhood’s transformation from a warehouse district to a creative-office destination.

The Fashion District, located in the sprawling metropolis’ urban core, “is truly going through a modern-day renaissance,” Davies said in a statement. “The area is attracting the energy and momentum that initially brought the earliest of settlers to the city of Los Angeles.”

Ronen said that the Norton building should be set for leasing by January 2019 with space ready for tenants in the Dearden’s building about six months later.

Source: commercial

CREFC 2018: Faisal Ashraf Weighs in on Lotus Capital’s New Platform

Lotus Capital Partners has been off to the races since it launched in 2016. In addition to arranging $315 million in financing from Mack Real Estate Credit Strategies for the construction and recapitalization of Penn-Florida Companies Via Mizner—a 2-million-square-foot mixed use project in Boca Raton, Fla., last year, the firm just expanded its offerings in launching a loan sale and distribution platform.

The business will serve lenders and investors looking to de-risk and leverage their positions in whole loans, A-notes and mezzanine debt. Lotus has already closed $150 million in private placements, including three ten-year mezzanine tranches on pharmaceutical company Allergan’s new headquarters in Madison, N.J., structuring and separately placed $70 million with Hyundai Asset ManagementMorrison Street Capital and Blackrock. The initiative will be led by Tim Taylor, the former head of special situations at Ten-X.

Commercial Observer caught up with Faisal Ashraf, Lotus Capital’s founder and managing partner, at the CREFC conference in Miami to learn more about the launch.

How has the conference been for you?

I’ve never seen so many happy people in my life. I found bullish sentiments all around. The only bit of frustration I found, which is a little ironic, is that people can’t get their money out fast enough.

Lotus Capital just launched a loan sale and distribution business. Talk us through why it’s the right time to launch a platform such as this. 

There’s a myth that loan sale advisory is a only a countercyclical business that is needed in a downturn. We believe that there’s abundant opportunity to address the capital needs of investors generally in the whole loan format or within their current capital structures. Additionally, we characterize ourselves as the only outsourced capital markets desk in the business, which means that existing lenders can outsource, for example, the A-note distribution of their portfolios to us so that they can leverage yield. As you know, a big part of debt funds’ strategies is to sell off their A-notes.

So, this is a business that has little to do with a downturn but rather the existing need that investors have today and it just so happens that there’s nobody else providing it.  As an example of capital structure distribution and just to test the thesis, I sold $150 million in mezz on behalf of a CMBS dealer recently.  This is a very technical process, it involves negotiating inter-creditor agreements and we have to leave a certain amount of spread so that someone can still have a solid CMBS execution.

What’s the primary benefit in outsourcing the distribution?

While the biggest firms will likely continue to do things internally, not every firm has large or dedicated capital markets capability. I think that, generally speaking, a firm may use our services because they believe we carry different/deeper relationships in the capital markets, or because we have creative methods of structuring that will save them time and money.  For example, we may have 5 new ideas on how to get that paper sold in the Middle East or Far East. In that regard we become an outsourced capital markets private-placement desk.

The proof point in the Allergan deal [Lotus arranged a $115 million 10-year, fixed-rate CMBS financing from a CMBS dealer for Lincoln Equities Group for the new Allergan U.S. headquarters in Madison, N.J.] was that we sourced $70 million of mezzanine of which $50 million was from an investor who had never invested in the U.S. We have a series of relationships that are off-market and allow us to present some interesting solutions. We’re not the silver bullet by any means, but we can give you capital markets expertise, strong distribution and potentially attract the off-market bids from years spent running distribution desks on Wall Street. The upside to this is it allows lenders to focus on their day jobs instead of spending time doing what we do.

Where do you see Lotus Capital going from here?

My goal is for Lotus to be seen as a preeminent real estate investment banking firm—that doesn’t mean that we’ll be the biggest firm in the world, it means that people think about our firm as offering high-touch solutions with regarding to intermediating capital and over time we’ll add other dimensions to the business. For now I’m pleased we are the fasting growing firm of our kind in the country –zero to $1billion in our first full year.  The deals we’ve done and pace we have kept aren’t for the faint of heart.  

What do you expect to see in the industry in 2018?

I see more bullishness. Like every year I expect some hiccups, but the market did a good job of shaking those hiccups off in 2017. With regard to sector-specific expectations, I do believe this will be the year that the retail sector is dealt with a little more thoroughly. I think certain investors will say, “Ok, we understand now what the have and have-nots are, and we will scale down part of our retail portfolio.” And that’s a great opportunity for Lotus to help them address that need and distribute some of that paper. 

Source: commercial

CREFC 2018: Columbia Pacific’s Billy Meyer Talks Competition and Customer Service

Seattle, Wash.-based Columbia Pacific Advisors has had a busy start to the year. It recently closed a $55 million refi/acquisition/ bridge-to-sale financing package in South Boston and a $35 million loan on a stabilized office building in East Hollywood. So far the debt fund has deployed $500 million across 40 loans, and it’s hungry for more. Commercial Observer caught up with Billy Meyer, a managing director at the firm, at CREFC’s annual conference in Miami to learn more about his personal conference agenda.

Commercial Observer: What do you think the general sentiment is here at the CREFC conference?

Billy Meyer: I think the majority of folks in the lending space believe there’s still plenty of deals to be had and opportunities exist for each and every lender, whatever their space is. The volumes for each individual production might be down, simply due to new competition. There’s a lot of money out there and new competitors are trying to find yield in different capacities. So, people are varying their strategies and maybe opening up new funds in order to target different markets. From what I see and from what my peers are saying, there are opportunities and heads are up chasing them down.

What is your competitive edge as a bridge lender, would you say?

In our specific space, communication is a big part of it. You’re partnering with a borrower and that means communicating effectively up front and then throughout the documentation process. The moment we’re first introduced to a new opportunity through to closing on that transaction might take three weeks or five weeks depending on how effective our communication is. We’re a short term bridge lender and we’re able to move very fast, so we need to communicate effectively if we’re going to talk through everything effectively in a short period of time. What separates us is, too, is that our money remains on our balance sheet the entire term of the loan and its fully discretionary based on what we want to do internally—we don’t have to go outside our walls to get approvals from anyone else and we don’t have multiple levels of credit committees. Also, everyone on our team can talk through a deal’s intimate details with the broker or the direct borrower, understand the execution strategy of what a borrower is trying to do and understand what makes sense and what doesn’t.  We pride ourselves with a high level of customer service and we understand that quick responses are what brokers and borrowers are looking for.

What’s a typical deal for Columbia Pacific Advisors?

We’re a lender in every region in the country and on all property types. We are most effective with Borrowers who need money fast, need a high level of confidence in closing, need the money for a short period of time or have a situation that is not quite bankable yet.  We don’t do new construction loans and we don’t do suburban land loans. But we’re very good at senior housing, affordable housing, multifamily, retail, office and self storage. Any type of cash-flowing, commercial real estate is where we excel and can close really fast. Our average loan is about $16 million, but we’re working hard towards increasing it to be $20 to $25 million. We’re hungry to get out there but at the same time we are all investors in the fund so we really care about making good decisions and getting our money back.

So you have skin in the game.

Yes. I have a piece of my own net worth in the fund as well as some of my parents’ retirement money. So with every transaction I think about whether I’m comfortable investing in this deal—I don’t want to lose on a deal and have my parents move in with my wife and kids [laughs]. the fund is entirely made up of private investors. There’s no institutional capital in the fund and nobody dictating what we can or can’t do. We do what we feel is right from a business sense.

What are some of your recent deals?

We did a roughly a $55 million loan in South Boston. It was a debt consolidation of a couple of different loans plus additional funds to acquire an adjacent property. The neighborhood was up-zoned recently so the borrower got a golden ticket. His property per square foot is now worth considerably more. We gave him a refi loan, an acquisition loan and a bridge-to-sale loan at 60 percent loan to value. We also did a loan in East Hollywood that was roughly $35 million.  It was on two adjacent parcels and one stabilized office building that just experienced a major tenant leaving—so it was around 60 percent occupied. The borrower had two loans and one loan matured, so again it was a debt consolidation and bridge-through-stabilization. We refinanced two loans and included proceeds for tenant improvements and leasing commissions.

What was your main purpose in attending the conference?

We’re focused on lead generation. We look to meet with brokers and also other private lenders who do almost exactly what we do but not quite, so lenders who aren’t comfortable lending on affordable housing or senior housing whereas we’re fluent in that space. We’re in the customer service business ultimately and brokers call us and the deal is not a good fit for us, we’ll refer them to who we think could be a good fit. It’s a small world in our lending space and we’re willing to share opportunities within the lending community. I believe there are plenty of opportunities around and greed is pretty low right now, it’s actually a really friendly space.

Source: commercial

Chetrit Group Scores $218M ACORE Refi for Multistate Multifamily Portfolio

ACORE Capital has provided a $217.5 million loan to Joseph Chetrit’s Chetrit Group to refinance the Empire Multifamily Portfolio— a portfolio of multifamily properties located in Florida, Indiana, Pennsylvania, Ohio and Kentucky, Commercial Observer can first report.

Iron Hound Management Company Principal Robert Verrone arranged the five-year debt, which includes a first mortgage plus a mezzanine loan. Verrone declined to comment.

The multifamily assets were previously owned by Empire American Holdings. Chetrit Group acquired the portfolio—comprising 56 properties with a total of 5,400 units—in 2015, after being brought in as a buyer by Verrone. Prior to Chetrit’s acquisition, Iron Hound spent three years restructuring the portfolio’s $317 million CMBS loan, which was being specially serviced by LNR, with an A/B note modification, splitting it into a $205 million A-note and a $112 million B-note, as previously reported by CO.

The portfolio was seriously neglected and its loan in special servicing for five years when it was acquired two-and-a-half years ago. Chetrit Group stepped in and has since increased the portfolio’s NOI from $14 million to $20 million, one source told CO on the condition of anonymity.

“Before Chetrit Group got involved in the deal, the portfolio’s properties suffered a significant amount of disrepair and neglect,” said Tony Fineman, a managing director at ACORE. “Chetrit Group came in, righted the ship and significantly improved the performance of the properties.”

While there are many moving parts in closing a multistate portfolio loan, the complexities embedded within were more on the legal and title side, Fineman said.

“What we liked about this deal is the significant improvement in what was once a pretty dilapidated portfolio—both in terms of performance and the physical plan,” Fineman commented. “The Chetrit Group has done a tremendous job. This transaction has the unique blend of a really great cash-flowing portfolio with a really good amount of upside.”

ACORE closed more than $2 billion in loans in the fourth quarter of 2017 and the firm is expecting a busy 2018, too, Fineman said.

Multifamily is just one asset class that the lender is focused on. “We like the multifamily sector a lot,” Fineman said. “Like everything else, you have to be cautious, but we’re very focused on the particular markets and submarkets we’re lending in and the sponsors’ ability to execute business plans in those markets.”

Officials at Chetrit Group could not be reached for comment.

Source: commercial

NYCB Provides $89M Refi for Two NoMad Office Properties

Kew Management has received an $89 million refinancing package from New York Community Bank for the Townsend and The St. James—two office properties located in NoMad, property records show.

Meridian Capital Group’s Allan Lieberman negotiated the financing, which consists of a seven-year, $33 million loan with a fixed-rate of 3.875 percent and a five-year, $56 million mortgage with a fixed-rate of 3.265 percent.

“With low interest rates available near the same levels as their soon-to-be-maturing loans on the buildings, Meridian advised Kew to structure a recapitalization,” Lieberman said in prepared remarks. “We were successful in providing Kew’s management with a strategy that accomplished their short- and long-term goals.”

The Townsend is a 12-story, 97,300-square-foot office property located at 1123 Broadway and The St. James is a 16-story, 156,000-square-foot office property located at 1133 Broadway. Both buildings were erected in 1896 and are located on the same block between West 25th and West 26th Streets.

Following a previous refinance in July 2013—also provided by NYCB—the properties underwent a capital improvement program, signing new tenants including restaurant La Pecora Bianca and a Rizzoli bookstore.  

“Allan and Meridian have provided invaluable counsel to Kew as we have enhanced our own portfolio and helped make NoMad a vital part of New York’s economy,” Leslie Spira Lopez, the president and CEO of Kew Management said. “They have both the expertise and vision to make Kew’s properties and New York ever greater places in which to do business.”

A spokesman for NYCB declined to comment.

Source: commercial

Thorobird Wins $65M in Public Bonds for Bronx Supportive Housing Plan

A residential project in the Bronx, designed to house middle-class and low-income tenants, as well as people with addiction and mental-health problems, has received $65 million in public bonds to fund construction, according to an announcement from its developer, Thorobird Companies.

Known as The Grand, the project, which will comprise three buildings at 220 East 178th Street, 225 East 179th Street and 2189-2195 Morris Avenue in the Mount Hope neighborhood, will offer 138 apartments targeted to residents across the income spectrum. Although a suite of features including a furnished roof deck, solar electricity and a modish design concept recall market-rate developments elsewhere in the city, dozens of The Grand’s apartments will be dedicated to supportive housing, a program designed to reintegrate mentally ill or formerly homeless or imprisoned people into the mainstream housing stock.

To that end, the complex will sport round-the-clock onsite counseling and support from social workers and other therapists. That service will be administered by ACMH, a New York City-based non-profit that runs programs for transitional residents at several housing programs in the city.

The 40-year financing for the project—which consists of contributions from the New York State Housing Finance Agency and the New York City Department of Housing Preservation and Development, will help Thorobird create a more humane community for needy residents than currently exists in the city, according to Thomas Campbell, Thorobird’s founder.

In typical affordable housing projects, “housing is something you do to someone, not for someone,” Campbell said. “We believe in homes, and we want to humanize the experience for our residents, [allowing them] to live in a place built with them in mind.”

“We’re so far behind as a society in providing affordable housing,” he added.

The project was jump-started in part by a $250,000 capital injection from the office of the Bronx borough president, Ruben Diaz Jr. The grant, known as Resolution A funding after the city provision that allows for the discretionary outlay, was crucial for getting larger agencies on board, according to the developer.

“When you get started with a project, you need someone to step in first,” Campbell said.

Diaz described Campbell’s project as a model for integrated housing solutions in the city.

“This is construction with common sense and compassion,” Diaz said, praising the conceit to house some of the city’s neediest residents alongside working-class neighbors. “It’s important for us to have income diversity.”

Still, Diaz said, the funding process was flawed. The HFA pushed Thorobird around in the project’s planning stages, the borough president averred, requiring the developer to meet exacting specifications before providing the financing bond.

Freeman Klopott, a deputy commissioner in the state housing administration, resisted that narrative, noting that New York State received an application for funding in February 2017 and approved the bond in September, without unusual delay. An official at the New York City Department of Housing Preservation and Development, who requested anonymity, agreed that no delay had occurred.

Source: commercial

CREFC 2018: Say Hello to CLOs

Commercial real estate collateralized loan obligations (CRE CLOs). It’s a bit of a mouthful for sure, and for some, CLOs are a sobering reminder of the pre-crisis Wild West. But, they’re baaack. And, judging by the packed house with standing room only that the CREFC panelists—including issuers, lenders and an investor—spoke to, people are curious about the new and improved 2018 CRE CLO market.

And for good reason: The market is heating up, significantly. Case and point, in December, Blackstone Group issued the largest CRE CLO post-crisis, the BXMT 2017-FL1 transaction, weighing in at a whopping $1 billion. The transaction was collateralized by 31 senior participation interests in loans secured by 71 properties, according to a report by KBRA at the time of the deal’s issuance.

Last year saw almost $8 billion in deal volume, but panelists estimate that amount will easily rise to $12 billion to $14 billion in 2018, driven partly by investor demand for the bespoke financing market. It’s a significant increase, given that in 2016 there was only $2 billion in issuance. That said, the market may be growing but remains disciplined and well balanced, one panelist said.

Today, CRE CLOs are a benign, nonrecourse source of financing that serve a distinct market purpose, panelists noted. Specifically, they solve the capacity issue around balance sheet financing. As an added bonus, when the market is functioning well, a CRE CLO is an accretive form of financing that complements warehouse financing nicely. Further, the deals create new capital markets opportunities and relationships for their participants.

First up in the panel discussion was the question of how recent CRE CLOs differ from CLOs issued pre-crisis. One panelist said that today’s CRE CLOs are “plain vanilla” unlike the more exotic pre-crisis days. But simply put, they have improved collateral quality. Pre-2007, the majority of transactions were more leveraged and the loans pledged as collateral had higher leverage attachment points. Today’s CRE CLOs are also composed entirely of first lien mortgages in contrast to pre-crisis collateral, which consisted of various position in the capital stack.

Most of the loans securitized in today’s CRE CLOs are floating-rate, short-term bridge loans on transitional assets where the sponsor is in the process of implementing a business plan on the property.

The notion that the loans included in the structures must always be cash-flowing is overstated, one panelist said. While generally true, the spectrum of loans in deals varies greatly and rating agencies are very pragmatic on how these loans are viewed. However, ground-up construction loans won’t make the cut.

Lenders also have more flexibility with CRE CLOs than they typically would in a REMIC structure, panelists said, with less servicing restrictions when it comes to modifying the loans. A key factor, given the transitional nature of the underlying collateral and the varying timelines of a borrower’s business plan implementation for those assets.

Tempted to dabble in the space and issue a one-off CRE CLO deal?

Proceed with caution, said participants. Significant resources are required from both an expense and labor perspective in order to pull a transaction together. From pooling the assets in an investor-friendly structure to working with the rating agencies and legal counsel to contending with extended transaction timelines and market volatility. The gestation period can take up to 15 weeks, and in a volatile market, the cost of funds targeted by an issuer can move significantly.  And don’t forget, CRE CLO issuances, like CMBS, are subject to risk retention requirements.

Something else to bear in mind if considering a single deal is that investors are typically more receptive to those who are in the market more frequently, panelists said.

Investors in the asset class areas alwaysresponsible for doing their homework. While one panelist had some concern that this isn’t necessarily always the case, evident in oversubscribed AAA tranches, another panelist argued that investors today are buying CRE CLO bonds based on diligence and underwriting as opposed to ratings—another key differentiation from the pre-crisis era.

One thing is pretty clear, with issuance expected to almost double this year, the use of CRE CLOs for transitional lending will continue for the foreseeable future.


Source: commercial

CREFC 2018: How’s CMBS Doing? KBRA’s Eric Thompson Fills Us In

CREFC’s annual conference at the Loews Hotel in Miami kicked off with an overview of how the CMBS market has been faring, courtesy of Eric ThompsonKroll Bond Rating Agency’s senior managing director. All eyes have been on CMBS with the financing source proving its competitiveness in 2017 and going up against bank and life company loans. Proof is in the pudding, and last year’s issuance volume neared $90 million, surpassing most analysts’ expectations.

Single-borrower issuance in particular increased by a whopping 88.7 percent in 2017 year over year to $36.5 billion, while conduit issuance remained flat at $48.5 billion.

KBRA expects single-borrower issuance to remain strong in 2018. “There’s a number of factors that might contribute to that,” Thompson told Commercial Observer between panels. “Some borrowers may be seeking to lock in a better rate than they currently have, do so ahead of rising interest rates and take some value accretion out of a property. It is also anticipated that M&A activity may spur acquisitions that result in capital market financings.”

There is also a couple of dynamics going on in the single-borrower space that make it appealing to market constituents, Thompson said: “One is that while it can be a very competitive market for pricing and execution for issuers that can lead to compressed profit margins, they can pre-place a lot of the debt with investors and have a good idea of where that execution might be. Two, I think there’s a deeper pool of subordinate buyers who are willing to buy further down in the capital stack because they’re comfortable with the credit on a single asset and comfortable in looking at their basis from the perspective of owning it. Unlike in a conduit deal, if things do go bad, you have more transparency into what conditions can effectuate a change in control as there is only one asset.”

KBRA is aware of a dozen or more single-borrower transactions coming down the pipeline as the year begins and expects to see up to three CRE CLOs issued by mid-February.

At 57 percent, 2017 appraisal LTVs were at their lowest since KBRA began rating conduits in 2012, which is both good and bad. “The issue is that when you have that level of leverage CMBS is competing more with insurers and banks. Even if banks pull back because of regulatory concerns, you have more competition than you would even if you had marginally higher leverage.”  

Historically a financing source dedicated to assets in secondary and tertiary markets, one interesting trend uncovered in KBRA’s research last year was CMBS’ increasing exposure to primary markets. “We found that primary markets default less than secondary markets by two to three points. When they do default, they have losses that are five points less than any other market,” Thompson said. “In the most liquid MSAs, the default rate is actually half that of other market tiers. So this is a positive credit element and a bright spot in terms of trends from prior years.”

CMBS loans in the largest, most liquid markets MSAs—New York, Boston, Washington, D.C., Chicago, Los Angeles and San Francisco—reached 33 percent in 2017, up from 28.1 percent in 2016. When combined with exposure to the next 11 largest MSAs, that percentage pierced the 50 percent level for the first time in KBRA’s rating history, reaching 54.3 percent (compared with 45.5 percent in 2016).

In his opening remarks, Thompson cautioned that, while primary market’s diverse economies can certainly withstand downturns, oversupply is always a concern to consider.

In terms of property types, 2017 was the year of the office with CMBS exposure to the asset class increasing to 39 percent. Perhaps unsurprisingly, retail exposure took a hit, dipping to 25.4 percent after averaging above 31 percent in previous years.

And while delinquency levels remain low, they are increasing. KBRA’s conduit portfolio delinquency rate reached 0.44 percent by year-end 2017, up from 0.15 percent at the end of 2016. The increase was somewhat expected given seasoning in transactions, Thompson said. Term defaults historically peaking between years four and six; the bulk of the delinquency (0.32 percent) is from the 2013 and 2014 vintages.

As one of the most buzzed-about topics at the CREFC conference, it looks like CMBS will continue to shine in 2018.

 


Source: commercial

Mesa West Originates $165M Refi of Two San Diego Apartment Buildings

Mesa West Capital has originated $165 million for San Diego-based Sunroad Enterprises to refinance two San Diego, Calif. luxury rental complexes, Mesa West announced today.

The five-year, non-recourse and first-mortgage financing was split into two pieces, with Mesa West keeping a $145 million A-note and New York-based investment manager Clarion Partners keeping the remaining $20 million on its books, according to a news release from Mesa West. The deal closed December 19.

“With Clarion, we had a conversation with the borrower to bring in a partner, and leverage was important to the borrower,” Mesa West Vice President Jason Bressler, who told Commercial Observer. “We identified Clarion as being active in multifamily in Southern California. HFF really helped us figure out the parameters borrower was looking for, and Clarion was a natural fit to get the execution the borrower wanted.”

ariva apts courtesy mesa west capital Mesa West Originates $165M Refi of Two San Diego Apartment Buildings
Ariva Apartments at 4855 Ariva Way in San Diego. Courtesy: Mesa West Capital

The debt is backed by Ariva Apartments and Vive on the Park, located at 4855 Ariva Way and 8725 Ariva Court, respectively, in Kearny Mesa, a suburb of San Diego.         

“We continue to be bullish on multifamily,” Bressler said. “It’s an asset class, in whole, that’s always going to bounce back very quickly. These properties are brand new and are very high quality and what each benefits from is they are in a central location with certain demand drivers.”

Ariva Apartments is comprised of 253 rental units within two four-story buildings. Construction was completed in 2014 and the building was fully occupied within 16 months of opening, according to a press release from Mesa West. The complex includes a cardio and strength playground and assigned, underground parking.

Monthly rents for Ariva range from $1,815 for 595-square-foot studios to $2,700 for a 1,241-square-foot, two-bedroom pad, according to the property’s website.

The seven-story Vive on the Park was constructed June 2017 and is home to 302 units. Amenities include a pool and spa, a fitness center with multiple stories, rooftop lounges with barbeque pits, social areas with sand fire pits, a business center, a clubroom, a game room, a social club and on-site dry cleaning.

Monthly rents at Vive on the Park range from $1,835 for a 546-square-foot studio to $3,530 for a 1,409-square-foot, three-bedroom apartment.

“The sponsor has done an excellent job in leveraging the portfolio’s quality finishes, high-end and diverse amenity offerings and central Kearny Mesa location in the lease up of these two projects in a very competitive market,” Mesa West Principal Steve Fried, who led the origination team with Bressler, said in prepared remarks. “We are confident in their ability to maintain the strong leasing velocity to meet the demand for this type of product in one of the most rapidly developing pockets in San Diego County.”

Ariva Apartments and Vive on the Park are the two most recent residential developments for Sunroad’s planned 40-acre community called Sunroad Centrum, which will surround the nearby Centrum Park and will be included as part of the Spectrum Technology Center—the redevelopment of the former 232-acre General Dynamics aerospace facility—in Kearny Mesa. Once completed, Sunroad Centrum will include 1,622 multifamily units and approximately 856,000 square feet of commercial office space, according to the release.

HFF Senior Managing Directors Tim Wright and Aldon Cole—out of the firm’s San Diego office—arranged the financing. Wright and Cole did not immediately respond to a request for comment. Sunroad Enterprises could not immediately be reached.


Source: commercial