CHARLOTTE, N.C. — Capital One Multifamily Finance’s Chad Thomas Hagwood kicked off with a fastball. When prompted with the often used “what inning are we in?” question, Hagwood’s response was indicative of how competitive commercial real estate lending is today.
“I don’t know what inning we are in of the cycle, but I know I want to play ball,” says Hagwood, senior vice president of Capital One Multifamily Finance. “People are after it, and we intend to fight it out tooth and nail.”
Hagwood’s commentary came during the closing capital markets panel of the ninth annual InterFace Carolinas, a half-day event that drew 212 attendees from North and South Carolina’s commercial real estate community. Bryson Thomason, senior director of Greenville, S.C.-based PMC Real Estate Capital, moderated the panel.
The most intense competition for financing is in the multifamily space because of the proliferation of Fannie Mae and Freddie Mac and their designated lenders.
The two government-sponsored enterprises (GSEs) have been competing against each other as well as other lenders. Hagwood describes the competition between the two agencies as a “bloodbath.”
“It’s all out brutal warfare competition the two,” says Hagwood. “I do expect Fannie and Freddie to be very competitive for the foreseeable future.”
Berkadia arranged a 10-year Freddie Mac acquisition loan on behalf of the buyer of High Ridge Landing (pictured) in South Florida’s Boynton Beach. Freddie Mac is coming off a record-breaking 2017 and also had the highest first quarter on record, according to the MBA.
Both agencies are coming off the highest multifamily loan volume in their history. So far this year, the panelists have noticed that Fannie and Freddie are upping the ante.
“They’ve done things with their terms and structures that have made them very competitive with life companies,” says Nick Heinzelmann, vice president and managing director of Lincoln Financial Group, a life insurance company. “Life companies used to have the advantage, but the agencies have caught up.”
Both life companies and the agencies are starting off 2018 on the right foot. The Mortgage Bankers Association’s (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations reports that life companies, Fannie Mae and Freddie Mac all had their strongest first quarter on record for originations.
In addition to those lenders, banks are also competing for deals. Hugh Allen, senior vice president of TD Bank, says that the runoff from construction loans paying off early has been a “rallying cry” for banks as that activity provides them an opportunity to get in the mix on deals.
“More banks are stepping up. We’re not going to be competitive on some of our terms, but we’ve been given this gift of spread compression,” says Allen, who oversees TD Bank’s commercial real estate business in the Carolinas and Georgia. “We’re a little more competitive with the life companies, and we’re winning more business. We’re seeing a lot of packages where there are as many banks at the table as there are life companies competing on lower-leveraged deals.”
Overall, commercial and multifamily originations in the first quarter are up 1 percent compared to first-quarter 2017, according to the MBA. With overall loan volume up and competition intensifying, Hagwood says it’s a great time to be a borrower as they have multiple capital options at their disposal.
“It’s a unique opportunity for the borrowing community right now because it wasn’t too long ago that it was a one-size-fits-all solution,” says Hagwood. “The beautiful thing for owners and operators is that everyone is open for business and operators are standing by. It’s about your property and what you need to accomplish with your business plan.”
Property Types in the Spotlight
Multifamily remains a very active property type for lenders, but some worry about saturation in top submarkets. Lincoln Financial’s Heinzelmann says that his shop has taken a “wait-and-see approach” on financing some apartment projects that have been recently delivered.
“We’ve tapped the brakes some on pre-stabilized assets,” says Heinzelmann. “It’s difficult to know where the rental achievement ultimately will be and many of the sexier markets have concessions built in.”
The panel also agreed that industrial’s long-term health in North and South Carolina bodes well for lenders looking to finance both core assets and value-add opportunities.
“We like the Carolinas for industrial. We see growth in the shipping industry and ancillary businesses,” says Richard Caldwell, senior vice president of Revere Capital.
“We’re looking for the opportunistic, value-add plays around the country, and in the Carolinas we’re pursuing vacant industrial,” adds David Cohen, managing director of Ready Capital Structured Finance.
The panel didn’t touch on financing retail or hotel properties, but they did discuss the opportunities and pitfalls lending on office projects. Caldwell says that office demand is more market dependent than other property types because it’s so sensitive to outside factors.
“It really depends on where you are,” says Caldwell. “I worry about office with the continued consolidation of how much space is required for businesses. The use of office won’t go away, but fundamentally companies are able to save so much money by packing more bodies into a small amount of space and/or have people work from home.”
Pictured is the WeWork Charlotte location at Stonewall Station in Uptown Charlotte. Co-working concepts like this are taking off across the country, and lenders are open to financing these ventures but worry about the fit-out required to bring these projects to fruition. (Photo courtesy of WeWork)
Cohen mentioned that co-working office space has become an active play for lenders, as the trend is taking off in top markets around the country with the expansion of concepts like WeWork, Spaces, Serendipity Labs and Industrious.
“For co-working spaces, it depends on what the business plan is,” says Cohen with regard to how he perceives its viability. “The fit-out is definitely an issue that we have an eye on.”
— John Nelson