Medalist Capital took eleven (11) people to this year’s MBA -Commercial Real Estate Finance Conference in San Diego. Collectively the Medalist Team attended 39 meetings, 4 breakfast meetings, 4 lunch meetings, and 5 dinner meetings.   We met 52 different capital sources over a 2-day period. The last day in San Diego was cold (52 degrees) and raining. Could someone please tell my wife, it was anything but a vacation?!

I would also be remiss if I did not mention two (2) recent and exciting developments at Medalist Capital.  Todd Lankford will be moving into production to swan song his already meaningful Medalist Capital career and we welcome Chuck Kleve as our new COO and Head Recruiter. Both Todd and Chuck were in San Diego, and we are excited about what promises to be a growth phase at Medalist Capital.   

The 2023 Commercial Real Estate Finance Conference was looked to with much interest and intrigue given the challenging debt and equity markets in late 2022. The MBA reports 54% fewer loan originations closed in the fourth quarter compared to the third quarter of 2022. The last quarter of the year typically sees the highest production volume, but a combination of higher interest rates, the disconnect between buyers and sellers on property valuations, and economic uncertainty (inflation worries) negatively impacted volume. The conference did not generate any great revelations, which the market had hoped for and at some level expected. The news out of San Diego was more of the same.

The good news, there is plenty of liquidity in the market. The not so good news is lenders will still be debt service coverage constrained on most transactions. The good news is pricing is coming in, the not so good news is maximum leverage will likely still be 65%. As a point of reference, mid-level pricing before the conference was 175-200 bp over the corresponding treasury. After the first day, the Medalist team met, and the consensus was pricing would come into the 150 range. Sure enough, we got an email after the conference from a large life insurance company, and I quote “My pricing just went down today (surprise, surprise)”. Base level pricing should reset to 150-160 bp over the corresponding treasuries. Interestingly, the larger lenders seem to want to hold on to pricing at over 200 bp given most lenders price to BBB corporate bonds, which trade in the 180bp range. We will see how long their position lasts.

The messaging was consistent across the board: we have money to lend and will work to get money out.  DSCR will dominate the underwriting and proceeds. The levers will likely be shorter loan terms, more interest only, prepayment flexibility, and lower pricing. If the market needs to give, DSCR may be the last lever they pull. The lowest spread we heard was a 130 spread, which at a 3.85%, 10-year treasury puts you at a low 5% rate, so not bad.  To get best pricing, you must qualify as a CM1, NAIC rating (1.50 DSCR on a 25-year amortization). The loan structure would be more aggressive (likely full-term interest only), but the loan proceeds would be constrained based on the 1.50 DSCR/25-year amortization, which pencils to approximately a 55% loan to value. A more liberal CM2 rating underwrites to 1.25 DSCR on a 25-year amortization with the 150-160 bp spread and leverage maxing out in the 65% loan to value range.

Office is the least favored product type with most lenders completely redlining office. Infill, unique office with good WALT is financeable, but the pricing would trade at a premium with some underwriting structure.  Multifamily and industrial are the most favored product type – no surprise here. Retail and self-storage are also looked upon favorably.

The debt markets are no different than the equity markets, as to determining and accepting that market valuations have changed. Once this happens, it will likely be a catalyst for the sales market to unlock and realistic debt structures to become accepted. It appears the retail market is already adjusting with properties trading in the mid to upper 7% cap rates and at these levels today’s debt terms work.  If we could get some relief on the treasury and see a 4% handle on interest rates, the debt markets should become more active. For now, lack of sales transactions will dominate the landscape. The mantra of not transacting unless you must remain prevalent at least in the short term. Although, loans must be refinanced and sellers will ultimately have to sell, which offers a light at the end of the tunnel.

At the conference, we met mostly with life companies (the most competitive capital source in the market), CMBS, debt funds, and banks. CMBS is active with high 5% to low 6% rates, but mostly interest only structures. Banks seem to be in the deposit gathering business and not so much in the lending business. At present, construction financing continues to be difficult, but available. Non-recourse construction financing is available from life insurance companies at 55% of cost and in the SOFR plus 350-450 range.

In closing to sum up the current environment, one lender told us, “If you see a deal that works, you better grab it.” Pricing and structure (flex prepay and interest only) is on the table. The fed has been consistent with their message:  we are not likely to bring rates back down quickly. Now more than ever, it is important to use Medalist Capital to navigate the debt markets. Medalist Capital has the best lender stable in the market so let us help make your debt accretive.

Howard Brooks
Principal