CRE’S GREAT GLOBAL
Nowadays when Greg Nalbandian sees a term sheet for a deal with Libor-based financing it includes language stating that if the market
were to transition away from the benchmark rate, a
comparable benchmark will be used to price the
loan. The language started to appear in term sheets
within the last several months and has become a staple in the past few, says Nalbandian, who is a senior
managing director in HFF’s Florham, NJ office.
Its appearance, though, hasn’t caused so much as a
ripple because “everyone know a transition is going to
happen,” Nalbandian says. And indeed the agreed-upon date for the change has
been set for year-end 2021.
Everyone even “knows” what
that substitute benchmark is
almost sure to be, Nalbandian also says: the Fed’s
favored replacement, the secured overnight financing rate, or SOFR, which it began publishing in April.
But try telling the global financial ecosystem
that. Regulators on both sides of the Atlantic are
pushing banks to wean themselves faster off of the
scandal-plagued Libor. For example, in a recent
speech UK Financial Conduct Authority CEO
Andrew Bailey said, “The best option is actively to
transition to alternative benchmarks. The most
effective way to avoid Libor-related risk is not to
write Libor-referencing business.”
In the US, the Financial Stability Board has just
released a statement noting that “in the markets
which face the disappearance of IBORs, notably
markets currently reliant on Libor, there needs to be
a transition to new reference rates.”
Any ambiguity in the transition path, however, is
not being felt by the people actually working the
deals. “It really doesn’t faze us,” says Nalbandian.
“When the transition comes, it should be seamless.”
Yet as blasé as borrowers may be about the
change, he acknowledges that there is some wari-
ness about its rising cost. Specifically, he’s observed
an uptick of borrowers requesting shorter-term,
fixed-rate loans to mitigate the continued increase
in LIBOR to control financing costs. And for con-
struction financing, spreads for very strong projects
have come in significantly—by as much as 50 to 75
basis points—to offset the increase in rates.
“Recourse requirements have also come in dramatically for a lot of projects,” says Nalbandian.
“Not that long ago it wasn’t uncommon to have a
construction loan with a full repayment guarantee.
Now, it’s very possible to have a repayment guarantee of 15% to 20%.”
And so it goes for commercial real estate debt
financing these days, both here and in offshore
markets. Global growth has been good, the world’s
Central Banks are accommodating in their policies
and the real estate markets reflect this.
Consider this tidbit from Cushman & Wakefield’s
June 20 IPO: It reported that institutional global
private equity raised nearly $250 billion for real
estate deals as of the end of 2017, a whopping 83%
over the previous three years. That figure, the com-
pany added, is expected to reach $4 trillion by 2022.
So even hiccups like the reset of a major benchmark
aren’t expected to impact capital flow, no matter how
much regulators would love to see banks step it up.
BY ERIKA MORPHY