THE CAPITAL MARKETS HAVE ENJOYED A ROBUST MULTI-
YEAR PERIOD. IS THERE ANYTHING ON THE HORIZON THAT
COULD SLOW THE FLOW OF CAPITAL?
The second quarter of 2017 has begun and it is still a very good time to tap the commercial real estate capital mar- kets. This is true for any source: life insurance, regional
banks, the GSEs; it is true even for CMBS market borrowers—it is
even true for a borrower seeking financing for a vacant office
building in the Maryland suburbs.
Joseph Donato, vice chairman with Newmark Grubb Knight
Frank’s capital markets group in Washington, DC, just priced
exactly such a deal with three debt funds. Pricing came in around
Libor plus 500 to 600 basis points, which is to say these funds
weren’t scared of the challenge.
Debt funds have been a little more
measured in their risk, Donato says, “but
if a deal is right they will price it.”
In this current environment, even empty suburban office build-
ings qualify as the ‘right deal.’ But what’s even more telling is that
if that office building had been even 50% leased and generating
some cash flow, the spreads would have been considerably tighter.
This wasn’t the case a few years ago, when even a partially occupied suburban office building might as well have been completely
empty as far as a lender was concerned. However, thanks to a combination of debt funds now better able to leverage their warehouse
lines of credit and the lowered expectations of investors of the past
few years—no more having to strive for high-teens returns—pricing
for such transactions could well come in by 100 to 500 bps.
“Yield expectations have tightened on cash-flowing deals so debt
funds have been able to reduce their spreads,” Donato explains.
This was supposed to be the year that the worrisome trends brew-
ing—the long-expected rise in interest rates, the great wall of
maturities, the start of compliance to the Risk Retention act, the
uncertainty of the Trump Administration’s plans for tax and GSE
As it happened, some of these events just
petered out—the wave of CMBS maturities
expected to fail to find refinancing being
among them. In the case of other chal-
lenges, such as the Risk Retention Act,
the market came up with a work-
able—even desirable—handful of
compliant structures. The
Federal Reserve is notching up
rates, but the markets priced
in those increases long
ago—and besides, the
reason for the rate
increases is a strong
economy, not worries
over inflation. And
while there are uncer-
tainties such as the
fate of the GSEs and
reform, answers will
likely be had by the
end of the year.
This is not to say that
this particular story line
about the capital markets is
over with a happy ending.
Rather, this is more of a case of
‘so far, so good.’
By Erika Morphy