NEWSLETTER JANUARY 2019
YEAR END 2018 CAPITAL MARKETS UPDATE ARTICLE
BY: PETER
KEEPPER
The gap between buyer and seller expectations appears to be slowly closing based on trends through 2018 that suggest loan constant increases could exceed rent growth during the remaining holding period. However, the lack of compelling deals on the market is influencing many sellers to hold as they can’t find an equivalent or better risk/return ratio. The demand from equity investors has exceeded the supply of deals on the market in 2018 which has been holding cap rates down from increasing more in tandem with loan constants.
The combination of tariffs, gradually rising rates and a global economic slowdown have resulted in investors underwriting lower rent growth and higher exit cap rates. Some exceptions were CBD office and industrial acquisitions. These bearish underwriting trends are anticipated to temporarily reverse course if a trade deal is struck with China. Hopefully this gets done in 1Q19!
As with the imbalance between the supply of compelling deals on the market and equity demand, the large supply of non-recourse bridge debt competition has driven down spreads for value-add properties. The average debt fund spread is down 75 bps from the beginning of 2018. The number of debt funds in the market was at a record high at the beginning of the year. Some consolidation is anticipated as the volume and demand for recapitalizations didn’t materialize due to the US economic performance and many prominent economists suggesting there could be a few more years of runway before the next downturn.
Insurance company spreads are also anticipated to decline as most have higher mortgage allocations in a coming year with a record low amount of maturing loans to refinance.
However, the counter argument to declining spreads is alternative investments such as senior rated corporate debt are rising.
2018 PROPERTY PREFERENCES:
Lender property preferences in 2018 didn’t change much and generally will be the same in 2019 but internet resistant neighborhood retail became more favored over suburban office.
1. Distribution industrial 2. Multi-family 3. CBD office
2018 was a year of gradually increasing global economic uncertainty with an abundance of equity and debt capital chasing fewer transactions. A lot of investors are
4. Neighborhood retail frustrated that pricing discovery didn’t really appear due
5. Suburban office
to the forces mentioned above. Investors needed to be
6. Flex
good individual stock pickers to find the right deals
7. Hospitality
compared to a few years ago when they could be more of
8. Large box retail & malls
an index buyer during a time period of less uncertainty, stronger rent growth and absorption rates.
ESSEX FINANCIAL GROUP QUARTERLY UPDATE
F or mor et h a n30y e a r s , E s s e xh a sh e l pe di t sc l i e n t sn a v i ga t et h ec a pi t a l ma r k e t s e ff e c t i v e l ya n de ffic i e n t l yt oi de n t i f yt h ebe s t fi n a n c i n gs ou r c ea n ds t r u c t u r et ome e t t h e i r c a pi t a l n e e ds .Be l owi sas n a ps h ot onc u r r e n t i n t e r e s t r a t e sa n ds pr e a ds , bu t pl e a s ec a l l u st oda yf or amor es pe c i fi ce s t i ma t eony ou r fi n a n c i n gn e e ds .
RECENT TRANSACTIONS
2930 UMATILLA
STANLEY MARKETPLACE
5.2
LIFE CO
LIFE CO
LIFE CO
PARK TECH
ARISTA I
MARSHALLS PLAZA
16.3
$
32
LIFE CO
LIFE CO
LIFE CO
RE/MAX PLAZA
SHERWOOD BUSINESS PARK
FORTY45
14 LIFE CO
ESSEX FINANCIAL GROUP QUARTERLY UPDATE
$
12 LIFE CO
NOILLIM
CMBS
$
NOILLIM
65.5
NOILLIM
$
NOILLIM
$
NOILLIM
4.2
NOILLIM
$
7.6
$
NOILLIM
17.5
$
NOILLIM
NOILLIM
$
PHASE IV INDUSTRIAL
TRANSACTION SPOTLIGHT
FORTY45 Forty45 is a full city block development in Denver’s Sunnyside neighborhood that has been remodeled and repurposed. The development includes a two-story 41,000 square foot mixed-use office and retail building and forty multi-family units spread across two parcels that are both for-sale and for-rent. The Property was originally built in 1965 and had historically been the corporate headquarters for Catholic Charities.
Essex Financial Group was approached by its client to help recapitalize the development, which it paid cash for in 2016. Essex’s client’s objectives were to maximize loan proceeds while simultaneously providing the lowest fixed interest rate possible for ten years. The primary challenges to the request involved an owneroccupied co-working tenant, a major retail tenant that had yet to finish their tenant improvement build-out, and a below-market rent signed by a major tenant, who was also the previous owner of the building.
Essex was able to provide its client with a 10-year, fixed rate loan with one of our correspondent life insurance companies with maximum proceeds and a market-leading interest rate. Essex was able to negotiate minimal structuring around the various challenges to the loan that were acceptable to the client. Essex secured a Loan Commitment in 30 days and closed the loan in 55 days and met the client’s targeted closing date.
PARK TECHNOLOGY CENTER Park Technology Center is a 145,700 square foot light industrial property located in north Denver atd 124th and Huron around 1 mile west of I-25. The four-building property was constructed in 2001 and is currently 98% leased to a variety of local and regional tenants. It was built by the seller, an industrial REIT and was institutionally maintained in excellent condition. Park Technology Center was purchased for $19,200,000 in late December. No tenant occupied more than 10% of the property and the seller did an excellent job of staggering the lease expirations over the next 7 years.
The buyer’s business plan was to hold the property for 7-10 years, roll rents to market and make some capital improvements over time. Their financing objective was to maximize loan proceeds and interest only (which typically move inversely) at the lowest market rate. Time was of the essence as the transaction needed to close in less than 55 days. As Essex originates and services loans for the the largest number of insurance company lenders in CO, we were able to create a strong competition and provided multiple options with insurance company lenders offering non-recourse terms. The winning lender, an exclusive correspondent lender Essex has represented for 25 years, provided a 10year fixed rate loan at 70% of the purchase price with 3 years interest only followed by a 30-year amortization. The borrower locked the rate at the floor rate when they signed the loan application which eliminated any interest rate risk during due diligence. The Loan Commitment was delivered in 20 days and the loan closed 55 days later on the contract closing date. No leasing capital or capital improvement reserves were required and the lender waived insurance impounds at closing.
ESSEX FINANCIAL GROUP QUARTERLY UPDATE