If you have designs on buying that aging B property to renovate it to a
B-plus, there’s some good news. Lenders want your business. But there’s also a downside—you likely won’t be the only one who covets that particular asset.
Since the end of 2012, Keith Harris, chief investment officer at Chicago-based owner and manager Laramar Group, began to see banks move more aggressively on acquisition and renovation loans. Wells Fargo and J.P. Morgan financed several of its acquisitions but Harris notes that local and regional lenders are also highly competitive.
“The debt market has gotten aggressive in terms of the amount of money that lenders want to put out,” he says. “At the same time, rates and spreads have come in a bit.”
Brokers are seeing the same trend, driven by swift closing timelines.
“Banks are very competitive on the B-class deals with value-add opportunity,” says Brian Murphy, a senior investment broker in the Dallas office of Atlanta-based Apartment Realty Advisors. “We closed two transactions last week where the buyer financed with a bank. Both were closed in less than 30 days from execution of contract; one of the deals was 17 days.”
Ease of execution plays a large role in why some lenders win business, but it’s not the only factor. “The banks were always the most aggressive. But with recourse to the borrower,” Harris says. “Fannie and Freddie have been non-recourse, but they have always lacked a bridge component."
Recently the GSEs have become more creative, offering future sizing flexibility. Fannie and Freddie are still aggressive with sizing and term, but they lost some market share to banks and insurance companies. The CMBS market is also back in a big way after losing market share during the recession.
“In the past, CMBS was gobbling up that product,” says Mitchell W. Kiffe, senior managing director with Los Angeles–based CBRE and former head of production at Freddie Mac. “This cycle, bond buyers don’t want C assets in secondary and tertiary markets in their pools.”
Holding the Line
With continued strong interest in core assets and land, and construction costs pulling down development yields, the interest in value-add assets makes sense. That’s where the money is right now.
“The return for B assets will be higher than for core assets because there’s more upside,” Kiffe says. “It’s actually rational that the gap between core and B will contract on a cap-rate basis [as the recovery continues].”
Despite the number of financing options and strong buyer interest in value-add, Kiffe doesn’t think the value-add market is getting frothy. That’s because buyers seem to be holding the line in what they’ll pay.
“I see that there continues to be discipline in the system from both the buyers and lenders,” Kiffe says.
But the competitive pricing is making it hard for buyers to find deals that meet their yield requirements. So far, buyers have generally held to their targets, but Kiffe predicts that buyers who earned yields in the mid-teens in 2010 and 2011 may have to live with returns in the high single-digits now.
“Some of our clients say it’s hard to get those midteens returns [for apartments getting a modest face-lift],” he says. “I think the market is competitive, but I think there’s still discipline on the buy side.”
