Capital Conundrum – Rate Expectations
I. Speaker context – Who’s Pip?
a. What is Gantry?
i. Former NBS Capital / Newmark Realty Capital
ii. Small but mighty – 20 owners, 100 people iii. Best life company lenders in Portland
b. Are we due for a correction?
i. Fed floodgates - The GFC and Covid
ii. Longest sustained period of economic expansion in US History
iii. The Golden Decade of CRE
iv. The Big Reveal on Asset Types: office/retail vs apartments/industrial – CBD vs. Suburbs
v. Cycles are the natural order
II. Now what? How will/are lenders responding?
a. Lender mindset = risk avoidance
b. Underwriting tweaks
i. No rent growth projections
ii. Firm 5% or higher vacancy/credit loss (with Covid consideration) iii. Minimum $200/$250 per unit reserves
iv. Focus on expense comps
v. Cap rate not below coupon rate
vi. DSC is constraining factor (1.25:1 = 80% of NOI)
vii. 1.50x on a 25-yr = best rates/terms
III. Interest Rates – the big quandary
a. Forget where we’ve been
b. Spreads in the 200 over range (175 to 250) – benchmarked by Corporate Bonds
c. Rates are generally in the mid-5% range and up
Takeaways:
• Expect greater equity contribution
• Plenty of debt available – but more selective
• The tide is ebbing, a focused approach is required
• Expect rates to trend higher in 2023 before moderating
2215 NW Quimby Blake Hering Suite 2 503-905-9102 Portland, OR 97210 gantryinc.com