If you’re an investor in the middle market, now is the time to consider taking advantage of market liquidity by refinancing, whether you plan to use the proceeds for acquisitions or investment in your portfolio.While it’s difficult to tell where interest rates will go, concern is beginning to permeate the market that while banks will remain strong, underwriting will be increasingly conservative. As a result, Meridian Capital Group has seen a significant increase in refinance and acquisition activity since the beginning of this year. Both CMBS and banks are experiencing an increasingly stringent regulatory environment, causing them to behave more conservatively on deals.
The challenge – while national, regional and local banks remain strong and well-capitalized, lenders tend to be regulated from a national level by the Federal Reserve, OCC and FDIC. Broader trends, such as the appreciation of commercial real estate in the Northeast and Mid-Atlantic regions, are being viewed by these regulatory bodies as increasingly risky for lenders while they are not properly accounting for the specific dynamics of each submarket and the merits of each loan. Lenders have done a great job adapting to the policies mandated by Dodd-Frank, but in 2016 we expect additional controls as regulation begins to address the recommendations outlined by the Basel Committee for Banking Supervision. This uncertainty regarding capital requirements and risk retention has begun to influence lenders to take a more conservative stance until these matters are resolved.
For instance, Meridian recently closed a cash-out construction take-out loan on a large multifamily asset located in Philadelphia where we forward rate locked for over six months, with a going in DSCR of 1.05X, conditioned upon a 1.20X DSCR at stabilization. We expect that structures like this will be increasingly less available as regulatory pressures increase and uncertainty persists.
What we’re telling clients is that if they want to refinance, don’t do it solely because they think rates are going to go up—do so because lending parameters are changing. For instance, you might see a difference in proceeds and interest-only terms. In 12 to 24 months from now term sheets will inevitably look different, and we are encouraging clients to capitalize on a strong lending environment where there is still a lot of competition and liquidity. In 24 months borrowers may not be able to close the same types of deals they can today.
Family-owned real estate companies are counting on refinancing to make capital available for acquisitions and investment. But if they don’t take a proactive approach to the changing market conditions and wait for their mortgages to mature, they may experience a significantly different lending environment than what they have become accustomed to over the past five years when they seek to refinance.
Fortunately, change happens slowly enough that it gives us time to strategize with our clients and create longer-term plans for managing their loan maturities and capital needs. We are still seeing property values supported by appraisals and lenders who haven’t been financing overzealously like the last cycle, but a shift is occurring. Now is the time to plan for it.
Israel Schubert is senior managing director and head of the New Jersey and Florida Offices at Meridian Capital Group.