'You’ve Got To Get Pretty Heroic': Lender Aggression Ramping Up For Industrial, Multifamily

Lenders are getting aggressive on multifamily and industrial deals, pushing their equity requirements down to win more deals as heaps of cash are plowed into the two asset classes.

Leverage ratios have eclipsed 80% in some commercial loans — a mark that had been rare in the aftermath of the Great Financial Crisis — as lenders are trying to outbid each other in an increasingly competitive market, debt experts said during Bisnow’s National Real Estate Finance Summit this week. 

“I think the debt capital markets have been more liquid than we’ve seen in 15 years really,” said Christopher Kramer, Newmark’s senior managing director for debt and structured finance. “[Loan-to-value ratios are] definitely a constraint, and lenders are definitely willing to push the credit curve on deals versus a year ago.”

Demand for multifamily and industrial properties has been on fire since the pandemic took hold: In 2020, 276M SF of new industrial development was built as e-commerce companies looked to expand at light speed. Three hundred forty-two million SF of new industrial space will hit the market by the end of 2021, according to data platform CommercialSearch.

Industrial property values have risen 41% above their pre-pandemic levels as of Q3, according to Green Street’s Commercial Property Index Report, and apartment properties increased 18% over the same time period. As larger and larger funds are targeting the sectors — nontraded REITs like those run by Blackstone and Ares Capital Management have already set a record for capital raising this year, most of which is allocated to industrial and multifamily — financiers are getting creative to land their loans on these projects.

“We're certainly getting back up to 75%-80% [loan-to-value ratio] these days in things like multifamily or industrial,” Nuveen Chief Investment Officer Shawn Lese said. 

Nuveen has begun to offer to provide the entire capital stack to make itself more attractive to borrowers, he said. The investment firm — which has more than $130B of assets under management and is a subsidiary of financial services giant TIAA — has started to put up the vast majority of cash into some deals to close on them, then shop for a senior loan after the fact, Lese said.

“They'll put in their 5% or so, we'll put in 95%,” he said. “What that does for us, that allows us to make ourselves a more attractive capital partner for the developers to try and access multifamily or industrial, which is kind of hard to do these days.” 

With competition from private capital, insurance companies and private real estate companies, Related Fund Management is signing deals up to nearly 85% loan-to-cost ratio in some cases, Related Fund Management Managing Director Alfred Trivilino said.

“If we look at our portfolio a couple of years ago, we were weighted average about 75-76% [loan-to-cost ratio], I would tell you today we are pushing into the 80s, selectively, depending on the asset price situation, but we are leaning in if we like the underwriting, like the basis, like the sponsorship … where the business plan we believe is attainable without pushing too far,” he said. “We’re pushing 85 in some cases.” 

Not every deal in the market is seen as a winner, though. Trivilino went on to describe deals Related’s lending arm had been pitched in the past two months — construction loans that would be both highly leveraged and have between 9% and 11% fixed interest rates. 

“We just think that is a complete misprice for that risk, and we’ve turned down five of those deals in the last few weeks,” he said.

The tenant appetite for industrial properties and apartments has driven prices in these sectors up so fast that, in the period between underwriting and closing on a deal, the rents that lenders have forecast for the property have been “blown out of the water," Lese said, which is causing cap rates to compress significantly. 

“The operational side is keeping up and justifying those cap rates,” Lese said.

Nuveen's industrial deals in the past year and a half have seen the properties leased up for 15% more than the lender's underwriting before the deals close, Lese said. In multifamily, rents are far outpacing projections — lease renewals alone are frequently seeing a 5% to 10% increase, while new leases are going up by as much as 40%, he said. 

”If you're going to be competitive … you’ve got to get pretty heroic in order to underwrite these things,” Lese said.