Kiser Group: What are some of the current trends that you’re seeing in the commercial real estate market, and how is Walker & Dunlop keeping up with those trends?
Huber: The first factor is higher interest rates. One year ago, the 5-year and 10-year Treasury bond yields were at 2.88% and 2.94% respectively. Today, those indexes have increased by approximately 60 basis points (or 0.6%). As a result, lenders are now requiring higher loan spreads across the entire range of leverage than they did one year ago. Second, liquidity has tightened in the development and value add space. Many bank construction and value add lenders need prime + xx% (8%+). Some banks and credit unions are reserving dry powder for existing relationships. Less bank liquidity is partially the result of volatility in the market (hesitancy about lending at 6% on the books when fed rates could increase further in 2023), and partly the result of extended construction and bridge loans that would have typically permed out by now. The former results in more banks requiring swaps if a borrower wants a fixed rate. Regarding the latter and oversimplifying the issue, extensions have been needed on floating rate loans originated at 3% because they don’t pencil for refinance at today’s 5, 6, 7% and require significant deleveraging with precious equity. Extensions on riskier assets, lead to higher capital charges which further constrain lending capacity. To provide solutions for clients, W&D maintains active relationships with local, regional, and national firms that are in the market for new relationships. Additionally, for deals with a longer development horizon, HUD construction loans can be a great solution.
Kiser Group: What are some common mistakes that investors make?
Huber: One mistake is that owners are not actively reviewing their loan maturity schedule (semi-annually), or having a maturity schedule that is too concentrated in any one year. Another is not structuring some flexible prepayment terms (if available) into new loans, as some lenders can offer flex prepay for no / a minimal charge. Certain sponsors see prepay flexibility as insurance they will never use, but if inexpensive or free and if considered relative to the maturity schedule, it’s valuable. Lastly, even if annual profit and loss budgeting isn’t prioritized at a firm, they should review year over year performance to identify actionable trends or issues.
Kiser Group: What are some of the most challenging aspects of working in the commercial real estate industry, and how do you overcome those challenges?
Huber: In times of volatility a dislocation between terms promised at quoted and those that are approved can surface. To minimize this issue the following are important: Work with known capital sources where possible. Also, over-communicate and prioritize preferred terms, to understand whose approval is needed within an organization and where any risks lie. Lastly, to navigate this volatility, W&D relies on a stable of diverse lenders to find liquidity in the debt markets. More capital relationships and financing options are always an advantage.
Kiser Group: How do you stay up-to-date with changes in regulations and policies that affect the commercial real estate industry, and how do you communicate those changes to your clients?
Huber: Walker & Dunlop has weekly national production calls. We discuss micro/macro economic realities, market consensus regarding upcoming fed policy moves, and various other topics. Where there are lender-driven changes (Agency radon testing policy) or changes originating from the professional associations (ASTM – vapor intrusion for example), we discuss those as well. We consult with our trusted third parties and we highlight any potential challenges or mitigating factors with our clients prior to engaging.
Kiser Group: Can you share some examples of successful projects that Walker & Dunlop has worked on, and what made those projects stand out?
Huber: I’ve arranged high yield floating debt for an industrial owner-occupant whose business banking relationship was in forbearance. We accessed equity in his real estate holdings to pay off all business debt and allow it to grow without banking oversight. The client saved his business while the lender holds great real estate at a safe loan basis. Lately we’ve quickly fixed loans to mitigate sponsor interest rate risk and lock in profitability. One recently had friable asbestos pipe insulation in the basement and laundry room. We coordinated testing, obtained bids for remediation, and cleared the engineering report for closing post-remediation in a few weeks. As an organization, we partner internally and across disciplines to prioritize client needs better than most. Agency-only loan originators often partner on deals with a high non-residential component to find life company solutions where the agencies may be less aggressive. Or a client may simply want to clear the entire market to ensure they are getting the best terms. Recently, a client asked for Agency and Life Company quotes on a $70.2MM portfolio of workforce housing located in 6 states. One Life Company was a close second, with aggressive terms, but we locked a Fannie 10 year full-term interest-only refinance at a little over 5% on May 1st.