Avatar Financial’s T.R. Hazelrigg IV on the Higher-for-Longer Scenario

In the realm of commercial real estate financing, much has changed over the past year in some respects, while in other respects the current environment is largely the same as it was 12 months ago. Connect CRE in March of 2023 quoted T.R. Hazelrigg IV, president and co-founder of Avatar Financial Group, on the cumulative impact of the Federal Reserve’s series of rate hikes. Ahead of this year’s Connect Los Angeles event, scheduled for May 1 and featuring Hazelrigg on the ‘Financing with Debt” panel, we asked him for an update.

Q: A year ago, Connect CRE quoted you as saying, “The Fed’s aggressive rate hikes have significantly compressed the spread between private money and conventional rates resulting in an explosion in demand for alternative financing.” Has the capital markets environment changed significantly since then, and if so, how?

A: The capital markets have not changed much at all, because the oft-mentioned federal rate reductions keep getting pushed back due to continued inflationary concerns. It is expected that lower rates will bring conventional lenders back, but every time we appear to get close to the horizon, it gets pushed further down the line. We expect that we’ll be in this environment for some time.

A year ago, we thought the rates would have dropped by now, yet here we are with the spreads between conventional rates and privates still compressed. Certainly, we see that rates haven’t dropped to increase that spread. Borrowers today are in the dilemma of being stuck with higher rates for potentially 5 years or more considering the defeasance associated with a CMBS loan or taking a higher rate bridge loan but exiting in as soon as 6 months with many private lenders More borrowers are choosing the shorter term deals in the hopes of locking in lower rates in the future.

Q: We’re hearing that federal regulators are keeping a close eye on banks’ levels of commercial real estate exposure. With that, have banks pulled back further from CRE lending in recent months?

A: They have maintained their pullback. Lots of community banks dramatically pulled back, have not loosened the reins, and look to be maintaining this stance for the foreseeable future.

Q: Federal Reserve Chair Jerome Powell and other Fed governors have indicated that rate reductions may occur later rather than sooner. What are the implications for Avatar clients of a higher-for-longer scenario?

A: It means more opportunities and at much higher rates, with more volume. We’re seeing higher quality transactions, with lower LTV, and higher quality sponsors. We’re also seeing larger deals $25 million and above. There will be an all-time high of maturities in 2024, with a dramatic increase even from last year’s volume.

Q: How have the needs of Avatar’s clients evolved since the company’s founding?

A: Historically, we have built a relatively tight niche. Our clients were entities that had a dramatic timing issue, like a 1031 for example, or other factors keeping them out of conventional lending. Now financing is difficult for everybody and there is a much bigger pool of clientele.

Currently, we are lending to clients who would historically never have considered private money. They have great credit and great properties but unfortunately, they didn’t get ahead of their balloon payments. These clients would typically go the conventional lending route.

In general, this is likely to be to be the best year we‘ve had in our history.

How are deals getting financed in today’s uncertain climate? On May 1, Connect Los Angeles 2024 brings together John Manning of MMCC, Gary Bechtel of Red Oak Capital Holdings, Felix Gutnikov of Thorofare and TR Hazelrigg, IV of Avatar Financial Group on the Financing with Debt Panel. Register now to hear from these industry experts.