Eugene Rutenberg on Navigating the “Gauntlet” of 2023’s Capital Markets

As founder & CEO of Celestial Fund, Eugene Rutenberg is responsible for all facets of Celestial Fund I, LLC and has final decision on which projects the firm participates in. The company was launched in 2018 as a personal investment vehicle and has now expanded into a capital consulting firm that raises debt and preferred equity for various types of commercial properties on behalf of investors and developers. It’s the latest chapter in a commercial real estate finance career that has spanned more than 15 years and has seen Rutenberg close more than $1 billion of complex floating-and fixed-rate commercial real estate transactions as both lender and capital advisor consultant.

Connect CRE sounded out Rutenberg for his take on the current CRE finance environment, much changed from a year ago, let alone the Global Financial Crisis that was setting in as Rutenberg got his start in the industry. As 2022 began, he said, “the typical M.O. was for a sponsor to buy a 3-4 cap property and pay roughly a 3-5% interest rate,” offsetting the difference in higher interest rate vs. cap rate with the projected property rental growth year-over-year and the increase in property NOI.

“However, this business strategy will prove difficult in 2023 as much of the rents across all property types will likely plateau and some rents in oversupplied markets such as Austin, Tampa, Las Vegas and Tucson may even dip as much as 20%,” said Rutenberg. He noted that many sellers haven’t quite comprehended that “with the U.S. in a rising interest rate environment it makes fair property cap rates vitally significant.”

Under these circumstances, he said, “sellers will need to exercise patience and pliability in their asking prices.” Meanwhile, lenders will expect borrowers “to bring more equity when acquiring an asset to cover higher DSCR stipulations and to help mitigate risk for potential future capital calls—a tender subject for some syndicators. I believe that 2024 will be a much brighter year for all.”

Until that brighter year gets underway, though, borrowers will have to contend with the current circumstances. Those facing imminent expirations on their interest rate caps will need to seek experienced capital consultants “to help them navigate the capital markets that have become a gauntlet of sorts, and to assist the refinance of their transaction with the goal of a ‘cash neutral ‘ position in order to avoid paying expensive new rate caps with the current lenders that are considering loan term extensions for additional fees to the borrower,” said Rutenberg. “Construction loans will continue to be completed subject to higher yield on cost and higher stabilized debt yield requirements in those markets that are still truly undersupplied.”

Whether seeking construction debt, a refinance or acquisition loan, borrowers need to come to the table prepared, Rutenberg said. For construction loans, “borrowers with strong balance sheets will need experienced GCs whom they have worked with in the past and successfully completed projects with.” In the case of acquisition and especially refinance, the essentials for success include “a good story, attractive lender loan basis and executable exit strategy.”