Newmark’s Chicago Debt & Structured Finance Team—Executive Managing Directors Joel Simmons and Ben Greazel, Vice Chairman Adam Levinson, and Associate Director Cody Simmons— has closed more than $21 billion of transactions locally and nationally, covering all major property types. The 1,000-plus transactions range from short-term bridge financing to construction and long-term financing on behalf of institutional and private capital clients. Amid a volatile capital markets environment, they have seen certain transaction types rise to the fore front and others lag as far as lender interest is concerned. Connect CRE sat down with Simmons, Greazel and Levinson recently for a candid discussion of what they are seeing in today’s marketplace.

Q: You’re all based in Chicago, but the team is active coast to coast. In terms of transaction volume, which geographies are more active than others and how does Chicago fit in the mix?

Joel Simmons: We follow our clients and roughly speaking, approximately half are from Chicago and the balance is everywhere else. There are no barriers to where we transact business. Historically, it was a much more local business, today it’s more national. So, while half of our clients are Chicago-based, only 25% of our business is in Chicago. In terms of active markets, over the past 18 months, like others, we have seen a substantial increase in business throughout the sun belt states as demand for outdoor lifestyle activities has surged; a byproduct of the pandemic.

Q: Are you seeing an increase/decrease in transaction volume among different property types compared to historical averages?

Simmons: Yes, and that is attributed to two factors; interest rates and return to work. The rapid rise in interest rates has caused a painful disconnect between buyers and sellers, especially in multifamily and industrial, which have historically traded at narrow cap rates. Retail has experienced a more subtle disconnect as cap rates there have continued to trade somewhat wider since the onset of COVID. These wider cap rates have provided more room to absorb escalating indices. Non-core office, on the other hand, has been severely impacted by a slow “return to work” trend coupled with today’s younger workforce’s preference for urban living. Until there is data that supports that workers are returning to near pre-pandemic levels and tenants are committing to leases, debt for office is going to be scarce and expensive.

Greazel: To expand on Joel’s retail comment, lenders are more open minded to lending on retail. COVID was tough on all CRE, particularly retail, which tainted lenders’ opinion of it. However, what we are seeing now is strong leasing velocity, increasing rents, and low vacancy in much of the retail inventory. The combination of the consumer returning in strong fashion to traditional brick-and-mortar real estate and relatively higher cap rates allows retail investors to complete sales transactions with positive leverage even in today’s rate environment.

Q: Moving from asset class to debt execution, what are the main differences you see happening today?

Greazel: We’re definitely executing more short-term refinances than acquisition financing because acquisitions have come to a screeching halt for the most part. On refinances, we are bridging to a sale or what is hopefully a sunnier interest rate environment. Generally speaking, borrower’s believe rates will come down in the next 12-24 months as inflation cools so getting into a new 10-year fixed rate loan is not appealing. Most are opting for a three-to-five-year extension or refinance, presuming there is enough NOI to support the higher interest expense and/or there is capital available to resize the loan. We have seen a “flight to relationships” with lenders being more particular about which deals they are willing to lend on and existing relationships becoming a big part of what gets a deal done today. We have been lucky to benefit from our existing relationships with small to mid-size regional banking institutions as volatility continues to increase; we have found these lenders to be the most aggressive.

Q: You had mentioned that multifamily and industrial are product types that people are continuing to chase. In addition to acquisition financing, are you getting much interest in construction financing on either of those property types?

Greazel: Construction financing requests remain strong for both industrial and multifamily. The difficulty in underwriting for almost every project is return on cost vs. agreeing on an appropriate exit cap. Costs continue to increase at a faster rate than rents, and cap rates are also increasing, squeezing developments from every angle.

I’m in the market right now on a student housing deal and I can tell you that the number of interested banks has dramatically slowed down from what it was in the first half of the year.

Adam Levinson, Newmark

Q: Are you finding an increasing amount of resistance from banks and other types of lenders that that you normally go to? And if so, how are you overcoming that resistance?

Adam Levinson: I’m in the market right now on a student housing deal and I can tell you that the number of interested banks has dramatically slowed down from what it was in the first half of the year. And banks are saying “we met our allocation, we’re not doing anything for the remainder of the year, or at least until the volatility is run through the system a little bit better.”

Simmons: There is not much resistance when it comes to permanent loans, it’s just whether or not deals are penciling out, because interest rates are pushed. The metrics of these loans are often outside of what the borrowers originally anticipated going into the beginning stages of their projects – increased coupons, subsequently lower leverage, and more structure. Banks are becoming increasingly conservative with their underwriting and willingness to accept new clients into the bank. To overcome this, we cast a very wide net to find the best capital execution and leverage our relationships.

Greazel: There is resistance across industries, especially with office and hospitality. That resistance is driven by the uncertainty regarding the return of the office worker, the return of the business traveler, and what effect inflation will have on the leisure traveler. Most crystal balls are foggy predicting the next 24-48 months. So unless you have a new 15-year lease borrowers will meet resistance from lenders. Many might be surprised to learn that US hotel room demand was within 3% of 2019 levels in October – but RevPAR was up 23% year over year. Even with a mild to moderate recession pumping the brakes on spending in 2023 that industry remains poised to prosper. It is these disconnects between lender sentiment and performance where we see opportunity. Those with fortitude, patience, and capital could be in for a great acquisition environment.