Mezzanine financing remains popular with funding sources as banks continue to shy away from offering loans in most categories of real estate development

 John Oharenko

Chicago, IL, July 1, 2023 – The Federal government averted last month's financial shutdown while wrestling with strong labor market conditions.  After 10 unprecedented rate hikes spanning two years, the Fed decided to keep benchmark rates unchanged.  

But facing a 4% inflation rate, policymakers warn that interest rates will be raised twice during the remainder of the year to tame inflation, according to Chicago-based  Real Estate Capital Institute® .

Bond investors react accordingly by widening the inverted yield curve by more than thirty basis points, portending recessionary conditions.

 With real estate capital markets in a state of flux at the half-year mark,  the following funding conditions exist:

 

Higher Rates and Spreads:  In the past month, the 5-year treasury climbed by about 30 basis points, while the benchmark 10-year note rose at about 15 basis points.  In addition, key permanent lenders, including the agencies, increased spreads by 15 to 20 basis points for fixed and hybrid loans.

Restrictive Construction Lending:  Construction loans for nearly all commercial real estate projects, including multifamily, are extremely difficult to obtain.  Regulators require banks to maintain strong liquidity ratios to provide ample cushions against additional rate hikes and potential CRE principal repayment issues upon completion.  Select smaller regional banks and institutional investors offer construction debt under extremely conservative parameters, with pricing often starting above 8%.

 Debt vs. Equity:  Mezzanine financing remains popular with funding sources.  Mezz debt is priced better than equity, yielding lower-to-mid teens or more.  Five-year term loans garner the most attention as borrowers shy away from longer-term debt, often priced over 7%.  Alternatively, extremely prime fixed-rate debt based on LTVs below 50% starts in the 5% range, with 6% or more is much more common.

 

Loan Maturities:  Given the massive volume of debt originations during 2013 and 2014, many ten-year loan maturities are due over the next few years.  And with declining property values (particularly office), lenders and borrowers alike brace for tough refinancing conditions and possible defaults.

Valuation Disconnect:  The public markets (REITs) show substantial property value deviation (discounts) from private markets.  Often, public pricing historically overstates actual market impacts during high volatility cycles, as seen today.  However, given the lack of private market transactions, numerous investors believe actual values are probably about 15% to 20% discounted from peak levels, as current debt pricing and availability remain problematic.

John Oharenko, Director of the Real Estate Capital Institute®, advises, "Record low unemployment and inflation above the Fed's targeted 2%-range keep investors on edge for more rate hikes, even as CRE markets remain stagnant."

 

The Real Estate Capital Institute® is a volunteer-based research organization that tracks realty rates data for debt and equity yields.  The Institute posts daily and historical benchmark rates, including treasuries and bank prime.  

 

^CONTACT:

 John Oharenko, Executive Director

director@reci.com / www.reci.com

^The   Real Estate Capital Institute^®

Chicago, Illinois USA 60622

 

Levin Johnston brokers six multifamily deals totaling nearly $19 million in California Bay Area

 

Adam Levin

Palo Alto, CA -- Levin Johnston of Marcus and Millichap, one of the top multifamily brokerage teams in the U.S. specializing in wealth management through commercial real estate investments, has successfully closed six multifamily transactions in the Bay Area totaling more than $19 million.

“Our team’s extensive knowledge of the local market trends and demographics was instrumental in closing all six deals,” says Adam Levin, Executive Managing Director of Levin Johnston. 

“Despite a slow start to 2023, the Bay Area’s multifamily market shows positive headway as investor demand has ignited through Q2. With competition on the rise, investors look to our expertise to identify and secure lucrative properties for their portfolios.”

Representing the sellers and sourcing the buyers, private investor clients, in each of the six transactions, the Levin Johnston Group demonstrates their aptitude for success in the highly specialized market.

Robert Johnston

The assets, located in the Bay Area region, range in size and value, further demonstrating the firm’s ability to efficiently bring to market a variety of properties and leverage their significant local relationships to swiftly meet specified investor demands.

“Investors understand the value of Bay Area multifamily assets and recognize the long-term economic stability attributed to the region,” says Robert Johnston, Senior Managing Director of Levin Johnston.

 “By applying our regional expertise and strong local connections, our team is able to break through the competition to strategically market a variety of properties and identify and secure assets that will offer our clients steady renter demand and stable returns for years to come.”

The closed transactions include:

 

454 Paula Ct., Santa Clara, California - $4.1 Million

This 9-unit apartment asset is ideally located in the prime employment hub of Santa Clara. Many of the largest technology companies have operations in or near Santa Clara including Google, Apple, LinkedIn, Microsoft, Intel, Yahoo and others, attracting high-caliber tenants with longstanding value. The key location and desirable unit mix consisting of partially renovated studio, one-, two-, and three-bedroom floor plans provided an exceptional acquisition prospect and drew significant buyer activity. Despite the high interest rate environment, Levin Johnston was able to achieve a competitive market price resulting in a win for both their clients.

360 Chiquita Ave., Mountain View, California - $3.9 Million

Situated within walking distance to Downtown Mountain View and San Antonio Shopping Center, this 12-unit apartment community afforded the buyer a unique opportunity to capitalize on location and increase value through deferred maintenance initiatives. Select units have recently undergone capital improvements including vinyl plank flooring and updated bathroom features.

1150 Greenwood Ave., San Carlos, California - $3.51 Million

This 13-unit asset is located in thriving Downtown San Carlos. The buyer was seeking an investment opportunity in a prime location, with solid returns and long-term value potential. Nurturing a strong relationship with both the buyer and seller, Levin Johnston was able to negotiate a favorable 5.52% cap rate on the deal.

317 Elm St., San Mateo, California – $2.75 Million

This well maintained, 7-unit property is located near Downtown San Mateo and Burlingame. With the seller completing recent capital improvements including a new roof and new exterior lighting, the asset provided the buyer an opportunity to acheive immediate returns on their investment. 

903 Adams St., Redwood City, California – Nearly $2.6 Million

Located within walking distance to the lively downtown area, this exclusive 5-unit asset offers tenants beautifully designed one- and two-bedroom floor plans featuring modern unit amenities, individual water heaters, private garages, and private enclosed patios in select units.

3719 Emerson St., Oakland, California - $2 Million 

Located in Oakland’s Glenview District, this 9-unit apartment community is centrally positioned within walking distance to local dining, retail, and community parks. With recent capital improvements completed by the seller, this asset offered the buyer significant opportunity to increase future cash flow, securing strong tenants as many households relocate to Oakland.

Bordered by the City of San Francisco to the north and Santa Clara County to the south, the Bay Area is one of the most highly desirable submarkets for the multifamily sector. 

Connected to Silicon Valley, the highly skilled technology pool that comes with the region has contributed to a significant uptick in growth and prosperity for the region. 

 

CONTACTS:

 

Hanna Kokuashvili / Kiera Moran

The Smart Agency, Inc.

(949) 520 - 6717

hkokuashvili@thesmartagency.com

www.levinjohnston.com.