Competition among commercial real estate lenders shows no sign of abating as borrowers continue to turn to private lenders for an influx of turnaround capital, according to Chris Mavros and Jon Leifer of Case Real Estate Capital, LLC (Case). How will recent tax reforms and rising interest rates affect the market? And what asset classes are garnering the most interest in this stage of the cycle?
In the following Q&A, Mavros, who serves as Case’s managing director, principal and CFO, and Leifer, Case’s director-acquisitions, address these questions as well as a range of others, including what it takes to be successful in today’s market and how the aging Baby Boomer generation is creating opportunities in the market. Founded in 2013 by Sandy Herrick, Case is a northern New Jersey-based commercial real estate company with discretionary capital. The company has already surpassed the $125,000,000 mark in investments.
Q. On the lending side, there remains a steady stream of available capital. What is your prediction on demand in 2018 and how will lenders react?
Mavros: Demand from borrowers will remain steady in 2018, which will only serve to further increase competition among lenders as new loan capital sources enter the market. The average lender will likely feel pushed to stretch on rate, leverage and structure to win deals this year.
Leifer: The influx of new players is particularly notable in the bridge lending space. Overall, it is an excellent time for borrowers to receive multiple quotes, but they must keep in mind that lenders with a strong history of execution provide the best opportunity for quality financing.
Q. What asset classes are garnering the most interest in the metro New York area and Florida in this stage of the cycle?
Leifer: Industrial and multifamily have the strongest fundamentals in the metro New York area and Florida markets. At eight-plus years into the economic recovery, new household formation continues to create opportunities for redevelopers in the multifamily sector. At Case, we have a healthy appetite for funding the repositioning of both industrial and multifamily assets.
Q. How is the unrelenting force of e-commerce affecting the retail sector?
Leifer: There’s no question that e-commerce, particularly Amazon, is remaking the sector, and retail properties continue to be adapted for new uses. Urgent care and food hall facilities are springing up like weeds in former storefronts. We’ll continue to see improvements in multitenant property performance as we “right size” retail supply.
Q. What are your predictions on land lending this year?
Mavros: Case is actively lending on land development deals, even where there remains a level of uncertainty. We are targeting acquisition loans on entitled land and development ready deals.
Overall, with regard to loans for unentitled land, lenders will hesitate to underwrite them given the multitude of risks inherent in early- to mid-stage projects. Borrowers will be pressured to pay significant fees and interest rates if they do not have entitled land.
Q. What shifts in investing will result from rising interest rates?
Mavros: These rate-increase trends undoubtedly affect cap rates and real estate values. By extension, if underwriting loan payoffs in future refinancing becomes difficult as asset values decline, the dollar amounts lenders are willing to extend will be affected as well. Investors, especially institutional ones, will likely focus on debt rather than equity to avoid taking last-dollar risks.
Q. How will recent tax reforms under the current administration affect CRE finance?
Mavros: The real impact of the tax bill will be seen next year – 2019 – and from the commercial real estate perspective, the reforms are very favorable. Any perks, though, will be offset by increasing interest rates.
Corporate tax cuts and pass-through deductions are a significant boon to partnerships, LLCs and S corporations that will not be taxed at the entity level. On a personal tax level, the elimination of the state income and property tax deductions will clearly have a negative effect, particularly in New York and New Jersey.
Q. How is the aging Baby Boomer generation creating opportunities in the market?
Leifer: We are seeing increased opportunities in the medical office and assisted living property sectors, although the market has five to seven more years before the peak retirement years of the Baby Boomer generation.
Self-storage is garnering a lot of interest as well, and new supply in this sector is trending up and down the southern coasts of Florida, where developers are building housing of every stripe. Baby Boomers are trading out of larger homes, generating demand for storage. Questions are arising about overbuilding in that sector, though.
Q. What are the major concerns in this stage of the cycle? How is Case addressing them?
Leifer: My main concern is that sponsors and their lenders maintain discipline in their underwriting. This is not a time to ignore the importance of mitigating risk. While there are good deals out there for strong sponsors with solid operational capabilities, if a deal seems too good to be true, it probably is. On a separate note, pricing expectations on the limited number of nonperforming loans out there seem to be getting more realistic.
At Case, we have the discretionary capital that allows us to deliver on our promises, which distinguishes us in the market. We remain interested in senior secured financings and gap financing when we find mezzanine or preferred equity opportunities compelling.
Q. What are the keys to success for your company?
Mavros: As Jon mentioned, we do what we say we are going to do and always have. Sandy, Jon and I have built long-standing relationships based on trust and integrity with each other and many colleagues in this industry. That trust and mutual respect will continue to drive our success.