Sara Havlena
Industrial borrowers will continue to see plenty of available capital, although rising interest rates will lead to more conservative terms. Life companies will remain the most competitive capital sources in the industrial space, while bank lenders will strive to compete. Count on life companies to beat the banks on pricing for larger deals at lower leverage, however banks will win deals by offering a more flexible prepayment structure. CMBS lenders will also strive to win deals, although they are having a hard time competing on pricing. E-commerce’s rapid and continued expansion will fuel the need for additional warehouse and distribution space. Developers are running around trying to buy land to build or renovate their existing space in order to meet the need. This demand creates confidence in the sector and lenders are not as worried about tenant rollover.
In light of the Fed’s tightening monetary policy, rates have rapidly increased. Best-in-class pricing for a 10-year fixed loan starts in the low 4% to 4.75% range. All indications point to the Fed continuing to raise the federal funds rate. Anticipated further increases have also caused lenders to widen their spreads on fixed-rate loans. As rates increase, lenders will be more constrained by debt service coverage ratios. Expect this to remain an issue until cap rates begin to widen. Lenders are stress testing loans at a higher rate than ever before. Anticipate a more conservative approach to underwriting and projected rent growth.
Borrowers will see 65% to 75% leverage. Most lenders would prefer to be below 70% LTV, but debt yield and DSC ratios are becoming more important in today’s market. Look for tighter debt yields, mostly because of the need for lenders to find a way to get more industrial space done, but also due to the incredible rent growth seen in most industrial markets. Count on lenders to target 7% to 9% debt yield, with the lower end only being tolerated for Class A assets. Lenders would like a 1.50x DSC, but most deals are usually inside that benchmark. The lowest lenders will agree to go is 1.25x to 1.30x for stabilized assets. There will be more focus on interest-only loans and borrowers are willing to take less loan proceeds in exchange for longer interest-only periods.
Life companies such as MetLife, New York Life, PGIM Real Estate, Unum, Mutual of Omaha, CUNA Mutual, Principal Real Estate Investors, Securian, John Hancock, Pacific Life, Voya Investment Management, StanCorp Mortgage Investors, Thrivent, Symetra, National Life, Security National Commercial Capital, RiverSource, Farm Bureau Insurance and GPM Life Insurance will be active.
Expect life companies to target the highest quality industrial properties with strong tenants. Life companies may stretch to 60% to 65% for the right deal but will be most active at a slightly lower leverage. Lower leverage life company debt for larger deals is pricing in the 200 to 300 basis point spread over SOFR in strong industrial markets.
Smaller local and regional banks will remain in fierce competition for industrial deals in the middle-market space, while the larger banks such as Wells Fargo, JP Morgan Chase, BofA, Morgan Stanley, Bank OZK and U.S. Bank will lead the charge in industrial bank lending on the institutional side. Also, look for Pacific Western Bank, CIBC Institutional Real Estate, Centennial Bank, Provident Bank, Associated Bank, Investors Bank, HomeStreet Bank, Columbia Bank, Fidelity Bank and MUFG Union Bank to pick up market share. Banks will offer maximum leverage up to 75% with recourse. Banks have increased rates across the board, with fixed-rate programs starting in the low 4% range and trending upwards from there depending on quality of sponsor, asset and location. Look for banks to seek shorter term loans — maxing at five and seven years.
CMBS lenders such as Wells Fargo, Morgan Stanley, Barclays, Citi, Goldman Sachs, Deutsche Bank, UBS, Argentic, Starwood Mortgage Capital, Basis Investment Group and Sabal Capital Partners will also strive to compete. Borrowers will see 5.2% rates.
Class B product in secondary markets that boasts positive net migration, net absorption, low vacancy and strong rent growth will attract investors as groups will be priced out of competing with the institutions for larger Class A deals in core markets. Warehouses — particularly large bulk space — have been the hottest commodity and any asset over 50,000 s.f. will gain very strong lender attention. Newer properties with high ceilings heights will be the most sought after. Low clear smaller buildings and flex properties with higher office finishes will be the toughest to finance. Lenders generally opt for tenants with strong credit and decent terms remaining on their leases.
Count on lenders to prefer industrial assets near highways, interstates, ports and airports. Major markets across the country will see plenty of available capital. Industrial properties in business-friendly states will also be desired. Lenders will target markets with both job and population growth. Phoenix, Dallas, Las Vegas, Nashville, Tenn., California’s Inland Empire and Salt Lake City are some of the most active and attractive markets for industrial leasing, investment sales and financing opportunities.
Borrowers that have experience with comparable properties will be the most sought after. Construction loans will need borrowers with the wherewithal to provide any additional equity required if hurdles arise. Lenders will want net worth equal to the loan amount and generally 10% in liquidity. However, liquidity may be able to negotiate down to 7% with a high-quality sponsor that is recycling cash to invest.
