GlobeSt.com: What happened to the funds raised in anticipation of this demand?
Petriella: There are a lot of people out there that want to make loans, but yield requirements have gone up and lenders are seeking returns anywhere from 15% to 20% IRR. The majority of deals aren't penciling in to meet those expectations.
GlobeSt.com: Are banks relaxing even a little bit the higher underwriting standards they put in place last year?
Petriella: Not really. With conventional lenders, if a bank dislikes even one small piece of a deal or an asset – everything else is fine – they simply won't take that deal on. It is very black and white right now.
GlobeSt.com: So where are developers that don't have the best deals or credit finding financing turning?
Petriella: Financing is out there, available from alternative sources, but it is expensive. For instance, I had one client – a publicly traded REIT -- that needed to raise capital for a project it wanted to pursue that was time-sensitive. It owned two contiguous assets, 15-acres each, one of which had a debt-free single tenant office building. So it raised capital using the equity in that 242,000-sf, $32 million asset.
GlobeSt.com: From where?
Petriella: From a hard money lender on the East Coast. Those lenders charge rates that are in the low double digits, so as I said, it was very expensive. But the REIT got the money it wanted for the new opportunity.
GlobeSt.com: What are the bright spots you see in the current environment?
Petriella: I am doing a lot of refinancing now on conduit loans made seven and 10 years ago, when the rates were in the mid 7% range. Getting low 6% now is stellar for them.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
