Earlier this month, Hines secured $182 million to refinance Intersect, a four-building office campus in Orange County. The deal offers some insight into how the debt markets are working. Life companies and the agencies have been the most active in providing debt during the pandemic, and this deal was no different. Hines, along with its joint-venture partner, placed the three-year, interest-only financing with MetLife Investment Management. JLL secured the funding on behalf of the borrower.
"Capital availability does not seem to be an issue, but valuation, underwriting, pricing discovery, and human capacity constraints have all been headwinds to lending the past several months," Kevin MacKenzie, executive managing director at JLL Capital Markets, tells GlobeSt.com. "On the debt side, life companies and agencies have been the most active throughout this time, and the appetite has continued to strengthen in recent weeks. Bank and debt fund activity has been more selective but for the right opportunity there is interest, and we also see that increasing."
Asset value is also playing a role in asset pricing. In some cases, pricing has declined during the pandemic. "On assets with a core profile the cost of fixed-rate debt is close to where it was pre-COVID, and, in some cases, lower—such as apartments—through the agencies. On more transitional asset profiles, spreads have increased but over a much lower LIBOR index, so typically floors have been instituted," says MacKenzie. "This has generally placed all in borrowing rates into similar ranges they were approximately one year ago, which still should be an attractive cost of capital for many situations."
Despite the market dislocation and stall in the debt markets, real estate has continued to be a favored asset class. In fact, the pandemic may prove to fuel more hard asset investment, akin to increased real estate allocations after the 2008 financial crisis. "Regardless of fluctuations in sentiment and transactions activity, the overall trend among institutional investors has been for higher allocations to real estate," Lauro Ferroni, senior director of research at JLL, tells GlobeSt.com. "With negative interest rates in many regions of the world, there a focus on cash flowing assets. We see no reason for this trend to reverse over the medium to long term given the ability for yield and multitude of advantages of real estate investments."
The pandemic will drive strategic changes, particularly for some asset classes, like office. "Site selection and occupancy strategies post-pandemic will be driven principally by strategic objectives, such as productivity, innovation, collaboration, workforce recruitment/retention, wellness and access to capital and customers," predicts Ferroni.
Ultimately, MacKenzie estimates that owners and investors will lean on existing relationships more to drive and close transactions. "It is important to remember that having the right relationships is paramount to getting proper interest and surety of execution in the current market we are navigating," he says.
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Kelsi Maree Borland
