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Dequity

Add this confusing term to your real estate lexicon. “Dequity,” a combination of debt and equity, is the newest buzzword in CRE financing conversations. The word refers to financing solutions that have the qualities of both parent terms. Dequity is used to fill the capital stack, between the senior loan and true cash equity. The gap can be filled with preferred equity, mezzanine debt, subordinated debt, A/B loans and more. While none of these terms are new, they represent the spectrum being referred to as dequity.

Dequity holders are at less risk than last-dollar equity, but the returns can be similar, especially in times of high interest rates. From a developer’s perspective, dequity is riskier than traditional debt, but still a viable way to fill the capital stack.

Dequity is gaining buzzword popularity as conventional loan agreements are harder to come by. Commercial real estate debt origination volumes are down by 52 percent year-over-year. Additionally, the capital markets have seen a 32 percent reduction in the number of lenders, compared to the same period from last year. Getting deals across the finish line has been increasingly challenging.

The Fed’s tightening strategy and rate increases have pushed returns for dequity into the high teens, close to the equity returns of yesterday. Creative and expensive capital solutions are the unfortunate reality of economic downturns, especially after periods where interest rates were practically zero. The market consensus is that, while rates will hopefully start to come down, they won’t be getting back to pre-pandemic lows at any point in the foreseeable future. After one more planned rate hike this year, the Fed’s current projection is for the benchmark rate to only be lowered to 5.1 percent by the end of 2024. Borrower costs will not be significantly lowered any time soon – so it’s best to freshen up on your dequity.

  • Bull, M., & Severino, R. (2023, September 21). Market Update & Forecast. Spotify. Retrieved September 22, 2023, from www.spotify.com
  • Stribling, D. (2023, September) “Dequity: A Debt, Equity And Capital Markets Explanation”. Retrieved September 22, 2023 from www.bisnow.com

 

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Student Housing Surge

Student housing has become an increasingly attractive asset this past year. Pre-leasing numbers, current occupancy rates and year-over-year growth reached near all-time highs, indicating a robust market. In contrast to the plateaued multifamily housing market, student housing just experienced an average yearly rent surge of around nine percent. This acceleration is likely attributed to higher college enrollment rates and the phase-out of remote learning.

Students who took pandemic gap years are back, and international enrollment is making headway. Enrollment increases are most prominent in notable universities with Division I programs and better brand recognition. Students are back in droves, and it appears they are looking for the quintessential college experience.

The student housing market presents favorable conditions for new supply. In fact, data shows that between 2010 and 2020, universities added 60,000 to 70,000 new beds annually. However, in 2022 the rate declined to only 25,000 beds indicating an undersupplied market, particularly on campuses transitioning from “commuter” to “resident” settings.

A rising trend of commuter-style, city institutions shifting to resident campuses makes them prime candidates for substantial housing growth. Florida International University and the University of North Texas are examples of urban-centered campuses with a large influx of resident students.

While the student housing market presents attractive opportunities, it has its challenges. Local political structures and associated “not in my backyard” sentiments can pose significant hurdles. Developers can’t simply plan to build cookie-cut designs across all college towns and achieve success. Barriers to entry can make development a headache but, at the same time, prevent oversaturation and promote a balanced market.

There is a common misconception that regional banks comprise the majority share of financing for standard multifamily properties. Though, student housing receives a chunkier portion of local financing. Regional banks often have better market understanding and the right connections to pull strings on these types of deals.

Developers may have to get creative with their financing if regional banks are continuously sidelined. It is also worth noting that cap rates for student housing properties are typically 80 to 100 basis points higher than standard multifamily housing. Fortunately for developers, recent net operating income growth in student housing helps offset the valuation impact.

 

Richter, Joseph, et al. “Daily Beat – Commercial Real Estate News.” Daily Beat, 25 Sept. 2019, www.dailybeatny.com.

Spotify. (2023, May 9). Student  Housing: Thriving Market Trends and Investment Opportunities. America’s Commercial Real Estate Show. episode.

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Interest-Rate Caps

Real estate investors with floating-rate loans will purchase rate caps as insurance from rate hikes and increased debt service. In fact, many commercial mortgage-backed security (CMBS) lenders will require their borrowers to purchase rate caps. If the Secured Overnight Financing Rate (SOFR) rises above a predetermined strike rate, the cap is considered “in the money,” and the borrower will receive monthly payments equal to the difference between current rates and the strike rate. Rate caps are paid with an upfront payment to the provider and typically last two or three years. For some time, pandemic borrowers enjoyed protection from the Federal Reserve’s increased rate hikes but now find themselves in hot water as their rate caps begin to roll off.

On a $100 million loan, a three-year rate cap at three percent purchased in 2019 cost $98,000. Today’s price is $3.48 million. Rate cap providers, most of which are banks, have been raked over the coals to make good on their promise. They are looking to recoup their losses now by charging a premium. Landlords now face a tough decision: fixed-rate financing at current rates or paying the premium. Economic volatility and the uncertainty of future interest rates only make this decision harder. Borrowers can find themselves forced to sell, default or break out the checkbook.

An estimated one-third of commercial property debt is floating rate. Since most CMBS lenders require rate cap purchases, real estate sales could significantly increase if landlords don’t have the necessary liquidity. Heightened sale volumes would inversely lower real estate values, and the market would see a repricing of assets. Landlords must take a careful, calculated approach to navigate the remaining market troubles. Contact the professionals at BayBridge Real Estate Capital for consultation in this area of expertise.

 

Richter, Joseph, et al. “Daily Beat – Commercial Real Estate News.” Daily Beat, 25 Sept. 2019, www.dailybeatny.com.

Rogers, J. (2023, January 23). Expiring interest rate caps to fuel distressed property sales. GlobeSt. Retrieved May 5, 2023, from https://www.globest.com/2023/01/23/expiring-interest-rate-caps-to-fuel-distressed-property-sales/?slreturn=20230405090202

Ryan, C. (2023). Landlords May Get New Reason To Sell. Wall Street Journal.

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BayBridge Real Estate Capital Arranges $131.72 Million For Florida College Campus

NEW YORK, March 20, 2023 – BayBridge Real Estate Capital secured a $131 million loan for Everglades College, the parent entity of Keiser University, to purchase nine suburban office properties in South Florida.

The loan enabled the institution to acquire approximately 543,000 square feet of space that it occupies for classrooms, labs and administration offices.

Amerant Bank, Ameris Bank, Locality Bank, SouthState Bank and TD Bank provided the financing for the transaction, which closed in early March.

About BayBridge Real Estate Capital

A specialty firm focusing on responsive execution and creative financing, BayBridge Real Estate Capital helps developers and investors source funding for a broad range of commercial real estate projects. With an emphasis on structured finance, the team brings decades of experience to markets across the country from its offices in New York, Miami, Fort Lauderdale, Boca Raton and West Palm Beach, Fla.

For more information, visit www.baybridgerec.com or call (646) 213-7561.

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Is Your Bank Running? You Better Go Catch It…

It’s bidding day! The FDIC is selling Silicon Valley Bank and Signature Bank, and the bids are due today. Only bidders with existing bank charters (and a little luck o’ the Irish) will be given access to the bank’s financials, when deciding whether to make an offer. This gives existing lenders the upper hand on private equity firms. If whole sales do not materialize, the banks will be sold in parts.

SVB and Signature were first to be run under water. Other banks, including First Republic and Credit Suisse, were headed for the same fate before being tossed an expensive lifeline. First Republic will receive a $70 billion rescue package pooled together by 11 other banks and the Federal Reserve. Republic’s share price dropped more than 60%, before receiving additional funding. Credit Suisse received a similar $54 billion lifeline on Thursday from Switzerland’s Central Bank, after its stock dropped 24% on Wednesday. Moody’s rating agency is currently reviewing Zions Bancorporation, Western Alliance, Comerica, UMB and Intrust, as well.

How might credit doubt and bank runs affect commercial real estate investors? Up until last week, our biggest challenge had been navigating the complications of increasing interest rates. Now there is new uncertainty in real estate finance as lenders are likely to tighten their underwriting. Debt will get more expensive and harder to come by. The entire situation is reminiscent of the Great Recession and guaranteed to constrain credit. Luckily, the panic is not as bad as that moment in history and the Federal Reserve’s response was swift and organized. Also, the Fed will likely cease rate hikes for the time being.

If we can help you navigate these challenging times, please don’t hesitate to reach out.

Works Cited

Richter, Joseph, et al. “Daily Beat – Commercial Real Estate News.” Daily Beat, 25 Sept. 2019, www.dailybeatny.com.

Young, Celia. “First Republic Scores $30 Billion Rescue Deal from Lending Rivals.” Commercial Observer, Commercial Observer, 16 Mar. 2023, https://commercialobserver.com/2023/03/first-republic-30-billion-rescue-deal/.

Schenke, Jarred, et al. “National Commercial Real Estate News & Trends.” Bisnow, https://www.bisnow.com/national.

 

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