Although interest rates are on the rise, banks are typically offering fixed-rate loans
in the range of 4. 75 percent to 5. 5 percent, depending on borrower and property-level
details, as well as the requested amount of leverage. Banks also tend to be the most
accommodating lenders with prepayment penalties.
Some banks allow the loan to be paid off at par immediately (i.e., no prepayment
penalty) and others provide flexibility outside of the first 12 to 24 months. Banks are often
the best fit for transitional properties, relationship lending or borrowers who want lower-leverage, nonrecourse loans and do not want to deal with the headaches of CMBS lending.
A low-risk option
Life insurance companies are often good lenders for borrowers who do not want to push
up leverage levels and have stabilized industrial properties. Life insurance companies
tend to be more risk-adverse than banks and usually seek to finance high-quality
industrial buildings in the best markets.
The primary goal for these companies is to match their liabilities with corresponding
loan maturities. As a result, they are a prime solution for long-term loans — 10 years or
more — given their annual obligations to those they insure. Lower-leverage deals for
amounts above $15 million are being priced with a spread of 125 to 150 basis points
above the corresponding index.
This spread pricing means that, even though long-term Treasury rates are rising, the
total annual interest costs are only marginally more expensive than last year because
spreads have compressed. For smaller life insurance companies that grant loans of less
than $10 million, interest rates are approximately 25 to 75 basis points higher than those
of larger loans.
The typical life insurance borrower is usually a long-term holder of assets that wants
solid cash flow during their holding period, given the life insurance company’s preference
for lower-leverage deals. Compared to CMBS and even banks, life insurance lenders
generally dominate the lower edge of the risk spectrum.
For borrowers who play in this area, they are rewarded with low interest rates and
strong cash flow. In other words, the typical life insurance borrower is usually less focused
on generating a high internal rate of return and more concerned with creating stable
cash flow and cash-flow multiples (earnings before interest, taxes, depreciation and
The CMBS market has found its footing after it all but disappeared following the Great
Recession. The fact that CMBS lenders must now retain a portion of their loans on their
balance sheet has helped to increase underwriting standards throughout the industry.
And, unlike the pre-recession days, buyers of these securitized loans today have
significant influence over what loans can be included in a securitized loan pool.
According to various projections, 2018 CMBS loan volume should be around $80 billion
to $90 billion, compared to an astronomical figure of $229 billion in 2007. The CMBS
market is primarily attractive to borrowers that want leverage higher than 60 percent,
nonrecourse provisions and interest-only payments for some or all of the loan term.
Borrowers need to understand the hidden risks of CMBS loans, however. Often, these
loans are “faceless,” since they are sold off in a variety of tranches to multiple investors,
making any type of workout difficult. And should a borrower’s business plan change for
any reason, there is little to no flexibility for prepaying the loan without yield maintenance
or a hefty prepayment penalty. The CMBS market definitely serves a niche, but borrowers,
including those pursuing industrial real estate deals, need to be careful.
n n n
Overall, it is a great time to be an industrial real estate investor, meaning commercial
mortgage brokers also can benefit from working in this sector. The market fundamentals
are as strong as they have ever been and, nationally, vacancy rates are at all-time lows.
Supply is generally in line with demand across all major markets and the demand from
high-quality owners is robust. With a multitude of financing options available, borrowers
have the luxury of choosing their lender and creating a competitive environment to
negotiate the best possible loan terms. n
Jonathan Pharris is co-founder and president of CapRock Partners, one of the
West’s leading private industrial real estate companies. Upon full build-out of
CapRock’s current portfolio, Pharris will have successfully directed the company’s
acquisition and development of more than 11 million square feet of industrial
product, totaling more than $1.5 billion in value. Reach Pharris at (949) 342-8000 ext. 103
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