Rising rates, low housing inventory and a vibrant economy should propel demand for rental properties

By Adam S. Finkel, co-founder, Tower Capital | bio

With a seemingly more hawkish Federal Reserve chairman, Jerome Powell, in place, coupled with a humming economy, many are anticipating a continued rise in interest rates. Some fear that will lead to higher cap rates for commercial real estate, lower property valuations, and an eventual slowdown in deal volume for the multifamily sector, which has been the favorite asset class for investors and lenders in recent years.

Contrary to popular belief, however, gradually rising interest rates are likely to continue strengthening the multifamily sector and also benefit investors with exposure to this asset class — along with commercial mortgage brokers who are involved in lining up financing. The single-family housing market has been in a slump and there is no sign of anything changing in the near term.

Rising interest rates, along with rapidly increasing construction costs, will continue to be headwinds for the owner-occupied housing sector in general, keeping the demand for rental housing strong. As interest rates climb upward, so do mortgage payments, making homes increasingly less affordable for consumers. This causes some would-be homeowners to remain renters for longer periods of time because they can no longer afford the home they want to purchase.

In addition, higher mortgage payments can negatively affect an existing homeowner’s debt-to-income (DTI) ratio, making it more challenging for them to qualify for financing on their ideal home. DTI constraints have been especially prohibitive for a millennial generation saddled with more student debt than any other in history.

Housing-market constraints

A research paper published by Freddie Mac last year stated that the “increasing interest rate environments we identified are almost always accompanied by reductions in mortgage originations, home sales, and housing starts across the board.” In addition, a tight supply of single-family homes has helped boost property values over the past several years, placing the dream of homeownership even further out of reach for many first-time buyers.

“ Positive demographic trends and consumer tastes have had, and will continue to have, a significant impact on the multifamily market. ”

According to a recent report from the National Association of Realtors, the median price of a single-family home is $50,000 more than it was in 2016. Fewer home sales generally warrant lower levels of new construction, keeping supply constrained and encouraging values to remain elevated. Homebuilders are fighting increased costs of materials, along with shortages of qualified trade workers, with no immediate end in sight.

In fact, delivery of new properties across all asset classes remains below historical averages, even as the overall population continues to grow. Conversely, owners of commercial real estate are benefiting from exceptionally low vacancy rates and increasing rents — especially in the apartment sector.

Cap-rate increases

It is common knowledge among mortgage brokers and many others in the commercial real estate industry that rising interest rates force cap rates higher. There are numerous studies published every year, however, that show no correlation between increasing interest rates and increasing cap rates, at least in the near-to-medium term. (This is not the case when looking at longer periods of time spanning several decades.)

In fact, rising interest rates often coincide with an improving economy, which tends to benefit real estate performance. Melissa Reagen, head of research for the Americas at TH Real Estate, an affiliate of Nuveen (the investment-management arm of TIAA) articulated it nicely. “If interest rates are rising because of stronger economic growth, as is currently the case, real estate demand will also likely be growing,” Reagen said. “If interest rates are increasing gradually, and are likely to remain at, or below, long-term averages, as is currently expected, real estate would likely be well positioned to benefit in such an environment.”

Even if (or when) cap rates do begin to drift upward, the effects will likely be lessened from increased rent and net operating income (NOI) growth. Mathematically, a 5 percent growth in NOI will offset a 25 basis-point increase in the cap rate to maintain the same property value. A property with $1 million in NOI priced at a 5 percent cap rate, for example, offers a value of $20 million. If the NOI grows to $1.05 million and the market cap rate increases to 5.25 percent, the property still holds its $20 million value.

Demographics and financing

Positive demographic trends and consumer tastes have had, and will continue to have, a significant impact on the multifamily market. The estimated 75.4 million millennials as of April 2016 are now the largest generation in U.S. history, eclipsing the baby boomers by half a million people, according to U.S. Census Bureau data.

The millennial generation, based on the Pew Research Center’s definition, includes those born between 1981 and  1997. They are now hitting their peak spending and consumption years. They are holding off on marriage, having kids later in life and moving more frequently than past generations, all of which leads to a propensity to rent.

On another front, despite murmurs of possible moves to change how  government-sponsored enterprises  (GSEs) Fannie Mae and Freddie Mac are structured and operate, the gridlock in Washington, D.C., has proved challenging to garner any kind of momentum leading to actual legislation. This past November, the Federal Housing Finance Agency (FHFA) announced that multifamily lending caps for Fannie Mae and Freddie Mac will be set to $35 billion for each agency in 2019.

Furthermore, loans for properties meeting certain affordability or energy- savings metrics, will be applied toward the agencies’ uncapped production. These parameters are intended to further the strategic goal of the FHFA, which is to provide liquidity for the multifamily market without hindering the participation of private capital. In addition, there has been an uptick in market participation by other lenders — including banks, credit unions, life insurance companies as well as alternative  lenders like debt funds, which are mainly involved in financing unstabilized or transitional assets.

• • •

The U.S. economy has been strong, with consistently positive quarterly numbers. Unemployment is at its lowest level in decades and consumer spending is on the rise. These are the positive trends influencing the rise in interest rates, and they are headwinds that bode well for real estate sectors such as multifamily, industrial and office.

With the GSEs providing relatively cheap, nonrecourse financing, and other lenders becoming increasingly competitive in the multifamily space, the foundation is set for continued velocity in the apartment sector, which should keep investors and other finance professionals — such as commercial mortgage brokers — busy for the next few years.

View Article on Scotsman Guide Commercial Edition

The new generation of commercial real estate professionals are like computer upgrades for the industry. These future leaders were still in school or just starting their careers when the market bottomed out nearly a decade ago. They watched how the market leadership guided their respective companies out of these rough waters and into calmer, more prosperous ones.

As the senior executives in the market reach the point where they’re ready to step back and let the next generation take over, a generation of young professionals are ready to take on that challenge.

These are some of the professionals poised to upgrade the industry in Arizona and beyond.

Emilie Andrews

Senior marketing director, Vestar

Andrews envisions, directs and oversees the marketing for signature lifestyle center Tempe Marketplace, along with Vestar’s entire Arizona portfolio of nine power centers. At Tempe Marketplace, Andrews executes more than 300 unique events, programs and art installations each year. Currently, Andrews serves as a member of the Tempe Tourism Office Board of Directors.

Casey Blais

Shareholder, Burch & Cracchiolo

Blais is a problem solver who has handled hundreds of commercial and residential property disputes, including abatement lien foreclosures. Blais served as president of the Young Lawyers Division of the Maricopa County Bar Association in 2014, he’s been selected by Southwest Super Lawyers as a “Rising Star” from 2012-2018.

Jenna Borcherding

Office tenant advisor, JLL

Market knowledge, client commitment and old-fashioned hard work distinguish Borcherding as a rising star. As part of a top-ranked local tenant rep team, she has helped close more than 850,000 square feet of office leases, placing companies like Deloitte, DLA Piper and Serendipity Labs. Borcherding was the 2017 NAIOP Developing Leader of the Year and a 2018 NAIOP Board Member.

David Breen

Manager of tenant coordination, Macerich

Breen is currently working on Macerich’s redevelopment of Scottsdale Fashion Square and was placed in the role due to his unique background in construction and education, earning a master’s degree in Real Estate Development from Arizona State University. Breen is active in the community as a member of the Urban Land Institute’s Young Leaders Group and Valley Partnership Advocates program.

Fred Bueler III

Project director, Chasse Building Team

Bueler earned his bachelor degree in civil engineering from ASU and has been in the building industry for 13 years, 10 with Chasse. Projects completed under Bueler’s leadership include the full campus re-build of Frank Elementary School in Tempe; the development of shopping center Edison Point in Maricopa and redevelopment of Town & Country Shopping Center in Phoenix.

Tim Colquhoun

Vice president of corporate banking, National Bank of Arizona

Colquhoun supports public and privately traded companies with their financing needs in a variety of sectors. Tim joined NB|AZ in 2015 as a lender with over 10 years of banking experience. Tim is an Emerging Leader with the Arizona Bankers Association, an advisory board member for Arizona Microcredit Initiative, and active in NAIOP.

Chris Evanoff

Associate, Fennemore Craig, P.C.

After moving to the Valley from Ohio to work for two federal district judges, Evanoff ultimately worked on federal water policy issues affecting Phoenix. He brings these unique experiences to his real estate practice. Chris is active in Valley Partnership and serves as a board member for the Tom Londen Memorial Golf Tournament.

Adam Finkel

Principal, Tower Capital

During his career, Finkel has been involved in the successful placement of close to $1 billion in debt and equity financing on behalf of his clients throughout North America. He has a diverse background in both finance, as well as commercial real estate leasing and sales. He is actively involved with the Urban Land Institute (ULI) and National Association of Industrial and Office Properties (NAIOP).

Cooper Fratt

First vice president, CBRE

Fratt specializes in industrial sales and leasing and industrial tenant representation in metro Phoenix. In the last five years alone, he has closed more than 10 million square feet of combined lease and sale transactions, totaling nearly $806 million in value. Fratt has been heavily involved with NAIOP Arizona since his early days in commercial real estate. Fratt achieved the SIOR designation in 2018.

Carrie Garcia

Chief administrative officer, LGE Design Build

Garcia has been with LGE Design Build for more than 15 years. She started as a receptionist and has grown into her role as Chief Administrative Officer and trusted advisor to the president and CEO, David E. Sellers. Her passion for people and focus on empathy have made her a tremendous leader who cultivates a culture of growth and excellence.

Phil Haenel

Director, Cushman & Wakefield

In 2018, Haenel won the Emerging Broker of the Year Award for Cushman & Wakefield having sold more than 2 million square feet of industrial buildings with a total consideration of more than $82 million in 37 separate transactions in 2017. Phil is a member of a four man team made up of Mike Haenel, Andy Markham and Will Strong. In 2018, the team finished as the top industrial team in the Phoenix office.

April Lubenow

Project Engineer, UEB Builders

Lubenow’s first development role has been spent as a project engineer for one of the first high-rise apartments to be built in downtown Phoenix (The Stewart). This is a massive undertaking — from the complex historical element of the Circles building at the project’s base to overseeing a large-scale project amid a CRE labor shortage and spike in material costs.

Clare Lydon

Real estate representative, Opus Development Company, L.L.C.

Lydon assists with all aspects of development in the Phoenix metro area from site selection and due diligence through project lease up. She has nearly four years of commercial real estate experience, most recently as an associate real estate manager at ViaWest Group. With Opus, Lydon’s experience includes working on Union Tempe and Longbow Gateway One.

Cullen Mahoney

Senior associate in Phoenix Business Unit, The Trammell Crow Company

Mahoney is involved in all facets of real estate development and investment from initial site acquisition and due diligence through project disposition. Mahoney’s experience spans office, industrial, multi-family and mixed-use developments. He is also active in the Arizona chapter of NAIOP as a Developing Leader member and chair for the Young Professional Group.

Cassandra Nesheim

Field operations coordinator and executive assistant, Wespac Construction

Nesheim joined Wespac in January 2018 and has embraced the Wespac culture, going above and beyond as a true team player. Nesheim helps with recruiting, coordinates field operations for General Superintendent needs, monitors safety reports, daily superintendent reports, and also represents Wespac while assisting in Business Development ventures.

Kyle Orne

Associate, Quarles & Brady

Within the real estate realm, Orne handles all manners of real estate litigation including: disputes over leases, purchases and sale agreements, and title and lien issues; disputes between joint owners of real estate; and development disputes between owners, developers, and contractors. Before joining Quarles & Brady, Orne earned the top score in Arizona on the Arizona Bar Exam.

Nick Pemper

Senior project manager, Skanska USA

Pemper has a strong operation focus that allows him to thrive on projects with highly technical MEP systems and fast tracked schedules. Pemper is a LEED Green Associate (GA), which client’s leverage to incorporate greener construction methods. When Nick is not at work, you’ll find him with his wife and four kids all under the age of six.

Sarah Philippe

Business development, Sundt Construction

Philippe serves as the business development representative for Sundt Construction’s Building Group, Southwest District. Philippe provides support to the district’s project executives, project directors and regional directors in client engagement and community relations. Prior to joining Sundt, Philippe was the senior development manager, distinguished events for the American Cancer Society (ACS) in Phoenix.

Byron Sarhangian

Partner, Snell & Wilmer

Sarhangian serves as Co-Chair of Snell & Wilmer’s Real Estate Practice Group and Opportunity Zone Industry Group. He has been ranked in Chambers USA: America’s Leading Lawyers for Business® in Real Estate from 2015-2019 and in The Best Lawyers in America® for Real Estate Law in 2019. He is currently representing investors, fund sponsors and developers with respect to the Opportunity Zone Program.

Jordan Taylor

Finance, True North Studio

In 2014, Taylor successfully launched a real estate fund and raised all capital necessary to acquire properties all across the country. Taylor brought an infrastructure for property management to Phoenix-based True North Studio. Taylor’s role at True North revolves around the oversight of all financial aspects of projects.

Vicente Terán

Project manager, Chasse Building Team

Terán has been involved in or is currently involved in the improvement and modernization of Town & Country; the modernization of Madison Meadows School, which won a Top Projects Award from Engineer News Record; the new campus build of Frank Elementary School; the modernization and gymnasium addition for Cheyenne Traditional School; San Tan Pavilions; and Edison Point.

Cole Woodward

Project manager, CORE Construction

Woodward is a key member of the CORE Construction team, currently leading a $40 million high school construction project from the ground-up in the East Valley. He has an impressive resume of other award-winning, multi-million-dollar projects, and also dedicates many hours of his free time to community service and philanthropic activity within the construction industry.

Each of these future leaders brings something different and unique to the market, making for a stronger industry. This next generation of professionals is more connected and industry-savvy than its predecessors, which means they will need to be inventive to make their ideas stand out.

The 22 people listed have already stood out among their peers by having a strong work ethic, a willingness to get involved in the community and displaying the personal characteristics that make good leaders. With these young professionals, the commercial real estate industry is in good hands moving forward.

View Article on Arizona Business magazine

STEVE BURKS

Real estate can be a refuge.

Your New Year’s celebrations aren’t complete without a portfolio review. As stocks continue to fizzle and pop, real estate investment strategies may look more promising. Historically, real estate has outperformed the stock market, acting as a stabilizer for investors when volatility takes hold. These eight real estate trends are the ones to watch in 2019.

Residential undergoes a generational shift.

Home ownership may have a new face in 2019 as younger buyers enter the market, while older homeowners make their exit. “Many millennials have recovered from the 2009 crash and have managed to find jobs that will allow them to afford homes,” says Nick Giovacchini, director of client services at AlphaFlow in San Francisco. As baby boomers age, they may be looking to trade down from larger homes to more affordable options, such as smaller rentals or senior living facilities. Giovacchini says high-end home sellers may have to reduce prices as millennials increase demand for more affordable housing. He says opportunities for investors lie in senior living housing, entry-level homes and condos.

Opportunity zones heat up.

Created by the Tax Cuts and Jobs Act, opportunity zones are new territory for real estate investors. Peter Muoio, executive vice president and chief economist at Ten-X Commercial, an online transaction platform for commercial real estate, says opportunity zones are on track to be the hottest trend in commercial real estate for 2019. “With valuations at cycle highs and fundamentals waning, the tax incentives offered by these programs are massively attractive, especially as not all of these zones are created equal,” Muoio says, acknowledging numerous cities may prove to be diamonds in the rough. As capital flows in, certain submarkets could see increased volume, and “increased liquidity is a positive for the commercial real estate environment.”

E-commerce remains a disruptor.

The retail landscape is in a state of flux as brick-and-mortar stores attempt to stem the e-commerce tide but 2019 may bring even stiffer competition. “Many consumers find it easier to purchase goods online,” says Jonathan Lewis, founder and CEO of JLJ Capital, potentially threatening traditional retail’s survival. “E-commerce is forcing many retailers to close store locations because they money they take in isn’t enough to cover the cost of their rents.” Lewis says real estate investors who want to maintain a position in traditional retail should consider hair and nail salons, restaurants, yoga studios and gyms – services not accessible via e-commerce and may be better positioned to survive market downturns.

Rising rates may trim commercial real estate returns.

“One of the biggest headwinds facing the commercial real estate market in 2019 is the combination of rising interest rates and slowing appreciation,” says Dianne Crocker, principal analyst with EDR Insight. “This means borrowers face a higher cost of capital at the same time that assets may not necessarily be showing higher yields to accommodate those costs.” The Federal Reserve raised rates four times in 2018, with at least two hikes projected for 2019. Investors will be looking for value-add opportunities but rates will have more impact on investment decisions. “Rigorous due diligence is critical at this late stage to ensure investors aren’t overreaching at exactly the wrong time,” she says.

New construction gets pricier.

Construction prices inched up 0.5 percent in October, reflecting a 7.9 percent increase year-over-year, according to the Bureau of Labor Statistics Producer Price Index. That’s something investors should be watching closely in the year ahead, says Lee Roberts, managing partner of SharpVue Capital in Raleigh, North Carolina. “In addition to supply-demand factors, there is a large policy component to this,” Roberts says. “Not only are interest rates being driven higher by the Fed, but materials costs are being affected in part by trade policy, while labor costs are moving higher in part due to immigration policy.”

Tech increases efficiency.

The tech train continues to glide along in 2019, with some unique implications for commercial property investors. “Commercial real estate is on the cusp of moving from a potentially inefficient industry to one that is notably more efficient, largely due to the growing volume of data that isn’t yet being tapped,” Crocker says. “Thanks to growing traction of technologies like machine learning, data analytics and platforms, the entire commercial real estate ecosystem will soon have better tools for decision-making.” Crocker says one of the most exciting possibilities that lies ahead for commercial real estate investors is the application of tech to support property risk management.

Build-to-rent gains momentum.

Build-to-rent is a relatively new trend, says George Maravilla, vice president at Tower Capital in Phoenix, but poised to expand. “These newly built and to-be-built rental communities have a lot of the conveniences and amenities of an apartment but feel more like a home,” Maravilla says, and as more developers move into this space it’s likely to join the mainstream of CRE asset classes. Build-to-rent communities are designed to fit the privacy and affordability needs of younger buyers shopping for a mortgage loan and boomers looking to downsize. Maravilla says build-to-rent represents a new frontier for investors with a pioneer mindset looking to diversify into non-traditional housing.

Offices get smart.

Smart technology is increasingly becoming standard for new homes and gaining ground in the office space sector as companies move toward digital tools and remote work. Franco Castaldini, chief commercial officer at Toronto-based ThoughtWire, expects increased experimentation with smart tech. “Owners and operators will learn from tech companies and adapt what works to a variety of tenants,” Castaldini says, to facilitate smoother operations. Additionally, “property owners will leverage use cases for preventing equipment failures and costly system replacements, responding to emergency events and automating routine workflows to mitigate initial technology investment costs.” Looking beyond 2019, Castaldini says smart tech may have an even wider impact in other real estate sectors.

Real estate investment trends you can expect in 2019.

To recap, here’s what real estate investors should be prepared for in 2019.

• Younger home buyers
• Opportunity zones
• E-commerce
• Rising interest rates
• Increased construction prices
• Big data
• Build to rent
• Smart technology

View Article on U.S. News

Rebecca Lake, Contributor

Business volume for bridge lenders remains high, but they are feeling more cautious.

Evan Gentry, founder and CEO of Money360, believes 2019 will be the year the California bridge lender hits $1 billion annually in loan volume. Money360, which launched in 2014, has been doubling or tripling in size annually despite the entrance of Wall Street hedge funds into the bridge lending space, Gentry says.

“There’s a lot of opportunity in the market,” he notes. “Transaction volume was strong in ’18; we think it will continue to be strong in 2019.”

Money360 is one of hundreds of U.S. bridge lenders that still see plenty of runway at this stage of the real estate cycle, despite growing competition that has fostered a new level of aggressiveness, including higher leverage, lower pricing, no appraisal loans, innovative loan structures and originators willing to lend on non-cash-flowing assets.

This year “was one of our best years, even though it was very competitive,” says Marissa Wilbur, origination associate with Archway Fund, a Los Angeles-based bridge lender that doesn’t require appraisals and allows higher leverage than some of its competitors. “By the end of June, we had hit our (year-end) target goal.”

Still, Archway Fund has found itself becoming more conservative on loan-to-value (LTV) ratios than it was two years ago, now rarely going above 70 or 73 percent leverage where it had previously allowed 75 percent, according to Wilbur. The slightly more conservative stance is due to where the industry is in the market cycle, combined with tight cap rates in Southern California, where the company did about half of its lending in 2018. The fund uses broker price opinions to win deals that need a quick close and advertises an average closing of just five to 10 days. The private lender will close out 2018 with loan volume of nearly $150 million, Wilbur says.

This was also a strong year for Rodeo Lending, a Los Angeles direct lender, according to Principal Rich Katz. Rodeo Lending’s bridge loans range from about $3 million to $12 million on a variety of property types, including office, retail, multifamily and light industrial.

“We grew, and we had a lot of payoffs, which shows there’s velocity in the market; things are moving,” Katz said.

Rodeo’s loan volume in 2018 was up 15 percent to 20 percent over 2017, according to Katz, despite the lender's conservative stance amid growing exuberance. “We’ve been pretty careful about what we are lending on because we think the market is flattening … where some of our competitors have been very aggressive.”

Recent stock market gyrations could encourage even more investment in the space and that could lead to looser standards if lenders aren’t disciplined, he notes. “People are looking for a place to put their money, so it probably will get more competitive,” Katz says. “Some lenders will do some crazy things and when that exuberance starts, that’s when you know you have to be careful. That exuberance has been going on for a little while now and will continue into 2019. We are disciplined and look to do good loans with responsible borrowers.”

A competitive landscape

Zach Murphy, co-founder and managing director of Los Angeles-based Pender Capital, which operates its commercial real estate origination arm from Dallas, says the bridge lender has internally tracked about 150 U.S. bridge lenders that are making loans between $1 million and $20 million and whom it considers to be competitors.

Despite that competition, Pender was successful in bringing on several institutional investors that enabled it to grow its loan volumes significantly in 2018, Murphy notes. In 2017, Pender did less than $50 million in bridge loans, and for 2019 it forecasts $400 million in loan volume. Its 2018 loan volume will fall somewhere in the middle of those figures, according to Murphy.

“We are seeing a lot more players and a lot more capital coming into the bridge space,” Murphy says. “We see that trend continuing, pretty strongly, and I think that will be a challenge for everyone.”

Although Murphy forecasts the sector’s loan volume in 2019 will be on par with 2018, he expects individual lenders could see fewer deals due to new entrants.

Finding a niche

With the influx of capital, finding a niche is one way for bridge lenders to differentiate themselves. New York-based Greystone focuses its bridge lending on two niches: multifamily and healthcare, and promotes its full-service ability, which includes bridge-to-agency lending, says Anthony Alicea, head of bridge lending production. Greystone saw its multifamily bridge volume double and its healthcare bridge lending triple this year to finish 2018 with over $1 billion in bridge loans, according to Alicea.

In May, Greystone and its investors closed a $750 million senior debt fund that will allow it to leverage over $2.5 billion in loan products, including bridge and mezzanine financing. In September, it closed a $300 million CLO backed exclusively by bridge loans on healthcare- related properties, a first in the industry.

Conservative vs. aggressive stance

With the influx of alternative funds, the risk threshold can vary significantly depending on the bridge lender. Borrowers that have a quality deal have nearly unlimited options for funding, while investors with a less-than-stellar project will also find a lender, says Adam Finkel, principal at Phoenix-based commercial mortgage broker Tower Capital.

“Overall, I still see pretty conservative underwriting from the bridge lenders; in fact I’m seeing some back off on leverage in some markets because they are very wary about where we are in the cycle,” he says.

Money360’s Gentry says his company will be borrower-friendly in 2019, yet credit-aware and cautious even as it forecasts a doubling of its loan volume amid high optimism.

“We are seeing standards stretched a little bit, but not anywhere near what we saw in the last cycle,” he says.

View Article on National Real Estate Investor

By Kerry Curry | Dec 19, 2018

The strong multifamily market is fueling competition in the lending environment, with an abundance of new players and extended services from life companies. Tower Capital’s Adam Finkel shares his view of the capital stack in 2019 and makes some predictions for the future.

The last 12 months have comprised significant economic changes that are transforming multifamily lending. We are seeing more alternative lenders, more competition for strong sponsors and quality projects and a revival of the CMBS market. It might look promising, but with the effects of the Great Recession still haunting the business, there is still a lot of caution, particularly for financing construction projects.

Tower Capital, a Phoenix-based independent structured finance firm, has been around for roughly three years and is aiming to reach $200 million in loan volume by the end of 2018. In a conversation with MHN, Co-founder Adam Finkel said he believes the company will surpass that volume in 2019 and have a greater percentage of total loan volume come from financing construction projects. Finkel also shared his outlook for the thriving Phoenix multifamily market

How did the multifamily financing landscape change in the past year?

Finkel: The multifamily landscape continues to be very robust, with a lot of capital seeking to be placed. An abundance of new alternative lenders consisting mostly of debt funds have made the bridge lending space especially competitive. Looking for additional yield, some life companies are now offering light bridge programs. The CMBS market seemed to regain its footing as a feasible source of financing. DUS lenders and Seller/Servicers have been expanding their market presence with additional offices and competition among the agency lenders is especially high. The agency lenders have become much more aggressive to win deals, often quoting terms based upon underwriting off of annualized T1 revenues. This creates greater risk that borrowers will be “retraded” on their loan proceeds by the time the loan is approved if the property does not perform as expected.

How did the current changes in the economy impact borrowers’ preference for a certain financing product? What will be the long-term consequences of these preferences?

Finkel: In general, borrowers are preferring to lock in fixed rates than be exposed to continued rising rates. Interest rate cap purchases are in more demand by borrowers and lenders to help mitigate interest rate risk. The new, recently enacted Opportunity Zones will breathe oxygen into the market, encouraging increased investment in under-served areas and much needed development of affordable workforce housing. Many folks are wondering if the idea of the privatization of Fannie Mae and Freddie Mac will start to gain traction. That will have a major impact on the availability of non-recourse financing for multifamily properties. I don’t expect any significant legislation passing in the immediate future, but it is in the back of people’s minds.

What would you say are the main challenges multifamily borrowers currently face? What about lenders?

Finkel: Rising interest rates are acting as a blessing and a curse, encouraging continued rental demand while also causing more loans to be DSCR (debt service coverage ratio) constrained. Both borrowers and lenders must remain cognizant  when it comes to where we are in the cycle and make sure they have realistic proforma projections. In most markets, supply and demand are maintaining a healthy balance, but political and economic uncertainty could provide headwinds.

Tell us how you think the capital stack will look in 2019. How do you see lending evolving?

Finkel: The wounds of the Great Recession still have not completely healed. Coupled with the increased volatility in the stock market this year, and the fact that most believe we are in the late innings of the cycle, lenders remain fairly prudent. They are very focused on the strength of the sponsorship—looking for borrowers with experience in the particular asset class being financed, as well as a strong balance sheet with plenty of net worth and liquidity. Given how low cap rates are, many stabilized properties can no longer support full leverage, especially in multifamily. Fannie Mae and Freddie Mac will both offer as high as 80 percent LTV.

However, most properties these days are DSCR constrained, pushing the LTV below 75 percent in most cases. As senior lenders remain conservative and interest rates rise, there is more demand for mezzanine and preferred equity financing to pick up the slack in leverage and we can expect more active players in that space. Rates typically in the low- to mid-teens for mezzanine debt. Preferred equity lenders may want a back-end kicker in addition to the preferred return.

Lenders will be getting especially aggressive to win deals with strong sponsors and quality projects. More “stretch senior” loans, where the lender keeps an internal A and B note to push leverage up to 85 percent LTV/LTC on construction and rehab loans, are being offered. Lenders remaining cautious on bridge and construction projects supporting the take-out financing. Most lenders are underwriting to an agency takeout, which can limit upfront loan commitment.

How did tech affect the financing business?

Finkel: I didn’t see tech having a significant effect on financing. There are some new cloud-based underwriting and packaging software companies, such as Red IQ and Clik.ai, that are trying to streamline the process for smaller independent local and regional debt and equity shops that are gaining some traction. These have also been utilized by asset managers, developers and acquisition firms.

What are your predictions for the industry in 2019?

Finkel: Certain primary coastal markets are topping out and will see downward pressure on rents due to new supply. Secondary and tertiary markets will see continued activity from out-of-state investors chasing yield. The new single-family for rent—new build—asset class will see continued momentum, along with many new funds being set up to take advantage of the Opportunity Zones.

Tell us about Tower Capital’s goals for the coming year.

Finkel: Tower Capital is targeting $300-plus million in loan originations with a continued focus on multifamily and a greater percentage of loan volume coming from construction.

How do you see the Phoenix multifamily market from a lender’s perspective?

Finkel: The Phoenix multifamily market remains robust with strong demand for both single-family and multifamily housing as population growth remains strong due to continued influx of new residents from markets through California, Vancouver, Toronto and the Midwest, chasing either affordability or better weather/fewer natural disasters. Supply has been kept in check by conservative lender underwriting, increased construction costs and lack of skilled labor. Increasing interest rates will continue to encourage renting as home values and mortgage payments rise.

View Article on Multi-Housing News 

By Alexandra Pacurar | December 19, 2018

PHOENIX, AZ – Tower Capital, an independent structured finance firm, is predicting the commercial real estate capital markets will remain robust in the New Year with funds competing for the better projects. “There’s a lot of money out there looking to be placed, both debt and equity” says Adam Finkel, Principal, Tower Capital.

Underwriting is still stringent and lenders make loans based on strong sponsors, the location of the asset and “where they are in the cycle,” Finkel tells GlobeSt.com. “Overall, supply and demand is balanced with maybe some oversupply in the marketplace. Lenders, however, have helped keep it balanced even with industry challenges such as increases in construction costs and developers having a hard time finding qualified workers.”

Meanwhile, there is still a lot of demand and a lot of “transactional velocity,” says Finkel. “We advise our clients to get more term on their loan and to make sure they have time to execute their business plan and allow it to season before selling or refinancing.”

A lot of borrowers are preferring fixed rates and shorter term floater rate loans. Clients are voluntarily buying interest rate caps to ensure rates aren’t going up to a drastic amount. “We also see people looking for longer term fixed rates since they are expecting rates to continue to go up,” says Finkel.

As there is so much money out there looking to be placed and lenders are increasingly stringent, some borrowers are looking for alternative financing with certain lenders shying away from retail and hospitality having a smaller lending pool.

“Banks, pension funds, insurance companies online lenders and private investors are typically the main sources entrepreneurs tends to look to for commercial real estate loans,” says Finkel. “ However, different lenders have different appetites for risks. Factors include the actual real estate, solid sponsors and of course, the business plan.”

“Overall, barring an international political event, 2019 will be a healthy capital market environment with plenty of opportunities,” says Finkel. “The market is trending upward and we are looking forward to it.”

View Article on GlobeSt.com 

By Tanya Sterling | December 04, 2018 at 05:43 AM

October was the company's second-best month in its history, with nearly $45 million in loans secured. Tower Capital, an independent finance firm focused on commercial real estate, is on track to reach $200 million in loan volume this year.

“For an independent shop here in Phoenix, that is a tremendous amount of loan volume,” co-founder Adam Finkel said. Phoenix-based Tower Capital originated and closed nearly $45 million in loans in October, the second-best month ever for the company, which Finkel and his business partner, Kyle McDonough, started in March 2015.

Tower Capital works to secure money for commercial real estate deals, including acquisitions and ground-up construction, Finkel said. Multifamily complexes make up the majority of the firm’s business, followed closely by hotels. The largest Tower Capital closing in October, Elux at Tramonto, a 138-unit apartment complex, was a $23 million loan that closed in 15 business days. Finkel said when he and McDonough started the company, they identified a need in the Phoenix area for an independent intermediary firm.

“We found a niche in the market,” Finkel said. “There was a need for an independent shop that provides independent advice and are not beholden to one lender.” The firm has done about 80 deals worth nearly $500 million since it opened.
“Our goal is to keep working on bigger deals,” Finkel said. Finkel said the first quarter of next year is already looking strong for the firm, and they expect to continue growing in loan volume secured.

14 Nov | PHOENIX BUSINESS JOURNAL

Structured Finance Firm Closes Nearly $45,000,000 in Loans in One Month

PHOENIX, ARIZ. (Nov. 13, 2018) – Tower Capital, an independent structured finance firm, is projected to reach $200 million in loan volume by the end of 2018. Last month alone, the team originated and closed $44,886,000 in loans across six properties, making October Tower Capital’s second-best month in 2018. With a broad range of combined experience, the professionals at Tower Capital have participated in almost every area of the commercial real estate industry including real estate brokerage, mortgage banking, securities, private lending, and development – across all real estate asset classes.

The largest Tower Capital closing last month, Elux at Tramonto, was a $23,000,000 loan that closed in just 15 short business days at a very competitive rate and 94 percent loan to cost. The 138-unit, Class-A multifamily community located in Phoenix, features a mix of one, two and three-bedroom units, with three different floor plans, including a clubhouse with a fitness center. Elux at Tramonto is at the forefront of new and rapidly growing asset class referred to as single family build for rent.

“We had several mortgage bankers to choose from including one of our current bankers, however we chose Tower Capital because they performed on all aspects of execution and delivery, finding the right lender that fit our needs with the largest return of capital in less than three weeks,” said Scott Curtis, Managing Member at Snowdon Tramonto.

In addition to Elux at Tramonto, Tower Capital and its affiliates secured capital for the following projects in October:

• Hilton Home 2 Suites – $7,200,000 Equity Financing. A 106-key hotel development located in an opportunity zone adjacent to the Longbow Golf Course in Mesa.
• Suncrest REALOP – $5,000,000 Equity Financing. Tower Capital was successful in introducing its client, Suncrest REALOP, to an institutional private equity group that resulted in a new equity relationship. Suncrest is a residential master developer and investment manager.
• Katerra Distribution Hub – $4,500,000 Senior Loan. The 26.90-acre subject property, located in Glendale, serves as a materials hub and light manufacturing facility for a technology-driven, offsite construction company, based in Menlo Park, California.
• 526 Mill Ave. – $3,000,000 Senior Loan. A 9,874 square foot, two-story, historic multi-tenant building originally constructed in 1912, located in Tempe.
• Harris Place Apartments – $2,186,000 Senior Loan. A 48-unit C-Class multifamily property located in Mesa.

We are aiming to reach 200 million in loan volume by the end of 2018 and are proud of our consistent growth this past year,” said Adam Finkel, Principal at Tower Capital. “Our goal for 2019 is to grow our market share, seek ways to improve, work more effectively and support our team so that we are able to surpass our 2018 performance next year,” said Kyle McDonough, Principal at Tower Capital.

Tower Capital was recently recognized by National Real Estate Investor as a ‘Top Financial Intermediary’ for total dollar volume of commercial real estate loans arranged.

Read article in Commercial Executive Magazine

 

Tower Capital, an independent structured finance firm, is projected to reach $200 million in loan volume by the end of 2018. Last month alone, the team originated and closed $44,886,000 in loans across six properties, making October Tower Capital’s second-best month in 2018. With a broad range of combined experience, the professionals at Tower Capital have participated in almost every area of the commercial real estate industry including real estate brokerage, mortgage banking, securities, private lending, and development – across all real estate asset classes.

The largest Tower Capital closing last month, Elux at Tramonto, was a $23,000,000 loan that closed in just 15 short business days at a very competitive rate and 94 percent loan to cost. The 138-unit, Class-A multifamily community located in Phoenix, features a mix of one, two and three-bedroom units, with three different floor plans, including a clubhouse with a fitness center. Elux at Tramonto is at the forefront of new and rapidly growing asset class referred to as single family build for rent.

“We had several mortgage bankers to choose from including one of our current bankers, however we chose Tower Capital because they performed on all aspects of execution and delivery, finding the right lender that fit our needs with the largest return of capital in less than three weeks,” said Scott Curtis, Managing Member at Snowdon Tramonto.

In addition to Elux at Tramonto, Tower Capital and its affiliates secured capital for the following projects in October:

• Hilton Home 2 Suites – $7,200,000 Equity Financing. A 106-key hotel development located in an opportunity zone adjacent to the Longbow Golf Course in Mesa.

• Suncrest REALOP – $5,000,000 Equity Financing. Tower Capital was successful in introducing its client, Suncrest REALOP, to an institutional private equity group that resulted in a new equity relationship. Suncrest is a residential master developer and investment manager.

• Katerra Distribution Hub – $4,500,000 Senior Loan. The 26.90-acre subject property, located in Glendale, serves as a materials hub and light manufacturing facility for a technology-driven, offsite construction company, based in Menlo Park, California.

• 526 Mill Ave. – $3,000,000 Senior Loan. A 9,874 square foot, two-story, historic multi-tenant building originally constructed in 1912, located in Tempe.

• Harris Place Apartments – $2,186,000 Senior Loan. A 48-unit C-Class multifamily property located in Mesa.

“We are aiming to reach 200 million in loan volume by the end of 2018 and are proud of our consistent growth this past year,” said Adam Finkel, Principal at Tower Capital. “Our goal for 2019 is to grow our market share, seek ways to improve, work more effectively and support our team so that we are able to surpass our 2018 performance next year,” said Kyle McDonough, Principal at Tower Capital.

Tower Capital was recently recognized by National Real Estate Investor as a ‘Top Financial Intermediary’ for total dollar volume of commercial real estate loans arranged.

REAL ESTATE | 14 Nov | AZ BUSINESS MAGAZINE