Warren Hitchcock, Senior Vice President, NorthMarq Capital

The market has seen the 10-year treasury increase by over 150 basis points (bps) since the start of the year. As treasury yields and swaps move higher, lenders in the marketplace have adjusted their pricing accordingly. Unfortunately, most sellers haven’t followed suit. This has created a more challenging environment for real estate transactions.

In the first quarter of this year, we sat down with Warren Hitchcock, who serves as senior vice president at NorthMarq Capital, to get an update on the state of the debt market. Warren has two decades of experience originating, underwriting, marketing, and closing debt and equity financing. Below is an overview of our discussion.

• What is the current sentiment amongst lenders on the Houston commercial real estate market?
  • Lenders have generally been very cautious on Houston over the past three to five years due to the oil/shale busts. Houston office assets are very challenging for lenders because of the massive vacancy, oversupply, and obsolete products. Retail lending has remained robust since Houston has some of the best retail fundamentals in the country. Until recently, multi-family wasn’t as aggressively pursued compared to other markets in the Sunbelt. Industrial has remained steady with plenty of interest, although the amount of interest is below some high barrier to entry markets. The good news for Houston is that the diversification story has been verified and confirmed with strong economic growth despite the recent pandemic and oil crash.
• What type of deals and asset classes do lenders have the most appetite for?
  • Debt Funds have been the most aggressive source of capital in the market (>$50 billion closed in 2021). These lenders have been running from 3.00% over Libor on a high-quality multi-family asset and light value-add to 5.50% over Libor for an entirely vacant office building acquisition during the pandemic with a hefty lift with the future fundings for capital, leasing commissions, and tenant improvements. Some of these funds can do construction as well as non-recourse loans.
  • Banks have an appetite for stabilized, core deals at lower short-term rates, but longer-term lenders can generally price funds lower.  Banks have been winning value-add and core-plus deals with lighter lift, rollover, or value creation play in exchange for recourse, reserves, or structure.  Pricing has been significantly impacted by the Fed rate hikes and the Russian invasion. Rates have moved 100+bps for some lenders, which price off short-term or swap rates.  Leverage is 65% for non-recourse and up to 75%+ for high-quality deals with recourse.
  • Life Companies are still providing the lowest price capital on longer-term loans.  Considering Life Co’s price off the longer-term treasuries, they have been less impacted, but rates have moved 25-50 bps.  Most Life Cos are generally more conservative on leverage, viewing the market from a 20+ year perspective and long-term cap rates. Therefore leverage averages typically 65% LTV. Rates are 3.00%-4.25%, with most around 3.50-3.75% for deals over $10 million.
• What are you predicting out of the Fed this year?
  • I can’t predict the Fed’s movements, but the specifics matter less than the trajectory. Rates are up, and we expect them to continue to rise. This year, I would pencil in four to five rate hikes in the 25-50 bps range. The movement of the Fed Funds rate directly impacts short-term rates. However, this movement will inevitably impact long-term rates less so than short-term rates.
• How are construction lenders navigating rising material costs and supply change issues?
  • Most groups feel the pressure of rising costs and supply chain deals with new construction.  Lenders in this space want fully vetted budgets and guaranteed maximum price construction contracts.  This focuses the capital on the most experienced sponsors with more prudent budgets.  The market sees significant contingencies, but no one wants to take construction cost risk.

• How has the Russian invasion of Ukraine impacted the debt market?
  • The Russian invasion of Ukraine has caused the global economy to cool off and has added a lot of uncertainty to the market. This has made it very challenging for lenders to price rates.
• Are you seeing lenders becoming more conservative at this point in the cycle? What changes have you seen so far in 2022 vs. 2021?
  • Yes and No.  There was a record number of deals done last year, and a record amount of capital was also deployed for most lenders.  We are coming out of a significant downcycle in many markets due to the Covid-19 pandemic (both coasts), so lenders are getting more aggressive on the right deals in the right markets.  The recent Russian invasion does have lenders spooked a bit.  There is uncertainty in the current cycle going forward and volatility in the markets, which both cause lenders to pull back some, not stretch.  This most likely shows up in slightly higher spreads and less aggressive leverage overall.

Thank you to our Capital Markets Committee!

Interested in joining the committee, or have requests for content? Contact us!

Committee Roster

• Capital Markets Chair John McMahon, Senior Associate, Trammell Crow Company
• Davis Amanyisye, Investment Sales Associate, NAI Partners
• Lance Dean, Economic Development, Hawes Hill & Associates
• Arif Momin, Summer MBA Financial Analyst, Flagship Capital Partners
• Drew Zahora, Senior Director, Investments and Asset Management at RYCORE Captial LP